What Is A Cryptocurrency And What Are Its Key Features?

Key Ideas

A cryptocurrency is a new form of digital asset based on a network that is distributed over a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.

The word “cryptocurrency” is derived from the cryptography-based encryption techniques used to protect the network.

Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies.

Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.

Cryptocurrencies face criticism for several reasons, including their use for illegal activities, exchange rate volatility, their speculative nature, and underlying infrastructure vulnerabilities. However, they have also been praised for their portability, divisibility, resistance to inflation, and transparency.

Understanding Cryptocurrencies

Cryptocurrencies are systems that allow secure online payments that are denominated in terms of virtual “tokens”, which are represented by internal accounting entries of the system. The “Crypto” prefix refers to the various encryption algorithms and cryptographic techniques that protect these entries, such as elliptic curve encryption, public-private key pairs, and hash functions.

Types Of Cryptocurrencies

The first blockchain-based cryptocurrency was Bitcoin, which is still the most popular and valuable. Today, there are thousands of alternative cryptocurrencies with various features and specifications. Some of these are clones or forks of Bitcoin, while others are new coins that were built from scratch.

Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto.” As of November 2019, there were more than 18 million bitcoins in circulation with a total market value of around $146 billion.

Bitcoin is the world’s leading cryptocurrency by market capitalization.

Some of the competing cryptocurrencies spawned by the success of Bitcoin, known as “altcoins,” include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all cryptocurrencies in existence is around $214 billion; Bitcoin currently represents more than 68% of the total value. Important: Some of the cryptography techniques used in cryptocurrencies today were originally developed for military applications. At one point, the government wanted to put controls on crypto, similar to legal restrictions on guns, but the right of civilians to use crypto was secured on free speech grounds.

Special Considerations

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to maintain an online ledger of all transactions that have been made, thus providing a data structure for this ledger that is quite secure. and is shared and agreed upon throughout the network by individual nodes, or computers that maintain a copy of the ledger. Each new block generated must be verified by each node before being confirmed, which makes it almost impossible to falsify transaction histories.

Blockchain technology is seen by many experts as having great potential for uses such as online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower their transaction costs by streamlining payment processing. However, because cryptocurrencies are virtual and not stored in a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to your funds or your personal information.

The great privacy offered by cryptocurrencies makes them attractive to criminals seeking to launder money from drug trafficking and other illicit sources. Cybercrime has also become a sensitive issue with the development of cryptocurrencies since they are not exempt from being stolen. It is claimed that the North Korean regime obtains much of its funding through cryptocurrency theft with the collaboration of hackers trained for the purpose.

The popularity of the emergence of cryptocurrencies has also led to scam phenomena where people are promised the possibility of making money quickly with a particular cryptocurrency, plus the promotion of a system of recruiting people under marketing schemes. multilevel. The reality is that these schemes have turned out to be pyramid schemes in which the old people in the network are paid with the money that the newest ones come in. One cryptocurrency scam that became very popular was the so-called Onecoin company, based on the cryptocurrency of the same name and run by the Bulgarian scammer Ruja Ignatova. When the scam was discovered, Ruja Ignatova ran away with billions of dollars, and only her brother and a few associates of hers were caught.

OneCoin has been the most famous scam that has taken place using the popularity of cryptocurrencies.

Advantages And Disadvantages Of Cryptocurrencies

Advantages

Cryptocurrencies hold the promise of making it easy to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. Instead, these transfers are secured through the use of public and private keys and different forms of incentive systems, such as proof of work or proof of stake.

In modern cryptocurrency systems, a user’s “wallet” or account address has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the high fees banks and financial institutions charge for wire transfers.

Disadvantages

The semi-anonymous nature of cryptocurrency transactions makes them suitable for several illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often place a high value on their anonymity, citing privacy benefits such as protection from whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.

Bitcoin, for example, is a relatively poor choice for conducting illegal business online, as forensic analysis of the Bitcoin blockchain has helped authorities arrest and prosecute criminals. However, there are more privacy-oriented coins, such as Dash, Monero, or ZCash, which are much more difficult to trace. Other types of cryptocurrencies such as the Chinese DC/EP are controlled by the government and do not offer any type of privacy to users, on the contrary, they allow greater government control over the different financial activities of its citizens.

Criticism Of Cryptocurrencies

Since cryptocurrency market prices are based on supply and demand, the rate at which one cryptocurrency can be exchanged for another can fluctuate widely, as many cryptocurrencies are designed to ensure a high degree of scarcity. In this sense, the volatility of the cryptocurrency markets can be the rule in these, with prices fluctuating from very low points to very high points.

Bitcoin has seen some rapid surges and crashes in value, rising as high as $19,000 per Bitcoin in December 2017 before falling to around $7,000 in the following months. Therefore, some economists consider cryptocurrencies to be a fad or financial bubble.

There is concern that cryptocurrencies like Bitcoin are not rooted in any material good. However, some research has identified that the cost of producing a Bitcoin, which requires an ever-increasing amount of energy, is directly related to its market price.

Cryptocurrency blockchains are very secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune from the threat of hacking. In the 10-year history of Bitcoin, various online exchanges have been the target of hacks and theft, sometimes with millions of dollars worth of “coins” stolen.

However, many observers see potential advantages in cryptocurrencies, such as being able to preserve value against inflation and facilitate exchange while being easier to transport and divide than precious metals and existing outside the influence of bank centers and governments. One of the theories about the foundation of Bitcoin suggests that the currency was created amid the 2008 financial crisis., to create and consolidate assets immune to the financial speculation of large Wall Street corporations, which had led to assets such as subprime mortgage bonds falling sharply. Time has shown that cryptocurrencies have created their own spaces for financial speculation and that they are not immune to depreciation, and not only that, today many famous economists such as Paul Krugman consider bitcoin to be a financial bubble that sooner or later will collapse. burst.

Cryptocurrencies, Trading Academies, And Multilevel Marketing

Due to their highly speculative nature, cryptocurrencies are an asset with which a lot of money can be generated very quickly in the so-called cryptocurrency exchanges and trading brokers through the difference obtained when buying and selling an asset in the network, just like currency pairs in the Forex market. This high volatility and potential to generate profits have led to a massive explosion of online trading courses and academies, among which we can find Udemy, Coinbase Learn, Coursera, Coinbase Earn, and DeveloperWorks courses, among others. These courses are intended to train the apprentice to operate in the cryptocurrency markets with their own money and obtain profits on a daily and constant basis autonomously.

Another phenomenon that has been observed on the rise since the appearance of cryptocurrencies is the emergence of multilevel business models that offer returns on investment as well as include more people in the business opportunity. By participating in this type of business, a person can receive commissions for the investment of another person in a certain fund such as those of AirbitClub or OmegaPro, or receive commissions for the payment of registration fees for educational courses from companies that offer training in the field of trading. of cryptocurrencies and other assets, examples of these latter companies are MELiUS and IM Mastery Academy. Companies that mix multi-level marketing and cryptocurrencies are often unregulated and it is quite difficult to tell which are legitimate business opportunities and which are pyramid scams.

Crypto currencies Vs Fiat Money

Fiat money is the printed paper currency backed by the government. While paper money was traditionally valued using a physical commodity such as gold or silver, through the gold standard, today, fiat money is backed by a faith-based system that relies on supply and demand. A cryptocurrency is a digital form of currency that is not backed by the government and is based on a cryptographic algorithm. Due to the lack of government support, it is impossible to use cryptocurrency for tax purposes.

Proponents of cryptocurrencies argue that Bitcoin is more reliable than paper money because it is immune to the possibility of heavy inflation that is known to plague fiat currency. Due to a $21 million spending limit placed on Bitcoin, there is only a limited supply of how much of this currency can be produced, making inflation impossible. This is in contrast to fiat money which can be endlessly printed at the user’s expense, leading to inflated fees and an overdose of producing paper notes that have little value.

What Are The Most Important Cryptocurrencies Apart From Bitcoin?

The field of cryptocurrencies is always expanding, and the next big digital token may be released tomorrow or anytime, and people in this world are always very attentive to that. While Bitcoin is widely seen as a pioneer in the world of cryptocurrencies, many approaches are taken by analysts to evaluate tokens other than BTC. It is common, for example, for analysts to attach great importance to the ranking of coins against each other in terms of market capitalization. The following list takes this factor into account, although others must be evaluated when defining the importance of a cryptocurrency.

Below we explore the most popular cryptocurrencies:

Ethereum (ETH)

Ethereum, the first Bitcoin alternative on our list, is a decentralized software platform that allows you to create and run smart contracts and decentralized applications (DApps) without any downtime, fraud, control, or interference from a third party. Applications on Ethereum run on its platform-specific crypto-token, Ether. Ether is like a vehicle to move around on the Ethereum platform and is primarily sought after by developers looking to build and run applications within Ethereum, or now by investors looking to make purchases of other digital currencies using ether. Ether was launched in 2015, and it is currently the second-largest digital currency by market capitalization after Bitcoin, although it lags behind the dominant cryptocurrency by a significant margin. As of January 2020, the market capitalization of Ethereum is about 1/10 the size of Bitcoin.

In 2014, Ethereum launched an ether presale which received an overwhelming response; this helped usher in the era of initial cryptocurrency offerings (ICOs). According to Ethereum, it can be used to “encrypt, decentralize, secure, and trade just about anything.” Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). As of January 8, 2020, Ethereum (ETH) had a market cap of $15.6 billion and a value per token of $142.54.4

Ripple (XRP)

Ripple is a real-time global settlement network that offers instant, secure, and low-cost international payments. Launched in 2012, Ripple “enables banks to settle cross-border payments in real-time, with end-to-end transparency, and at lower costs.” Ripple’s consensus ledger (its confirmation method) is unique in that it does not require mining. All of Ripple’s XRP tokens were “pre-mined” before launch, meaning there is no “creation” of XRP over time, only the introduction and removal of XRP from the market supply according to the network guidelines. In this way, Ripple distinguishes itself from Bitcoin and many other altcoins. Since Ripple’s structure does not require mining, it reduces the use of computing power and minimizes network latency,

So far Ripple has been successful with its current business model; it remains one of the most attractive digital currencies among traditional financial institutions looking for ways to revolutionize cross-border payments. It is also currently the third-largest cryptocurrency in the world by overall market capitalization. As of January 8, 2020, Ripple had a market cap of $9.2 billion and a value per token of $0.21.7

Litecoin (LTC)

Litecoin, launched in 2011, was one of the first cryptocurrencies to follow in Bitcoin’s footsteps and is often referred to as “bitcoin gold silver.” It was created by Charlie Lee, an MIT graduate, and former Google engineer. Litecoin is based on an open-source global payment network that is not controlled by any central authority and uses “script” as proof of work, which can be decrypted with the help of a consumer-grade CPU. Although Litecoin is like Bitcoin in many ways, it has a faster block generation rate and therefore offers a faster transaction confirmation time. In addition to developers, there is a growing number of merchants that accept Litecoin. As of January 8, 2020, Litecoin had a market cap of $3 billion and a value per token of $46.92,

Tether (USDT)

Tether was one of the first and most popular of a group of so-called stablecoins, cryptocurrencies that aim to peg their market value to a currency or other external benchmark to reduce volatility. Because most digital currencies, even major ones like bitcoin, have experienced frequent periods of dramatic volatility, Tether and other stablecoins try to smooth out price fluctuations to attract otherwise cautious users.

Launched in 2014, Tether describes itself as “a blockchain-enabled platform designed to make it easy to use fiat currencies digitally”. Effectively, this cryptocurrency allows people to use a blockchain network and related technologies to transact traditional currencies while minimizing the volatility and complexity often associated with digital currencies. On January 8, 2020, Tether was the fourth-largest cryptocurrency by market cap, with a total market cap of $4.6 billion and a value per token of $1.

Bitcoin Cash (BCH)

Bitcoin Cash (BCH) holds an important place in altcoin history because it is one of the earliest and most successful hard forks of the original Bitcoin. In the world of cryptocurrencies, a fork occurs as a result of debates and discussions between developers and miners. Due to the decentralized nature of digital currencies, wholesale changes must be made to the code underlying the token or currency in question due to consensus; the mechanism of this process varies depending on the particular cryptocurrency.

When the different factions cannot agree, sometimes the digital currency splits, with the original remaining true to its original code and the other copy starting life as a new version of the old currency, with changes to its code. BCH began life in August 2017 as a result of one of these splits. The debate that led to the creation of BCH had to do with the issue of scalability; The Bitcoin network has a strict limit on the size of blocks: one megabyte (MB). BCH increases the block size from one MB to eight MB, with the idea that larger blocks will allow for faster transaction times. It also makes other changes, including removing the Segregated Witness protocol that affects block space. As of January 8, 2020, BCH had a market cap of $4.

Pound (POUND)

One of the most hyped cryptocurrencies is one that, as of January 2020, has yet to be released. In mid-2018, rumors circulated that the social media giant Facebook, Inc. (FB) was developing its cryptocurrency. Given Facebook’s incredible global reach and the potential for huge trading volumes on its platform, the crypto world had long speculated that the social media titan might launch its digital token.

The rumors were formally confirmed on June 18, 2019, when Facebook published the Libra white paper. The token’s tentative launch date is later than 2020, as Facebook has committed to circumventing regulatory hurdles ahead of launch. Libra will be partly overseen by a new Facebook subsidiary, the financial services group Calibra. When Libra launches, it is sure to attract a great deal of attention from the inside (and outside) of the cryptocurrency sphere. In May 2020 it was revealed that Calibra, Facebook’s payment platform, had changed its name to Novi.

Currency (XMR)

Monero is a secure, private, and untraceable currency. This open-source cryptocurrency was launched in April 2014 and soon aroused great interest among the crypto community and enthusiasts. The development of this cryptocurrency is completely donation-based and community-driven. Monero has been launched with a strong focus on decentralization and scalability, and allows complete privacy through the use of a special technique called “ring signatures”.

With this technique, a group of cryptographic signatures appears that includes at least one real participant, but since they all appear valid, the real one cannot be isolated. Due to exceptional security mechanisms like this, Monero has developed a somewhat nasty reputation – it has been linked to criminal operations around the world. Nonetheless, whether it is used for better or worse, there is no denying that Monero has introduced significant technological advances in the cryptocurrency space. As of January 8, 2020, Monero had a market capitalization of USD 994.0 million and a value per token of $57.16.

EOS (EOS)

Aside from Libra, one of the newer digital currencies to make our list is EOS. Launched in June 2018, EOS was created by cryptocurrency pioneer Dan Larimer. Before his work at EOS, Larimer founded the digital cryptocurrency exchange Bitshares, as well as the blockchain-based social media platform Steemit. Like other cryptocurrencies on this list, EOS was designed after Ethereum, thus offering a platform on which developers can build decentralized applications. However, EOS is notable for many other reasons.

First, its initial coin offering was one of the longest and most profitable in history, raising a record $4 billion in funding from investors through year-long crowdsourcing efforts. EOS offers a proxy proof-of-stake mechanism that it hopes can offer scalability beyond its competitors. EOS consists of EOS.IO, which is similar to a computer operating system and acts as the blockchain network for digital currency as well as EOS coins. EOS is also revolutionary due to the lack of a mining mechanism to produce coins. Instead, block producers generate blocks and are rewarded in EOS tokens based on their production rates. EOS includes a complex system of rules to govern this process, with the idea that the network will ultimately be more democratic and decentralized than those of other cryptocurrencies. As of January 8, 2020, EOS had a market cap of $2.7 billion and a value per token of $2.85.

Bitcoin SV (BSV)

Bitcoin SV (BSV), with “SV” in this case standing for “Satoshi Vision”, is a hard fork of Bitcoin Cash. In this sense, BSV is a fork of the original Bitcoin network. A network upgrade planned for November 2018 resulted in a protracted debate between mining and development factions in the BCH community, leading to a fork and the creation of BSV. The developers of Bitcoin SV suggest that this cryptocurrency restores the original protocol of Bitcoin developer Satoshi Nakamoto while allowing new developments to increase stability and enable scalability. Bitcoin SV developers also prioritize security and fast transaction processing times.

As of January 8, 2020, BSV had a market cap of $2.1 billion and a value per token of $114.43.

Binance Coin (BNB)

Binance Coin (BNB) is the official token of the Binance cryptocurrency exchange platform. Founded in 2017, Binance has quickly become the largest exchange of its kind globally in terms of overall trading volume. The Binance Coin token allows Binance users to trade dozens of different cryptocurrencies efficiently on the Binance platform. BNB is used to facilitate transaction fees on the exchange and can also be used to pay for certain goods and services, including travel expenses and more.

As of January 8, 2021, Binance Bitcoin had a market cap of $2.3 billion and a value per token of $14.71.

With information from Investopedia.