What is Cryptocurrency and how does it work?
Ever since its inception, cryptocurrency has been gaining popularity and attracting new investors. In the past few months, they have become one of the most talked-about topics. The crypto coins have started taking the world by storm. While most of the cryptocurrencies have grown exponentially, there have been few that have seen dips as well. But what does it mean? What is Cryptocurrency? Let’s find out.
What is Cryptocurrency?
Cryptocurrency is a secure digital currency that one can use to trade goods and services or trade them for profit. It is not backed by tangible securities and is stored on a digital ledger. The cryptocurrency market is now worth more than the world’s most valuable company. As of Jul. 14′ 2021, the combined value of cryptos stood at over $2.2 trillion.
Many companies have come up with their currencies. They are often called tokens, and these can be traded specifically for the good or service that the company offers. You will need to exchange actual money for cryptocurrency to access the goods or service.
Whether cryptocurrencies are legal or not depends on where you are living. For example, they are legal in the U.S., but if you are residing in China and trying to trade in cryptocurrencies, you may end up in trouble because China has banned the use of cryptocurrencies. On the other hand, in India, it is neither illegal nor regulated by the government.
Types of Cryptocurrency
Since the introduction of the first blockchain-based cryptocurrency, Bitcoin, in 2009, many other alternatives have emerged. Apart from top cryptocurrency Bitcoin, there are tens of thousands of different cryptocurrencies that are traded publicly. Popular cryptocurrencies include Ethereum, Litecoin, Peercoin, Namecoin, Cardano, and EOS. Though the total value of all cryptocurrencies has gone down from what it was in April, it is still more than $1.6 trillion.
How Does Cryptocurrency Work?
Cryptocurrencies work using a technology called a blockchain. A blockchain is a form of public digital ledger spread across many computers that manage and record transactions. It consists of a chain of blocks linked together using cryptography, on which transaction details are recorded after proper authentication and verification by peer-to-peer computer networks.
The information about purchasing and selling a cryptocurrency like Bitcoin is entered and transmitted to a network of powerful computers, called nodes. These nodes compete with each other to confirm the transaction using computer algorithms. This process is known as bitcoin mining. The first miner who successfully completes a new block is rewarded with bitcoin. The buyer and seller pay for these rewards in the form of a network fee.
After it is cryptographically confirmed that a cryptocurrency is purchased, the sale is added to a block on the distributed public ledger, followed by proof of work. It is the process where the majority of the network must confirm the sale. Finally, the block is permanently chained to all previous blocks of transactions, using a cryptographic fingerprint known as a hash, and voila! The sale is complete!!
Once the data is stored, it cannot be altered or hacked, making it highly secure. In addition, this technology allows individuals to deal directly with each other, without the involvement of a bank or other third party, and that too in a highly secure way.
What makes Cryptocurrencies so popular?
One of the significant reasons cryptocurrencies are so popular is that they are considered the future currency, making it more appealing. When the economy was terrible during the Covid-19, cryptocurrencies were stable. Therefore, people are in a race to buy famous cryptocurrencies like Bitcoin before they become even more valuable.
People like such currencies because they are decentralized and there is no involvement of central banks or any central authority. They are removed from managing the money supply. Their no involvement means that they can’t reduce the value of money via inflation over the years or interfere in the working of Cryptocurrency.
Another reason why Cryptocurrency has become a rage among people is blockchain, the technology behind Cryptocurrency. It’s a decentralized processing and recording system and can be more secure than the payment systems that we use currently.
Other supporters of this currency believe that they can make easy money with them. Therefore, they are not bothered about the future of the currency but rather prefer to buy Cryptocurrency and trade them when they’re going up in value.
How can you buy Cryptocurrency?
To buy cryptocurrencies, you’ll need a “wallet.” It is an online app that can hold your currency. There are five main types of cryptocurrency wallets that you can use to send, receive, and store cryptocurrencies: desktop wallets, mobile wallets, online wallets, hardware wallets, and paper wallets.
Generally, you create your account on an exchange, and then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum. While you can purchase some cryptocurrencies, including Bitcoin, in U.S. dollars, for others, you need to pay with bitcoins or another cryptocurrency.
A growing number of online brokers are also offering cryptocurrencies, such as Tradestation, eToro, and Sofi Active Investing. But before investing in them, be sure to protect yourself from fraudsters. Also, know that just like in the stock market, investors should part ways with their money only when they’re willing to lose, as even the most stable cryptos can be wildly volatile and cryptocurrency prices may fluctuate.
Top 10 Cryptocurrency by Market Capitalization
If you are considering investing in cryptocurrency, here are the top 10 cryptocurrencies you need to look out for in 2021.
|Cryptocurrency||Market Capitalization (Data current as of Aug. 4, 2021)|
|Binance Coin||$56.2 billion|
|USD Coin||$27.5 billion|
While it is far-fetched to say that Cryptocurrency will fully replace fiat currency, one cannot forget that Cryptocurrency has a huge potential to change how financial transactions take place. However, if you plan to invest in them, research well before investing your hard-earned money as the market is relatively young and more volatile.