What is Cryptocurrency – Work Process, Pros & Cons

If you know a little bit about decentralized digital money, you should have come across the word ‘Cryptocurrency’ and may be even familiar with its most common versions, Bitcoin and Ethereum.

However, there are more than 5000 different types of cryptocurrencies currently in circulation, according to a recent study by Coinlore.

Though this is a novel and moving asset class, it may be a bit risky if you purchase them without conducting a thorough research.

There are mixed opinions about cryptocurrency and investing in this highly speculative digital currency.

For that matter, you will need to understand fully what cryptocurrency is and how exactly it works.

What is Cryptocurrency: A Brief History

What is cryptocurrency

Cryptocurrency is not a new concept. In fact, the idea for cryptocurrency was initiated way back in the late 1980’s.

Since then, a lot of people created different cryptographic electronic money such as Digicash, Bit Gold and more.

The timeline of cryptocurrency is very interesting. Here it is, according to its different periods.

2008 – 2010: The beginning: Satoshi Nakamoto first published the white paper called Bitcoin on October 31, 2008. This is a Peer-to-Peer Electronic Cash System which works on blockchain technology.

However, the first block of 50 Bitcoins was first mined by Satoshi Nakamoto on January 3, 2009. This block, now referred to as the Genesis Block, had little value during its initial period.

In fact, till April 2010, it was less than 14 cents. The first pizza was bought in May and the value rose to 36 cents by early November and settled at around 29 cents that year.

2010 – 2014: The surge: This is the period when the market for cryptocurrency started to form. By February 2011, the value of it was $1.06 and then came down to around 87 cents.

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In early April till the end of May, the value rose up to $8.89, and in June it peaked to about $27 when its market value was nearly $130 million.

Other types of cryptocurrencies came to the market on and from September 2011 such as Litecoin, Altcoins, Namecoin, and more.

Since 2012, the prices have grown steadily and in September 2012 Bitcoin Foundation was founded to promote its development.

In 2013, the prices rose to as high as $1,163 and crashed to as low as $152 constantly amidst regulatory, criminal, federal, and software related issues.

2014 – 2016: Scams made headlines: Due to the lack of centralized control by banks and intentional anonymity, criminals started making the most out of this digital currency.

The largest Bitcoin exchange of that time, Mt. Gox declared bankruptcy in January 2014 after losing 850,000 bitcoins. Several major cryptocurrency exchanges were hacked during this period which called for security enhancements on exchanges.

More guarantees were offered on reserve holdings and emergency insurance funds such as Secure Asset Fund for Users were created.

Crypto traders were also advised to store cryptocurrencies safely in hardware or software wallets rather than on an exchange.

2016 – 2018: A worldwide phenomenon: With the steady rise in prices of cryptocurrencies henceforth as well as its much-improved scalability, bitcoins and other cryptocurrencies became a worldwide phenomenon.

The prices reached an astronomical height of $20,000 by December 17, 2017. This is when Ethereum, the new blockchain project, came into existence and became the number two cryptocurrency pretty soon.

This offered a lot of potential and soon generated more than 200,000 different projects, each having their own cryptocurrencies.

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With other blockchains such as Tezos and Cardano competing with Ethereum, the cryptocurrency market continued to grow and extend its market cap.

2018 – Present: Bust and recovery: Sustainability of cryptocurrency was always a point of concern. It was mainly due to the lack of security and financial regulations that resulted in continued hacks on exchanges.

However, due to the volatile nature of the cryptocurrencies, its power to change different sectors of the society, and the underlying blockchain technology, it regained its foothold on the market.

The future of it seems to be bright and implementation of newer and better concepts has brought in stability with more and more investors being excited and interested in investing in cryptocurrency.

How Does Cryptocurrency Work?

Most of the people in the world invest in it just as they do for procuring different assets including precious metals and stocks. You can use cryptocurrencies to buy regular goods and services. This digital medium of exchange works primarily on blockchain technology.

The basic concepts involved in it are:

  • Blockchain – which acts as a technology as well as a public ledger of transactions, and
  • Cryptography – which secures every process of each transaction.

The working process of cryptocurrency is more like the use of a debit card of any bank. The only difference being, the banks and governments issue the currency and maintain the records of transactions in bank credit but in cryptocurrency it is an algorithm that does it all.

All transactions here are made between peers through the cryptocurrency wallet – a software. Check out Most Important Cryptocurrencies Other Than Bitcoin.

The Pros

Transparency

Though the use is anonymous, the fact that all transactions are stored in an open ledger using blockchain gives it an unparalleled transparency and accountability for social exchange.

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Accessibility

You can buy, spend, and invest on cryptocurrency from wherever you are without even needing a computer. You can do so using your mobile device and manage everything from financing to making your investment decisions in real time.

Anonymity and security

The anonymous nature of transactions offers an additional layer of security as well as online privacy. This means that there is little or no chance of identity theft.

The Cons

Comprehending

When you go for a large-scale adoption, the most challenging task would be to comprehend it. It will be more difficult if you are not tech-savvy.

Market fluctuations

Since most people use cryptocurrencies as an investment, it is hard to speculate the market fluctuations so that it works in your favor.

Risks involved

Apart from chances of hacks, there is also no security in case of any losses. If you are naïve, you will be subject to cheats, scams, and even stealing your hard-earned money.

Conclusion

Cryptocurrency is a digital currency that exists only on computers and can be transferred between peers without any middleman. The blockchain technology records each transaction in a digital public ledger using cryptography.