Cryptocurrency is a decentralized digital currency based on blockchain technology and protected by cryptography. To understand cryptocurrencies, you first need to understand three terms — blockchain, decentralization, and cryptography.
1. How Cryptocurrency Works
In short, a blockchain in cryptocurrency is a digital ledger whose access is distributed among authorized users. The ledger records transactions related to a range of assets, such as money, houses, and even intellectual property.
Access rights are shared among users, and any information shared is transparent, instant, and "immutable." Immutable means that blockchain records exist forever and cannot be modified or tampered with - even by administrators.
2. The benefits of cryptocurrency
A centralized currency is the regular currency we use, managed by an institution such as the Reserve Bank of India. The decentralization of cryptocurrencies means that there is no comparable authority responsible for overseeing the rise and fall of a particular cryptocurrency. This has many benefits over centralized currencies.
1. Currency owners do not need to "trust" a single governing entity, as everyone in the network has access to the same information that cannot be changed.
2. Data is still only accessible by network users and is strictly protected. Shared ownership also means that all users agree to the accuracy of the data, meaning there is little scope for data mismanagement or communication. Think of it as a democracy.
3. Security is a fundamental part of blockchain.
Cryptography is a method of protecting data from unauthorized access through the use of encryption techniques. Most of the claims made by blockchains, such as privacy and immutability, are achieved through cryptography.
3. Types of cryptocurrency
There are currently tens of thousands of cryptocurrencies and by 2022 this number will reach 10,000. Major cryptocurrencies include:
1. Bitcoin
Bitcoin is the world's first widely accepted form of cryptocurrency. Bitcoin is so popular that there was a time when its name was synonymous with cryptocurrency. But potential investors need to know that bitcoin has become very expensive. In 2021, the cost of one bitcoin is $68,000. But the good news is that you don't always have to buy whole coins, you can buy smaller parts.
2. Altcoins
Altcoin is a term referring to any alternative digital currency to Bitcoin. The most popular in this ecosystem is Ethereum - one of the fastest growing cryptocurrencies in the market. There are a range of other altcoins in the market today such as Luckyblock, Shiba Inu and Terra.
3. Encrypted Tokens
The concept of cryptocurrencies and tokens can confuse many people. At first glance, coins and tokens look the same. However, there are still many differences between the two:
Coins can be mined, but tokens cannot be mined.
Coins are pegged to the blockchain whereas tokens are not.
In terms of utility, they vary in the types of products or services they allow users to purchase.
4. Should you invest in cryptocurrencies?
There are many advantages to trading cryptocurrencies, but there are also many disadvantages. Here are the top three reasons for and against cryptocurrencies.
advantage:
1. They are private and secure: The blockchain technology that powers cryptocurrencies ensures the anonymity of users. It also ensures a high level of security through the encryption technology we discussed earlier.
2. They are decentralized, immutable and transparent: the entire system runs on shared ownership, data is available to all licensed members and is tamper-proof.
3. They are an inflation hedge: Cryptocurrencies are a great investment in times of inflation. For example, investors often compare cryptocurrencies to gold. One of the reasons behind this is that, like gold, they have a limited supply as there is a cap on mining any type of cryptocurrency.
shortcoming:
1. They are not widely understood: they are a relatively new concept, and the long-term sustainability of cryptocurrencies remains to be seen.
They are prone to high risks: Needless to say, cryptocurrencies offer as much reward as risk. Their highly volatile and speculative nature makes them prone to sharp declines. Investing in cryptocurrencies can be risky for a number of reasons.
2. A major deterrent may be that digital currencies appear to have no intrinsic or underlying value. There is a supply and demand equation used to determine the value of cryptocurrencies like Bitcoin.
3. Additionally, it is easy to see how simple speculation on the internet could result in a substantial increase or loss in the value of these tokens.
4. In addition, the fact that many countries ban cryptocurrencies or restrict their use also poses a significant risk. Their legality is disputed in countries such as India.
5. Scalability is an issue: This is a complex issue that has more to do with the technical aspects of blockchain. In short, the slow nature of the blockchain makes it prone to transaction delays. This tends to make crypto payments inefficient compared to modern electronic payment technologies.
epilogue
Whether or not cryptocurrencies are the future of money, one thing is clear: it is not advisable for anyone to invest in it without doing enough research.