Analyzing The Ins And Outs of Cryptocurrencies
Method Of Validating Crypto Transactions
Why Cryptocurrency’s Price Rise And Fall?
Difference Between Digital Currency And Crypto
Benefits Of Using Cryptocurrencies
Risks Associated With The Use Of Cryptocurrencies
If you are reading this, one likelihood is that you are looking for a solid reason to invest and not seeking an alternative to traditional currencies. But luckily for you, this article would explain all that there is to know about cryptocurrencies.
First, let’s get a clear definition of what these coins are. Simply put, they are virtual money built on blockchain (more on this in a moment) and cryptography which works using a computational algorithm, a private key to digitally sign transactions, and a public key that serves as your identity to the public. These measures offer a sense of security to users.
Its greatest advantage lies in the fact that it does not require any central authorities, and in one way or the other, it offers a greater amount of privacy compared to fiats.
To make use of these coins, as they are widely referred to, you’d need a wallet that would serve as a store for your virtual money. This wallet can be software or hardware, it all depends on you.
Using a hardware wallet means that before your transactions can get signed digitally, you have to insert your hardware wallet. As a result, you can’t perform a transaction without it.
If it’s software, everything you need would be entirely online, and you would have eliminated the risk of losing your hardware wallet and consequently not being able to sign transactions. But the software also has its own inherent risk, which includes losing your phone and/or losing access to your backup.
If this ever happens, your crypto investment is as good as gone.
As the name suggests, it’s a block (series) of transactions linked together with a chain. They serve as the bedrock of any cryptocurrency project as they are required to store or record transactions happening through a peer-to-peer network.
Blockchains find their greatest advantage in the fact their blocks are immutable as soon as they are entered making them a strong force against counterfeiting. This and the fact that its records are publicly verifiable accounts for its wide acceptance in cryptocurrencies.
They also find usefulness outside the crypto world due to its outstanding features. They are used in smart contracts, real estate, and many others.
Mining, as it’s called in short, is a way of authenticating every transaction on a cryptocurrency network. When a transaction is received by the miner, he puts it across through to an encryption algorithm to validate the data keys received without revealing its details using hashes which is an ordered sequence of letters and numbers.
It is then required of the miner, who’s doing this to ensure sanity of the transaction and obviously would also be rewarded, to perform proof of work (solving the complex mathematics that ensued) or proof of stake (staking an existing token and getting a reward in form of transaction charge).
It is worth noting that these methods consume a lot of electricity, a fact which has continued to raise a lot of eyebrows.
When looking for cryptocurrencies to invest in or an alternative to fiat currencies, it is worth knowing that there is a multitude of them.
Generally, there is Bitcoin which is by far the most popular. Any other coin is normally referred to as altcoins. Altcoins include Ethereum, Litecoin, Ripple, and a host of others.
There are also meme coins, which to a large extent, has no use cases and are more of a fad than a currency as they rely on influencers or celebrity to pump their facial value. A good example is Dogecoin and Elon Musk.
If you’ve been a close observer, by now you’d know how volatile the prices of crypto assets have been over the past couple of years. A good question to ask would be what factors are responsible for this rise and fall in prices.
First on the list are demand and supply. This topic isn’t new if you did basic economics in high school. It is simply put, if there’s high demand and low supply, prices would rise and vice versa. So prominent crypto projects normally have a volume cap to regulate their supply.
But creating scarcity on its own does not create value, there has to be demand. This thus begs for each project to have a real-life use case.
Also, there is the meme coin which could be said that it is working using the greater fool theory, looking for a bigger fool to pay higher than you did so you can profit as they have no tangible use case.
You might be wondering, your money in your bank app is online, you don’t have to carry physical cash when transacting, and the same goes for all crypto. But there’s a sharp difference in the fact that cryptos are backed by cryptography and run on the blockchain network.
Also, the decentralization it offers gives it a hedge over fiat.
Thinking a bit deeper there’s the central bank digital currencies, CBDC, which also runs on blockchain, but the difference lies in the fact that as its name goes, it is controlled by the central bank, which thus eliminates the democratization involved.
The first benefit would be the privacy it affords the user. You no longer have to enter your details whenever you are performing a transaction.
However, while your name is not out there, anyone who knows a particular wallet address belongs to you can always trace you. This means it provides pseudonymity against the anonymity it is widely purported to offer.
Another benefit would be the ease with which you can get it across borders, almost instantly, without any interference from banks. This beats the wire transfer offered by traditional banks.
Also, the fact that you can invest your money in an asset of your choice, directly, without the need for a broker or any third party, is a huge advantage over what we’ve been used to.
As it is still a new technology, there are some risks associated with its use as it is a largely unregulated space, thus opening the ground for criminal groups or various terrorist organizations to move funds without government interference.
Also, the enormous amount of electricity it consumes continues to raise an eyebrow, although methods that require less energy, like proof of stake are gradually taking the order of the day.
Then there are price fluctuations which is limiting its use as a means for transacting. No one would want to accept a payment that could shed 50% of its value in a twinkle of an eye. But then there are the stablecoins which are backed by physical assets like gold or the US dollar and hence always have their price fixed.
As cryptocurrencies continue to get wide acceptance, it’s safe to say they are here to stay, but as you can see, there are still some grey areas it needs to address. Just as the internet grew over the years to what it is today, you can’t rule it out. The future is indeed very bright.
