To make it simple cryptocurrency, like Bitcoin, is a digital version of money where the transactions are done online. A cryptocurrency is a medium of exchange just like your normal everyday currency such as the USD, but designed for the purpose of exchanging digital information through a process known as cryptography. The first ever-successful cryptocurrency emerged from the invention of Bitcoin, by Satoshi Nakamoto. This was then followed by the birth of other types of crytocurrencies competing against Bitcoin, or BTC.
How Do Cryptocurrencies Work?
The reason why cryptocurrencies are in such demand right now is because Satoshi Nakamoto successfully found a way to build a decentralized digital cash system. What is a decentralized cash system?
A decentralized system means the network is powered by its users without having any third party, central authority or middleman controlling it. No central bank, or any government, has power over this system. This is most commonly known as the Blockchain Technology.
The blockchain can be likened to an online ledger, where all transactions are recorded and made visible to the whole network. This comes to show that cryptocurrencies are not secured by people or trust, but by complex mathematical equations. It is very secure and it’s highly unlikely that the address of a currency is compromised.
Only miners are able to confirm a transaction. This is their role in the cryptocurrency network. They record transactions, verify them and disperse the transactional information in the network.
For every completed transaction monitored and facilitated by the miners, they are rewarded with a token of cryptocurrency, for instance with Bitcoins.
In order for you to be a miner, you would need to solve a cryptologic puzzle which is a set of very complex mathematical questions set by Satoshi Nakamato himself. If you successfully solved the puzzle, as a miner you can build a block and add it to the blockchain.
How Is The Value of Cryptocurrencies Determined?
The value of cryptocurrencies is dependent on the market. The prices of various cryptocurrencies vary a lot and is one of the most fluctuating and volatile markets to date. The price of cryptocurrencies like any other products is dependent on demand and supply. If more people demands a particular currency and it is short in supply, then the value increases. More units are mined by miners to balance the flow. However, most currencies limit the supply of their tokens.
For instance, the total amount of Bitcoin issued is only 21 million. Therefore Bitcoin’s supply will decrease in time and will reach its final number by 2140. It also explains why Bitcoin’s value is higher as compared to other cryptocurrencies.
What Is Cryptocurrency Used For?
Cryptocurrencies can be spent for different purposes and the best part is, all transactions are completed online! There are generally 3 different transactions that can be performed when using cryptocurrency:
1. Bitcoin Trading
2. Personal Spending
3. Crowd Funding
Bitcoin trading can be very profitable for both professionals and beginners. The market is new, where arbitrage and margin trading is widely available. The currency’s high volatility has also played a major role in bringing new investors to the trading market.
Compared to other financial currencies, Bitcoin has very little barrier to entry. If you already own Bitcoin, no verification is required and you can start trading almost instantly. Moreover, Bitcoin is not fiat currency. This simply means the price is not related to the economy or policies of any single country.
And unlike stock markets, there are no official Bitcoin exchanges. Instead, hundreds of Bitcoin exchanges operate 24/7 around the world. Because of no official exchanges, this results in no official Bitcoin price where the currency is known for its rapid and frequent price movements.
Second is personal spending. You can use Bitcoin to purchase almost anything! From buying cars to travelling the world. In December 2013, a Tesla model S was purchased for a reported 91.4 BTC. The dealer, located in California continues to accept Bitcoin as a means of payment. They have since managed to sell a Lamborghini Gallardo for 216.8 BTC.
You can also travel the world using Bitcoins! Just head to www.cheapair.com. On 22nd November 2013, they announced that they would be the first online travelling agency accepting Bitcoin. You are able to purchase flights, hotels, car rentals and cruises. You can even book the whole package.
Cryptocurrency also provides the chance for you to give back to society. How? By crowd funding. You are able to be part of someone’s success story by donating to a crypto crowd funding project. Companies such as Lighthouse have built their crowd funding platform using Bitcoin.
The perks of donating through this system are you will not be charged for your donation and funds will not be released unless the project meets its criteria. You are also able to withdraw from the campaign before its completion.
Believe it or not, aside from Bitcoin, there are over 800 cryptocurrencies! However, we will only discuss the top 5 most prominent currencies in the market. These 5 cryptocurrencies are:
Firstly, is Bitcoin.
This is the first ever cryptocurrency invented and remains by far the most sought after cryptocurrency to date. Bitcoin is known as the digital gold standard in the cryptocurrency network. As explained in the previous module, Bitcoin is the pioneer of Blockchain Technology that made digital money possible.
It is the first ever decentralized peer-to-peer network powered by its users without any central authority or middleman which means, no unnecessary costs are included in the digital money transaction.
Over the years of Bitcoin’s existence, its value has fluctuated tremendously from zero to over $2000 per bitcoin to date. Its transaction volume has also reached 200,000 daily transactions. One major advantage that it has over other cryptocurrencies is Bitcoins are impossible to counterfeit or inflate. The reason being there are only 21 million bitcoins created for mining, no more no less. Therefore it is predicted by 2140, all bitcoins will already be mined.
The second most popular currency is Ethereum.
Created by Vitalik Buterin, it has scored itself the second spot in the hierarchy of cryptocurrencies. This digital currency, launched in 2015, is predicted to surpass Bitcoin and may be the cryptocurrency of the future.
Is Ethereum similar to Bitcoin?
It is in a way, but not really. Like Bitcoin, Ethereum is a part of a blockchain network. The main difference between the two currencies is that Bitcoin blockchain focuses on tracking ownership of the digital currency while Ethereum blockchain focuses on running the programming code or network.
Another use of the Ethereum blockchain is its ability to decentralize any services that are centralized. For instance, Ethereum is able to decentralize services like loans provided by banks, online transactions using Paypal as well as voting systems and much more.
The third cryptocurrency is Litecoin.
When the currency was first launched in 2011, it aspired to be the ‘silver’ to Bitcoin’s ‘gold’. Litecoin also recorded the highest market cap of any other mined cryptocurrency, after Bitcoin. The main reason of Litecoin’s creation is to make up what Bitcoin lacked. The main difference between Litecoin and Bitcoin is the 2.5 minute time to generate a block for Litecoin, as opposed to Bitcoin’s 10 minutes.
One of the biggest advantages that Litecoin possesses is it can handle a higher volume of transactions thanks to its algorithm. The faster block time also prevents double spending attacks. While Litecoin failed to secure and maintain its second place after Bitcoin, it is still actively mined and traded and is bought by investors as a backup in case Bitcoin fails.
The fourth currency is Monero.
This digital currency was launched in 2014 and its main goal was to create an algorithm to add the privacy features that is missing in Bitcoin. Monero invented a system known as the “ring signatures” to conceal the identity of its senders and recipients.
Ring signatures combine a user’s private account keys with public keys obtained from Monero’s blockchain to create a ring of possible signers that would not allow outsiders to link a signature to a specific user.
While Monero users have the ability to keep their transactions private, they are also able to share their information selectively. Every Monero account has a “view key,” which allows anyone holding it to view the account’s transactions.
Last but not least is Ripple.
Ripple is actually a technology that has a dual function; as a digital currency as well as a digital payment network for financial transactions. It was launched in 2012 and co-founded by Chris Larsen and Jed McCaleb.
Unlike the other cryptocurrencies, Ripple allows a transfer of money in any form, both fiat and cryptocurrency. Ripple also uses a middleman in the currency transactions. The medium (the middleman) known as “Getaway” acts as a link in the network between two parties wanting to make a transaction. In Ripple’s network, any currency can be exchanged between one another.
The way it works is that the Gateway functions as a credit intermediary that receives and sends currencies to public addresses over the Ripple network. This is why Ripple is less popular when compared to the other digital currencies, with only a $0.26 value to date.
Have you heard of Erik Finman? The teenage Bitcoin millionaire who started picking up Bitcoin at only $12 a piece back in May 2011, when he was just 12 years old. He received the Bitcoin as a tip from his brother and a $1000 gift from his grandmother. He now reportedly owns 403 Bitcoins, which holds a value of roughly $2,600 where it has accumulated to a stash of $1.08 million and change.
There are various concrete reasons why you should invest in cryptocurrency. Firstly are its transactional properties. Cryptocurrency transaction is fast and global. Transactions are propagated immediately in the network and are confirmed within minutes. Since the transactions are managed by a global network of computers, they do not take into account your physical location.
Secondly are their monetary properties. The currencies are in controlled supply thus there is a high chance that the value of the currencies appreciates over time. As mentioned earlier, Bitcoin will somehow reach its final number somewhere in 2140.
Third is their revolutionary property. You have more control of what is going on in your account and how the system works and operate. This is due to the decentralized network of peers which keeps a consensus on account balances and the transactions made. as compared to your physical bank account, which can be changed and controlled by people you don’t see and governed by rules you don’t even know.