Cryptocurrency is a digital currency for which encryption techniques are used to regulate its use and generate its release. Unlike fiat currency — like US dollars, euros and yen — cryptocurrency is not regulated or controlled by any bank, government or centralized financial authorities.
Instead, it relies on the power of the Internet to guarantee its value and confirm transactions. Users on a network verify every transaction, and those transactions then become a matter of public record. This prevents the same digital currency or coin from being spent twice by the same person.
How are cryptocurrency records kept?
That digital public ledger on which all transactions are recorded is called the blockchain. Data is stored across a network, so it’s not susceptible to exploitation by hackers or central failure.
Each record or series of records on the blockchain is known as a block. A block is sent to the network and added to the blockchain after it’s accepted by the network as a valid transfer. Once verified, the blocks cannot be changed.
What does it mean to mine cryptocurrency?
Cryptocurrencies are released to the world through a process called “mining.” For you to mine this currency, you must attempt to solve a computational puzzle known as a hash, which allows you to add the next block. These transactions are then recorded in the blockchain for all to see.
People around the world compete to be the first to solve a hash. Those “miners” who succeed in solving the hash receive a block reward — or an amount of the cryptocurrency they mined.
Why should I use cryptocurrency?
You already use debit cards and credit cards — two tools that “digitize” your dollars, pounds or euros. But there are a few advantages to using cryptocurrency over your standard government-issued currency.
- Low transaction fees. Because miners are simply rewarded cryptocurrency from the network itself, there are typically little to no fees for core transactions.
- Ownership. With your digital key, access to your currency is yours alone. Unlike money you store at a bank, your use of your cryptocurrency cannot be frozen or limited by any entity.
- Identity protection. Paying with credit or debit cards requires submitting sensitive banking information that could be stolen or compromised. Cryptocurrency can be sent directly to a recipient without any information other than total amount you want to send.
- Accessibility. Billions of people can access the Internet, but not everyone has access to banks or money exchange systems. Cryptocurrency requires no bank or line of credit to make or receive payments electronically.
- Risk-free for sellers. Payments using cryptocurrency can’t be reversed, which means merchants don’t have to worry about stopped payments. The blockchain makes it difficult for you to be defrauded.
Are there drawbacks to using cryptocurrency?
Aside from the difficulty of understanding the concept of cryptocurrency itself, there are a few drawbacks to using it:
- General awareness. More people and businesses are starting to accept cryptocurrency, but it’s a small number compared to those accepting debit and credit cards.
- Volatility. Cryptocurrency exchange rates can vary greatly. Which means the amount you pay or receive one day could be wildly different the next. The market should eventually settle down, but it’s hard to predict where the rates will be.
- Newness. Even popular bitcoin is new and growing. It could take time before the various cryptocurrencies reach their potential. Similarly, some may fall by the wayside, while others come to dominate the market.
What’s the most popular cryptocurrency?
Among the burgeoning 700 cryptocurrencies in use at a time are the heavy hitters of the market. These popular ones are those you’ll be able to spend more easily.
- Bitcoin. The original cryptocurrency, bitcoin is also the most valuable. Its good reputation and large user base have cemented it as the leader for now. It’s entering the mainstream and can even be spent at retailers like Amazon and Victoria’s Secret.
- Euthereum. Launched in 2015, Ethereum is a decentralized software platform that enables Smart Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party.
- Dash. This cryptocurrency prioritizes anonymity by using “Masternodes” to complete multiple transactions at once. There is no public ledger, which makes it harder for others to observe your savings and transactions.
- Litecoin. Started by a former Google employee, litecoin caught on quickly and is accepted by more retailers than some other cryptocurrency. Litecoin plans on releasing a total 84 million coins — far more than bitcoin’s 21 million.
- Zcash. Zcash, a decentralized and open-source cryptocurrency launched in the latter part of 2016, looks promising. “If Bitcoin is like http for money, Zcash is https,” is how Zcash defines itself. Zcash offers privacy and selective transparency of transactions. Thus, like https, Zcash claims to provide extra security or privacy where all transactions are recorded and published on a blockchain, but details such as the sender, recipient, and amount remain private.
- Ripple. Ripple is a real-time global settlement network that offers instant, certain and low-cost international payments. Ripple “enables banks to settle cross-border payments in real time, with end-to-end transparency, and at lower costs.
- Monero. Monero is a secure, private and untraceable currency. This open source cryptocurrency was launched in April 2014 and soon spiked great interest among the cryptography community and enthusiasts. The development of this cryptocurrency is completely donation-based and community-driven. Monero has been launched with a strong focus on decentralization and scalability, and enables complete privacy by using a special technique called ‘ring signatures.’ With this technique, there appears a group of cryptographic signatures including at least one real participant – but since they all appear valid, the real one cannot be isolated.
Bitcoin continues to lead the pack of cryptocurrencies, in terms of market capitalization, user base and popularity. Nevertheless, virtual currencies such as Ethereum and Ripple which are being used more for enterprise solutions are becoming popular, while some altcoins are being endorsed for superior or advanced features vis-à-vis Bitcoins. Going by the current trend, cryptocurrencies are here to stay but how many of them will emerge leaders amid the growing competition within the space will only be revealed with time.
Bottom line
Cryptocurrencies offer a new way of storing and spending money anonymously and without the use of a centralized bank or financial institution. The technology is relatively new, and so it’s not yet widely understood or accepted as a means of payment. But it’s growing quickly and could be an important method of financial transactions in the future.
