In simple words, cryptocurrency is decentralised money designed to be used over the internet. It is secured by cryptography, which makes it impossible to double-spend or counterfeit. Most cryptocurrencies are based on blockchain technology, a distributed ledger enforced by a wide network of computers.
A distinctive feature of cryptocurrencies is that they are not issued by any central authority, making them completely immune to government manipulation or interference. Let us dive deep into this digital asset and fully understand what is digital currency.
Cryptocurrency is a decentralised digital currency based on blockchain technology. It is an alternate form of money created using cryptographic algorithms. You can use it to buy goods and services or trade them for profit. This digital currency is finite and sometimes equated to gold and silver.
It is created through mining, which is a procedure where complex problems are solved by powerful computers, generally as a reward for making a successful cryptocurrency transaction. In simple terms, the exchange of crypto usually results in more cryptocurrencies being introduced. Now that we have the basic idea of what is crypto, let us focus on how they work.
Blockchain refers to a distributed ledger or database shared among a wide range of computer networks. It stores information in digital format. This technology is widely known for its role in cryptocurrency systems for maintaining a decentralised and secure record of transactions. The defining feature of blockchain is that it guarantees the security and fidelity of data and creates trust without any need for a third party.
In the case of cryptocurrencies, blockchain is used in a decentralised manner so that no single person or a group of people have control. Instead, all users collectively maintain control. Learn more about blockchain wallets and blockchain login.
How Does cryptocurrency Work?
After knowing what is private cryptocurrency, it is time to talk about how cryptocurrency works. Cryptocurrencies work on a distributed ledger known as the blockchain, which basically keeps a record of all transactions and updates them. Individuals can buy crypto from brokers and store them using a cryptographic wallet.
Owning a cryptocurrency does not mean owning anything tangible. You only have a key that allows you to move a record from one person to another.
What are the Largest Cryptocurrencies?
Bitcoin was the first ever cryptocurrency that changed the way people thought about money. It is still the most popular crypto and the largest in value. Here are some of the best cryptocurrency to invest in, along with their market cap: –
- Bitcoin – $338 billion
- Ethereum – $132 billion
- Tether – $67 billion
- USD Coin – $56 billion
- Binance Coin – $36 billion
- Cardano – $16 billion
- XRP- $16 billion
- Solana – $13 billion
- Dogecoin – $8 billion
- Polkadot – $7 billion
What is Cryptocurrency Used for?
After talking about how does cryptocurrency work, let us understand its uses. Even though cryptocurrency is nowhere near replacing institutionalised money, it has found wide acceptance around the world. Here are two major ways in which one can use a cryptocurrency: –
- Mode of Payment
With the rise in popularity of cryptocurrencies, many businesses worldwide have come to accept them as a viable mode of payment. Apple is one of the most notable acceptors of crypto as a payment medium. However, the Indian economy is still exploring cryptocurrency. Nevertheless, with tech giants such as Facebook and Apple hoisting its cause, crypto is expected to gain traction in India soon.
Today, cryptocurrencies like Bitcoin and Ethereum have become some of the most lucrative investment options. The appreciation of value is dynamic and can prove to be a superb avenue for expanding capital. However, the investors must consider the volatility of this digital currency. For instance, Bitcoin, the most popular crypto with the largest market cap, has had some erratic changes in value.
Can You Convert Crypto into Cash?
Now that we have a basic understanding of cryptocurrency and how blockchain works, you may be wondering whether you can convert your digital assets into cash. Yes, it is possible to convert cryptocurrency into cash. There are a few different ways to do that.
- Through Exchanges or Brokers
In this method, you need to deposit the assets into a cryptocurrency exchange and demand a withdrawal afterwards. The broker will transfer the money to your bank account that was used to buy crypto. The process is safe and secure; however, it may take 4 to 6 days for conversion. The exchange also charges a small fee for the transaction, which can vary with the broker and the country. Here are some simple steps you can follow to convert your digital assets into cash through an exchange.
- Create an account with the exchange or broker.
- Then, you need to complete the verification process for the exchange firm.
- After that, deposit your assets into your account.
- Finally, you will be allowed to cash out your digital coin.
- Through Peer-to-Peer Platforms
Another method to convert your crypto assets into cash is through a peer-to-peer platform. This process is faster and charges less transaction fees. One needs to be careful of the fraudsters while conducting peer-to-peer transactions. It is recommended to keep your assets locked up until the payment has been processed. You can follow these steps to conduct peer-to-peer transactions: –
- Sign up and select the location of your ideal buyer.
- Then, send trade requests to crypto buyers.
- Opt for an escrow option, where your cryptocurrency is kept secure until the payment is complete.
What are the Risks of Crypto?
The growing popularity of cryptocurrencies is attracting considerable attraction around the world. But must be aware of the risks related to crypto trading. Let us talk about some significant risks: –
The value of crypto assets keeps fluctuating. The changes in market sentiment can lead to sudden and sharp movements in price. It is not uncommon for the value of these digital currencies to quickly rise and drop.
Cryptocurrencies are not regulated by the government and central banks. However, they are attracting more attention. For instance, there are discussions about whether to consider crypto as a commodity or an intangible currency.
- Susceptible to Hacking and Errors
Even in the case of cryptocurrencies, there is no perfect way to completely prevent technical glitches, hacking, or human error.
- Liquidity Risk
There may arise a situation where the crypto trades cannot be settled or can be traded only at an adverse price due to the market situation.
Mining the Currency is Expensive and Polluting
Cryptocurrencies are intangible assets and exist only online. Yet this digital currency has a real-word environmental impact. To fully understand how it pollutes the environment, you must know how cryptocurrency is created. They are made through a process called crypto mining, which we have briefly discussed.
The procedure for mining crypto relies on computations conducted in real machines that use a lot of electricity. The processing of numerical data in data centres is done using specialised computers, which keep running constantly. Thus, a huge amount of energy is consumed. Bitcoin mining alone takes up more energy than some countries such as Chile, Netherlands, and Czech Republic.
Staking in Cryptocurrency
Staking is a complicated idea in the field of cryptocurrency. But the key takeaway is that it is a way to generate rewards for holding certain crypto assets. Even if you are just looking to earn some rewards, it is useful to know a little about how staking works.
Some cryptocurrencies, such as Ethereum, Tezos, and Cosmos, allow staking crypto. You can ‘stake’ some of your crypto assets and earn a certain percentage reward with time. This generally happens through a staking pool, which is similar to a savings account that offers interest.
Your crypto assets earn while staked because they are put to work by the blockchain. The cryptos that allow staking make use of a mechanism called proof of stake, which is a procedure to ensure that transactions are secured and verified.
Types of Cryptocurrencies
Bitcoin was the first cryptocurrency created in 2009 by an anonymous person referred to as Satoshi Nakamoto. Since then, thousands of cryptocurrencies have come along. Each of them claims to have a distinct function and specification. Also, cryptos other than bitcoin are called altcoins. Learn more about what are altcoins.
Here are some of the major types of cryptocurrency: –
Ethereum comes second when it comes to popularity. It was founded by Vitalik Buterin and Gavin Wood in 2015. Today, it represents more than 17% share of the crypto market. There are some differences between Bitcoin and Ethereum. Unlike the original cryptocurrency, Ethereum is designed to be much more than just an exchange medium. It is a decentralised network based on blockchain technology.
NFTs or Non-Fungible Tokens, a significant invention secured by Ethereum that represents the ownership of unique things. It allows you to tokenise items such as collectables, art, and even real estate. There is only one owner at one point in time. Learn more about what is NFT.
Solana is a high-performance blockchain platform which is designed to host scalable applications. It was founded in 2017. Solana is currently an open-source project that is run by Solana Foundation. It is known for making faster transactions and charging lower transaction fees compared to other blockchains such as Ethereum.
Cardano is one of the largest cryptocurrencies in terms of market capitalisation. It is a blockchain that is sustainable, flexible, and scalable. Cardona allows the development of a wide array of decentralised games, finance apps, and more.
Polkadot is a blockchain platform that secures and unites a growing network of specialised blockchains, also known as parachains. It helps apps and services to securely communicate across chains and forms the basis for an interoperable decentralised web. With Polkadot, one can create a custom blockchain within minutes. Moreover, it uses only a small fraction of the energy consumed by other blockchains.
Bitcoin was first introduced by an anonymous developer named Satoshi Nakamoto. Since then, it has become the most popular cryptocurrency across the world. It is created, stored and traded using a decentralised ledger called the blockchain.
Litecoin is a cryptocurrency that was created from a fork in Bitcoin in 2011. It was designed to concern that Bitcoin was getting centrally controlled and in order to make it difficult for largescale mining firms to get ahead. One significant feature is that Litecoin processes transactions faster than Bitcoin.
Dogecoin is an open-source cryptocurrency that is also known as the meme coin. It was launched in 2013 and has the image of the Shiba Inu as its logo. The underlying technology of dogecoin is derived from Litecoin. It is supported by a loyal community who trade it as tipping money for social media content.
Binance coin or BNB is a cryptocurrency issued by the Binance exchange. In the beginning, this coin was based on the Ethereum network, but now it has become the native currency of the blockchain created by the Binance exchange. It has expanded to a number of applications on a wide range of platforms.
Polygon, earlier known as Matic network, is a technology platform that allows blockchain networks to connect. It operates with the help of the Ethereum blockchain and connects projects based on Ethereum. With the Polygon platform, one can enhance the scalability, flexibility, and sovereignty of the project.
Another emerging finance technology is DeFi (Decentralized Finance), which is quite similar to the technology used by cryptocurrencies. Learn more about DeFi coins.
What is a Cryptocurrency Wallet?
Cryptocurrency wallets keep the private keys safe and accessible. It allows individuals to send and receive crypto assets. Technically, crypto wallets don’t store cryptocurrency. Your assets are live on the blockchain, which can only be accessed using the key.
The private keys prove the ownership of crypto and allow one to perform transactions. In case you lose the keys, you basically lose access to your assets. That is why it is important to keep the hardware wallet safe or use a reputed wallet provider. You can also use a hot wallet, which stays connected to the internet and the cryptocurrency network.
Are Cryptocurrencies Legal?
Cryptocurrency has remained a controversial topic ever since it came into existence. It has been criticised for its volatility and its environmental impact. However, some countries believe in the decentralised currency. El Salvador made Bitcoin legal in September 2021.
The legal status of this digital currency varies with the country. In India, the government is preparing a bill to regulate cryptocurrencies in India. It has also announced that a 30% steep tax will be levied on virtual assets such as crypto. Keep in mind that taxing does not give cryptos any legal status.
Advantages and Disadvantages of Cryptocurrency
Blockchain-backed cryptocurrency has been one of the significant breakthroughs that have occurred since the advent of the internet. It has transformed the game for investors and businesses across the world. But just like any other technology, it has its set of advantages and disadvantages.
Here are some of the advantages of blockchain technology.
- Protection from Inflation – Inflation causes the value of currency to decline with time. Unlike conventional money, the value of cryptocurrencies increases with the increase in demand.
- Self-Governed – The governance of a currency is essential for its development. The cryptocurrency transactions are stored by developers, who keep the record up to date. This keeps integrity of the crypto.
- Decentralised – This is a major advantage of cryptocurrency. The decentralisation helps keep the asset free from monopoly. No individual or organisation can determine the worth of cryptocurrency.
- Secure – The blockchain ledger is based on various mathematical puzzles which are hard to solve. It makes cryptocurrencies safer than standard electronic transactions.
- Easy Transfer – Cryptos have an optimal solution for secure transactions. They are lightning fast.
After looking at the advantages, take a look at some of the disadvantages of cryptocurrency.
- Illegal Transactions – The government cannot trace any crypto user by their wallet. Bitcoin and other cryptocurrencies have been used as a payment medium for making illegal deals on the dark web.
- No Refund – In case there is a dispute, or if funds have been sent to a wring wallet, the assets cannot be retrieved.
- Environmental Impact – Mining cryptos requires plenty of computational power. All this leads to a huge amount of energy consumption.
- Vulnerable to Hacks – Even the most secure cryptocurrencies are free from hacks. The data may be stolen by hackers, which can give them access to many accounts.
How Do You get cryptocurrency?
As an investor, you may purchase crypto from any of the popular crypto exchange platforms such as Coinbase. Investing through financial derivatives is another popular way to get cryptocurrencies. Learn more about cryptocurrency for beginners.
What is the Point of Cryptocurrency?
Cryptocurrencies have brought a paradigm shift in the concept of money. They have streamlined the existing financial architecture and made it cheaper and faster. The technology with a decentralised monetary system has made it possible for the transacting parties to exchange money or value without any intermediary institutions like banks.
Bitcoin was the first cryptocurrency developed under an anonymous name, referred to as Satoshi Nakamoto.
One of the major reasons for the popularity of cryptos is the assumption that suggest that they are the currency of the future. Also, the rising value of crypto encourages people to invest in it.
Cryptocurrencies are based on blockchain technology, which does not allocate control to any single person or entity. Instead, the users have the privilege of managing the operations of the cryptocurrency in a distributed manner.
Cryptocurrencies are extremely volatile. But unlike conventional money, its value keeps increasing with the rise in demand. Make sure to weigh the advantages and disadvantages before investing in crypto.
It is possible to purchase cryptocurrencies through a wallet. You can create an account on an exchange platform and transfer real money to buy crypto.