What is Cryptocurrency?

Cryptocurrencies are getting popular day by day. Bitcoin was the first-ever cryptocurrency and is the most popular one right now. At present, there are more than 6700 cryptocurrencies around the world. In the future, where the world may go cashless with different kinds of electronic money, and all financial transactions may become digital, cryptocurrencies have some scope and possible prospects.

What is cryptocurrency?

A cryptocurrency is a form of digital money that can be used to buy goods and services online. The users purchase “coins” or “tokens” of a given cryptocurrency in exchange for a real currency, like dollars. There are thousands of cryptocurrencies traded publicly at present, Bitcoin being the first and the most popular one.

Unlike real currencies that are regulated by a central bank or government of a country, cryptocurrencies are maintained by a decentralized peer-to-peer network of computers called “Blockchain” technology. Each “coin” is basically a unique line of code that cannot be duplicated within the cryptocurrency’s infrastructure. Therefore, each “coin” can be uniquely identified and tracked while it is exchanged or traded within the network. The record and trading history of each “coin” is maintained in a shared digital register/ledger of data called “Blockchain”. In context to cryptocurrencies, a blockchain is a digital ledger that keeps the transaction history of every unit of the cryptocurrency, i.e., the ‘coins’, and keeps a record of how ownership of ‘coins’ changed over time. Each transaction of the given cryptocurrency, be it online purchase of a good or service or trading of ‘coins’ is recorded as a ‘block’, with new blocks added to the front of the chain.

The blockchain is a distributed ledger. The blockchain file is stored on many computers across the network. Whenever units/coins of a given cryptocurrency are traded or transferred, the transaction is verified by blockchain ‘Miners’, and the transaction is broadcasted for an update in every blockchain file. As the blockchain file is not stored on a central server or location, the possibility of generating counterfeit ‘coins’ or making fraudulent transactions is negligible. The blockchain file is readable by everyone within the network, so every transaction is transparent and secure.

Cryptocurrencies have a high level of security. The new blocks are linked in the chain using cryptography that involves complex mathematics and computer science. If the blockchain data is tried to be altered by a hacker or a fraudulent, the cryptographic links between the blocks are disrupted with the immediate identification of the fraudulent ‘node’.

Cryptocurrency is a kind of digital money that is not regulated by any central authority or government but is valid within and maintained by a distributed, peer-to-peer network of computers. The units or ‘coins’ of a given cryptocurrency can be obtained via Initial Coin Offerings (ICO), purchasing by real currency at an online cryptocurrency exchange, by trading with other cryptocurrencies, offering goods and services for a given cryptocurrency, or as a reward by blockchain mining.

How does cryptocurrency work?

Cryptocurrency is a decentralized unregulated digital monetary system. When a person buys a given cryptocurrency, it is stored in a digital wallet. The digital wallet is accessible either through an app or a vendor. Each person with the wallet is assigned a public and a private encryption key. The private key is required to sign off’ any transaction. It works like a digital signature to validate any purchase or transaction. Every transaction ever made is recorded in the blockchain. The blockchain is a public ledger that is visible to all persons within the network. The entries in the ledger cannot be changed without fulfilling specific conditions. Nobody has control or regulation over the ledger. It is a self-governed database stored at multiple locations in a shared distributed network of computers. A person with the digital wallet of a given cryptocurrency becomes part of the network. Any person or institution outside the network has no interference with a given cryptocurrency.

Every transaction in a cryptocurrency happens peer-to-peer between two persons. When a transaction is made, it is initially unconfirmed until verified. The verification of a transaction is completed by a cryptocurrency ‘miner’. The miners use powerful computers to solve complex algorithms to verify a transaction. Cryptocurrency mining is open-source. Anybody provided is part of the network, can perform ‘Mining’ and confirm a transaction. The first miner to solve the complex mathematical problem gets the chance to add a new block in the blockchain and is rewarded with the given cryptocurrency. Solving the complex mathematical problem is called a ‘proof-of-work system’. Once a transaction is successfully verified by a ‘Miner’, it is added to the blockchain ledger. This way, the ownership of given ‘coins’ is changed and updated in the ‘ledger’. As the ledger is public worldwide, changes in the ownership of ‘coins’ or ‘tokens’ are visible to all persons within the network.

Is cryptocurrency valid?

There have been doubts regarding the validity of cryptocurrencies. Cryptocurrencies are legal in the United States and many other countries. In the United States, cryptocurrencies like Bitcoin are subject to capital gains tax. The legal validity of a cryptocurrency depends on each country. Many countries have banned cryptocurrencies, while in many countries, there is no clear legislation regarding them. Any cryptocurrency is a parallel monetary system based on shared trust among its holders. Obviously, it is valid within its online community and can be used without a doubt for purchasing goods and services within its network of users.

As the cryptocurrencies are purchased by real currency and can be traded for real currencies, like dollars, at online cryptocurrency exchanges, it definitely has some value in the countries where a given cryptocurrency is legal. Many popular cryptocurrencies have a market capitalization of billions of dollars, making them widely acceptable among large online communities and networks. Due to the wide acceptance of many cryptocurrencies and the availability of reliable systems for their trading in real currencies, cryptocurrencies are somewhat trust-worthy.

Instead of real currencies, cryptocurrencies are better compared to stocks. They are worth investing in or purchasing as far as they have good market capital and trust among online communities. No government or central authority regulates a given cryptocurrency. It is self-regulated on a supply-demand basis. The validity of a given cryptocurrency only depends upon its online community and total market capital.

A lot of people see cryptocurrencies as an investment that may give exponential returns in the future. Remember, cryptocurrencies have no legal regulation, and it is just virtual money that is acceptable within confined online communities. Investment in such instruments can be risky. Nobody knows what comes in the future, whether popular cryptocurrencies will become acceptable parallel payment systems or may get discarded someday due to trust issues, security reasons, or by the law. The key holds in the future. Anyone looking for investment in a cryptocurrency must take it as a dead investment that may give an exponential return someday or turn into lost money forever.

Important cryptocurrencies by market capital

There are more than 6700 cryptocurrencies in 2021. The top 20 cryptocurrencies by market capitalization as of March 6, 2021, are listed below.

You can learn about current market capitalization and other statistics of important cryptocurrencies from CoinMarketCap.

Why are cryptocurrencies gaining popularity?

Most of the people interested in cryptocurrencies are attracted by a skyward rise in their values. Cryptocurrencies are highly volatile, and their value rises and falls sharply. A lot of people gain interest in cryptocurrencies for the blockchain technology behind them. Such people usually engage in buying cryptocurrencies for experimental purposes. Many people like the decentralized and unregulated nature of cryptocurrencies, while many from generation Z engage in buying cryptocurrencies for fun. Cryptocurrencies can be seen as similar to stocks or commodities. However, there is no legal authority to monitor and regulate them. Therefore, their future is best unknown.

Online brokers for cryptocurrencies

Some of the top online brokerages and cryptocurrency exchanges are Coinbase, eToro, FTX, Liquid, Robinhood, Kraken, SoFiactive Investing, Deribit, Tradestation, Phemex, Bybit, bitFlyer, Binance, and Bitmax.

Best cryptocurrency trading platforms –

Some of the best cryptocurrency trading platforms are Bitcoin Era, Bitcoin Up, Binance, Kraken, eToro, CEX.IO, Bitfinex, and Shapeshift.

Risks of investing in cryptocurrencies

Remember, all cryptocurrencies are virtual money. Their value is based on a supply-demand basis. They are highly volatile, with their value going through extreme ups and downs. There are lots of unknowns in investing in cryptocurrencies. Most people do not understand the blockchain technology behind it and are prone to fraudulent activities. Money laundering is a major issue with cryptocurrencies. These virtual currencies are suspected to be used for the dark web. Trading in cryptocurrencies is similar to gambling. It may give an unproven and unpredictable return of investment. The lack of any regulatory authority or common legislation makes the future of cryptocurrencies uncertain.

How much is it worth?

Blockchain technology is interesting and useful in several other areas as well. If you are interested in cryptocurrencies for learning blockchain technology, cryptocurrency is a practical way to engage with it. If you are looking into cryptocurrencies as investment instruments, beware, there is no shortcut to wealth generation, be it stocks, commodities, or cryptocurrencies. Particularly, in context to cryptocurrencies, you never gain any profit until you find a ‘greater fool’ who is ready to pay more than you for your holdings. After all, all cryptocurrency transactions are peer-to-peer affairs. If you are interested in blockchain mining, the rewards largely depend on your luck. If you have a budget for a powerful computer, you may try blockchain mining. Still remember, blockchain mining is largely unprofitable, and the rewards for blockchain mining are a matter of luck.