The Definitive Guide to Cryptocurrency and Bitcoin

What is a Cryptocurrency? What is a Bitcoin?

A cryptocurrency is a medium of exchange just like normal currency, designed to be highly secure and anonymous. Cryptocurrencies are designed to facilitate exchange of digital information through a process made possible by cryptography.

Cryptography is commonly used to secure transactions and to control the creation of new coins that people buy and sell over the internet. Born out of the need to secure transactions during the second world war, cryptography has evolved to become one of the most effective and reliable way of securing money, information, and communications online.

The first cryptocurrency to be created was bitcoin in 2009. Ever since, hundreds of other cryptocurrencies called, Altcoins, have come into being. Unlike normal currencies, cryptocurrencies are designed to decrease in production over time.

Bitcoin which is the most popular cryptocurrency will never have more than 21 million coins in circulation. The cap is designed to prevent inflation which is synonymous with fiat currencies regulated by central banks.

Cryptocurrencies, unlike other currencies, are not controlled by central banks. No government in the world has control over cryptocurrencies as they are fully decentralized. These types of digital currencies work on a technical system initially created by Satoshi Nakamoto.

Some other popular cryptocurrencies include Litecoin, and Ethereum (or Ether).

 

How do Cryptocurrencies Work?

Cryptocurrency worth is based on its value in relation to other currencies often the U.S dollar, which is used as the baseline. Once their value has been ascertained they can be used to represent debt registries, contracts or the act of currency exchange.

Units of cryptocurrency are usually created once a transaction occurs. Each unit created is then preserved through an algorithm/encryption. The units are normally linked to vast chains of data where currency can be tracked and exchanged. To ensure the currency units are more concrete and hard to copy, they are normally time stamped and processed.

Cryptocurrencies work on a decentralized network that ensures network security and provides a way of verifying transactions. Networks, in this case prevent double spending by ensuring all transactions are added to a ledger immediately.

Each cryptocurrency comes with a dedicated team of developers and miners who ensure network support and develop code for increasing security and verifying transactions.

 

Cryptocurrencies & Bitcoin mining

Cryptocurrencies coins are created through a process called mining. While it may sound as straightforward process, miners have to solve complex mathematical computation to come up with a new coin. Computations appear as mathematical puzzles that become increasingly harder with the creation of each cryptocurrency coin.

Cryptocurrency miners are in constant competition to come up with a solution to a complex math problem. Whoever wins usually ends up with a set amount of tokens. The reward for mining a block, currently stands at 12.5 bitcoin’s.

When a miner completes a mathematical problem, they are required to add a block of transactions into existing chain of similar transactions bundled in blocks to form a blockchain.

To be able to solve the mathematical programs one needs a computer and a special type of computer. Miners rely on computers with huge computer resources to solve a block having transaction data using cryptographic hash functions.

Initially, the cryptocurrency mining or bitcoin mining was the work of cryptography enthusiasts. However, with the growth in popularity of digital currencies, mining is now considered a lucrative business attracting interest from a number of people and businesses. Bitcoin miners have also started to open pools and combining resources to effectively compete.

 

Read also: 5 Unconventional Ways You Can Make Money From Bitcoin (And Other Cryptocurrencies)

 

Cryptocurrency & Bitcoin Basics

Public Ledgers

Public ledgers are used to store cryptocurrencies right form when they are created. Each coin is encrypted to hide the identity of the owner and the system uses cryptographic techniques to ensure legitimacy of record keeping.

 

Transactions

The transfer of funds between two digital wallets is referred to as a transaction. Each transaction gets submitted to a public ledger and awaits confirmation. Cryptocurrency wallets use encrypted electronic signatures to provide mathematical proof that a transaction is coming from an owner of a given wallet. Confirmation of each transaction takes some time, ten minutes for bitcoin.

 

Cryptocurrency Wallet

For one to own a cryptocurrency they must have an online wallet for storing coins and for trading purposes. Cryptocurrency wallets are designed to connect owners to a network. They come with private and public keys with encryption style and double key encryption. The double encryption is for protection and ensures only valid owners can connect to a network and access the currency.

 

Cryptocurrency Value Determination

Cryptocurrencies are unique in their own way in that they are not managed by a single entity. The attribute protects them from manipulation by centralized bodies, a problem synonymous with fiat currencies.

The value of cryptocurrencies is usually determined in the Exchanges just is the case with other currencies and commodities. The exchanges provide avenues whereby currency holders can trade tokens from one coin to another and buy more coins.

Businesses have started to accept digital currencies to facilitate transactions, thus helping set the value of some of the most popular coins. Forces of demand and supply also play an important role in determining the value of cryptocurrencies. A digital currency that cannot be accepted by people will essentially have little or no value.

 

Cryptocurrency Characteristics

Volatility

The growth in cryptocurrency popularity means they have become extremely volatile compared to fiat currencies. A lack of sufficient knowledge has left them extremely vulnerable to the smallest of news. Bad press, which most of the time results in price swings of as much as 20% significantly affects their prices. In 2014, bitcoin prices fell 23% when a major bitcoin exchange was hacked.

 

Rising On Speculations

Unlike fiat currencies that are normally supported by fundamentals, most people invest in cryptocurrency for speculation purposes. Investors are increasingly buying tokens of blockchain startups and quickly selling them once their price appreciates. The practice is already fuelling speculation of a bubble forming around cryptocurrencies which could burst.

 

Security

The security that comes cryptocurrencies is second to none. Cryptocurrencies wallets come with secret keys for approving transactions and for transferring of currencies to other parties. Owner’s funds are usually safe as long as the security keys are kept safe

Cryptocurrencies are also less susceptible to seizure by law enforcement, unlike fiat currencies. Transactions delays and holds synonymous with payments services such as PayPal are also unheard of with the use of digital currencies

 

Transaction cannot be altered

Transactions created by cryptocurrencies cannot be easily reversed since they use the blockchain technology. Once a transaction has been written in a public ledger and confirmed by other nodes on the network, it becomes impossible to alter the transaction.

 

User Anonymity

User anonymity is one of the reasons why cryptocurrencies are growing in popularity. The use of blockchain technology makes it impossible to determine the person behind a transaction, as user identity is never written in a blockchain. Transactions are normally carried out on public addresses, which no one can identify by just viewing the information.

 

Cryptocurrency Legality

Cryptocurrencies are legal in most jurisdictions around the world. However, Iceland and Vietnam are some of the countries that have frozen the trade or handling of cryptocurrencies. Iceland has a freeze on foreign exchange which makes it impossible for people in the country to engage in the businesses of buying and selling cryptocurrencies.

China threatened to crack down on the use of cryptocurrencies but has in the recent past started to lessen its stance. However, financial institutions in the country are barred from handling bitcoin’s. Russia on the other hand has passed a ban on the use of any other currency other than the Russian Ruble to facilitate the purchase of goods.

A year ago, China accounted for 90% of all Bitcoin trade. A crackdown on the use of digital currency has led to a reduction in the amount of cryptocurrency based trades in the country, leading to the emergence of new powerhouses. Japan and South Korea have emerged as the epicenter of cryptocurrency, as the two countries now account for a huge volume of cryptocurrencies transactions.

Japan recognized bitcoin as a form payment early in the year, a move that has led it to account for almost half of the global trade volume. There are more than 4,500 stores in the country that let customers pay for goods using bitcoin. The U.S currently accounts for a quarter of the total global volume.

The U.S has moved to regulate the use of Bitcoin, the IRS having ruled that the cryptocurrency is to be treated as property, for tax purposes. Issued guidelines indicate that people creating bitcoin’s and exchanging them for fiat currencies are not beyond the reach of the law.

 

Read also: The rise of digital currencies in Singapore

 

Benefits of Using Cryptocurrency

Better Security

Unlike cash and credit cards, cryptocurrencies eliminate the risk of fraud. Cryptocurrencies are digital and cannot be counterfeited or reversed easily. They also reduce the risk of someone being ripped off in a transaction as is the case with legacy payments. It is also extremely hard to steal cryptocurrency compared to a wallet full of cash.

 

Lower Fees

Unlike other modes of payments, there aren’t any transaction fees when it comes to cryptocurrencies exchanges. This is because the network that handles cryptocurrencies normally compensates miners. The only charges one is likely to incur are those associated with third party services such as Coinbase that maintain bitcoin wallets.

 

Access to Everyone

One of the biggest disadvantages of fiat currencies is that one must exchange them when travelling from one country to another. Since cryptocurrencies are not bound by exchange rates or interest rates, they can be used on the international level. Cryptocurrencies operate on a universal level thus making transactions a lot easier across borders.

 

Total Control

Unlike other type of money retaining systems, cryptocurrencies accord users total control. Banks, credit unions, and payment systems are known to come with restrictions and terms of service that one must adhere to, to be able to use their services. With cryptocurrencies, you are always on the driver’s seat without any third party dictating terms and ways of use.

 

Decentralization

A global network of computers that use blockchain technology manages and records bitcoin transactions. What this means is that the valuation of a cryptocurrency is not pegged to the policies that a central body passes.

 

Disadvantages Of Cryptocurrencies

Irreversible Payment

Cryptocurrencies don’t have a base center for payment processing, which makes it extremely impossible to reverse transactions once they are made. If you transfer, money to the wrong person the only way you can be able to get a refund is by coming to a consensus with the other person.

 

Not Widely Accepted

Cryptocurrencies are yet to have the global appeal synonymous with baseline currencies such as the dollar and the Euro. The limitations essentially mean they can only be used on a limited amount of areas or functions. If you had a cryptocurrency and wanted to use it to buy a good, you will have to search first to see whether the seller accepts the digital currency.

 

Lack of Awareness and Understanding

Many people are still unaware of cryptocurrencies and what they can do. This significantly reduces what one can do with them especially in areas where people still need education.

 

High Volatility

The fact that there are still a limited amount of coins in circulation leaves cryptocurrency exposed to a lot of volatility which tends to affect their valuation. However, its volatility is expected to drop as times goes by and more people adopt it.

 

Read also: How do I manage risks when trading cryptocurrencies like Bitcoin & Ether? Find out here.

 

The Future of Cryptocurrencies like Bitcoin

There has been a lot of speculation about what the future holds for cryptocurrencies. Even as skeptics insist a bubble is building around cryptocurrencies, they continue to soar in value. The wave of popularity around digital currencies appears to be in the initial stages.

Venture capitalists and institutional investors scrambling to get a piece of the action has only gone to raise the popularity and credibility of most cryptocurrencies. As it stands the future looks, bright and only time will tell on whether cryptocurrencies will become alternative forms for finalizing transactions all over the world.

 

 

This article “The Definitive Guide to Cryptocurrency and Bitcoin” first appeared on ZUUOnline.Sg.

(By Neha Gupta)

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