What Is Cryptocurrency?
Unless, you’ve been living under a rock, you might have heard and come across the term ‘Cryptocurrency’. So what is cryptocurrency exactly?
What purpose does it serve? Is it like any other paper currency? Can you print it? How does it work?
These are the questions that must pop in the minds of those who don’t have a basic understanding of cryptocurrency.
In this guide, we will explain what cryptocurrency is, it’s definition, history, common terms associated with it, its features, and advantages and disadvantages.
Let’s start with the definition of crypto.
What Is Cryptocurrency? - Cryptocurrency Definition
The word cryptocurrency consists of two words: Cryptography and Currency.
Currency as we know, is a generally accepted form of payment system and is used a medium of exchanging goods and services. It is issued by the government and is distributed throughout the economy.
Crypto means secret or hidden, originating from the Greek word Kryptos. Cryptography is the process of encrypting sensitive information using codes that only people concerned with the information can decode.
Combining these two together, cryptocurrency is a digital currency that is a medium of value exchange that is based on encryption to ensure security.
Cryptocurrency is decentralized, that means no single entity such as government or a central bank has any authority/control over it.
There is no middle-man in crypto. You can directly transfer crypto funds to your receiver without having to go through anyone.
You won’t need any social security number or a credit score to send and receive funds. Your transactions are also anonymous therefore you only and the other party can see the transaction information.
A Brief History Of Cryptocurrency
To some, cryptocurrency is a new asset. It is the latest trend in the world of finance and trading that is sought by everyone due to its features.
But do you realize that cryptocurrencies have been around for more than 10 years now! Yes, for a decade, cryptocurrencies have changed our perception on currency, payment, and the way we handle money.
But what are its roots? How did it originate? Who came up with the idea of a digital currency? How has it evolved over the last decade?
In this section, we will take a brief look at the short, but rich history of cryptocurrency. One thing to be noted here is that the history of cryptocurrency is closely related to the history of Bitcoin as it is the first cryptocurrency that paved the path to world of crypto that exists now.
To understand how cryptocurrency originated, we need to understand the reason behind its origin. 2008 was the year of the financial crisis. People were losing trust on the traditional financial institutions and wanted something new.
People were tired of the control the government and central bank had over their currency. They wanted a break-free from centralized authority and enable peer-to-peer transfer where no third party would intervene.
Researches and economic scientists were aware of this problem and attempted to come up with a solution. Even before 2008, there were failed attempts at creating a decentralized money system that was based on encryption.
Two such examples were B-money and Bit Gold. They were meant to be online currencies with ledgers protected by encryption. They were never fully developed and never worked as intended.
Coming back to 2008, a mysterious poster under the pseudonym ‘Satoshi Nakamoto posted a paper titled ’“Bitcoin – A Peer to Peer Electronic Cash System” in a mailing list discussion on cryptography.
The main objective/proposal of this paper was to come up with a “purely peer-to-peer version of electronic cash”.
It would do so by eliminating government’s and banks interference and replacing them with a peer network consisting of codes, cryptographic encryption, and algorithms.
What would separate Bitcoin from the previously failed digital currencies would be eliminating the double spend problem and thus removing the need for a central authority to validate the transactions.
The way Bitcoin achieved this was through record keepers called ‘Bitcoin miners’ where they maintained the decentralized network together in the form of a blockchain. More on mining and blockchain later.
Mining & Public Apperarance
The following year (2009), Bitcoin was made available to the public. The first block was mined by Satoshi himself and earned 50 BTC as a reward.
As the Bitcoin software was made public, mass mining Bitcoin also started. Mining involved generating new Bitcoins and to record and verify these transactions on the blockchain.
Until 2010, Bitcoin was never used for any purchases. That changed when a programmer named Laszlo Hanyecz purchased 2 pizzas in exchange for 10000 BTC!
This transaction was worth $30 at that time. If he had hold onto those Bitcoins, they would be worth $56 million now!
Emergence of other coins
Moving on, in 2011, the cryptos other than Bitcoin start to emerge. Since these were alternatives to Bitcoin, they were given the term altcoins. The first altcoins were Namecoin and Litecoin.
Litecoin was created by Charlie Lee to be faster than Bitcoin in terms of transaction speeds. Currently, there are over 2000 cryptos in existence.
In 2012, the block reward halved for the first time. Bitcoin surpassed $1000 in value during 2013. After this, it suffered a decline in price and took two more years to reach $1000 again.
As Bitcoin rose in value, people started noticing the lucrative nature of crypto and many scams and theft started to emerge. In Jan 2014, Mt. Gox, the world’s largest Bitcoin exchange, got hacked and around 740,000 bitcoins were stolen.
Ethereum was the next big cryptocurrency to be released in the year 2016. It focused on smart contracts and dApps. Another significant thing to emerge was the ICO’s (Initial Coin Offering).
These are fundraising platforms that offer their coins to the investors in exchange for their funds.
Bitcoin Peaking at $20000
2017 was the year of the bitcoin and it kept getting more popularity and adoption. During a massive bull run, its price crossed $1000 to $10000 and swiftly peaked just below $20000.
Many crypto traders turned millionaires cashing on this bull run and to this day, this price remains the all-time high for Bitcoin.
On Jan 2018, the crypto Ponzi scheme Bitconnect was shut down. To this day, it remains as one of the biggest exit scams in cryptocurrency.
Currently, there are thousands of cryptocurrencies with many providing real world use case. The history of cryptocurrencies is indeed quite an interesting one and it remains to been what the future holds for it.
Common Terms In Cryptocurrency Trading
There are several terms in cryptocurrency trading that you need to be familiar with if you interested in making profit off of crypto trading.
Here are some of the common terms in crypto trading that we will explain in the simplest form:
Altcoin: Any crypto other than Bitcoin is referred to as an altcoins.
All-time high: The highest price of a crypto till date.
Arbitrage: Taking advantage of the price difference between two crypto exchanges. Buy from the cheaper exchange and sell it to another exchange for profit.
Blockchain: A public ledger that is decentralized and distributed which is used to record crypto transactions and is secured using cryptography
Block: Blocks contains record of transactions that has been verified and confirmed.
Bullish: The phase when the market price of the crypto increases.
Bearish: The phase when the market price of the crypto decreases.
Cold storage: Storing crypto offline such as hardware wallet or paper wallet.
Cryptography: The process of encrypting and decrypting information to secure it.
Exchange: Marketplace where traders can buy and sell cryptocurrencies.
Fiat: Government issued currencies such as the pound, dollar, etc.
FOMO: It stands for Fear of Missing Out. It is the panic that arises when traders believe they will miss out on huge gains if they don’t trade now.
FUD: FUD stands for fear, uncertainty, and doubt. This includes spreading false/negative information to cause a price drop for an asset.
HODL: It means to hold. It simply means to hold on the cryptocurrency rather than selling it.
Hard Fork: It means to create a permanent change in a crypto’s protocol creating a completely new blockchain. Both the old and new blockchains exist together.
ICO: Initial Coin Offering is the first crypto offering by companies to raise money.
Market Cap: The total market value of a crypto.
Mining: The process of creating a new crypto by solving complex mathematical problems. It also involves confirming and verifying transactions.
PoW: Proof-of-Work is the system of proving that a crypto transaction has been verified.
PoS: Proof-of-stake is an alogorithm which doesn’t have a block reward. Instead, they receive transaction fees for their efforts.
Private key: It is a cryptographic key that is made up of numbers and letters that can be used to access one’s crypto.
Public Key: The address which can be used for receiving crypto. It is also made up of numbers and letters.
Features Of Cryptocurrency
Crytocurrenices are quite unique in their nature. Its features separate it from any other money management system.
Here are the salient features of cryptocurrency:
It is decentralized and not regulated by anyone
In the case of the traditional currency system, government and banks control the financial system. Cryptocurrencies were created to remove this authority and be independent in nature.
Nobody owns the network where crypto transactions are recorded and verified. They are done in a distributed and open network.
Every computer that is connected to the network can see the same information as it is replicated by every node connected.
Privacy and anonymity
Cryptocurrency offers complete privacy to its users. They don’t need to provide their personal information when carrying out a transaction.
All others can see is a public key. You can transfer millions of dollars no one will never know it was you.
On the blockchain, others can see your amount transferred but never find out who transferred it.
Transactions are permanent and irreversible
Once a transaction has been recorded on the blockchain, it is updated on every node connected and that is permanent and irreversible.
All these transactions are recorded and is visible to public offering transparency.
If you however, send funds than intended, you cannot reverse it. It then depends on the receiver to send you back the extra amount.
Traditional money (fiat) has an unlimited supply, i.e. central banks can print as much currency as they desire. Through currency supply, they control the value of the curreny.
But in the case of crypto, the amount is pre-determined by the creators. Once all the crypto has been mined, no more can be added. This is also how crypto derives its value from.
Thus in the case of crypto, currency manipulation and decrease in value over time is avoided.
The crypto ecosystem doesn’t need trust any single organization to function
In the case of traditional money system, you had to trust the central authority in order to use it.
Once you make a transaction with crypto, all nodes receive that information and verify it. Everyone on the blockchain has the exact same copy of the ledger where you can verify the information.
Thus, you don’t need to trust any single party or organization when dealing with cryptos.
Advantages Of Cryptocurrency
From its features above, we realize that cryptocurrency has many advantages to offer. We will list out the major advantages in this section:
Easy to setup: To start trading cryptocurrency, all you need is a crypto wallet and an exchange. It’s a matter of few minutes to set up your account and then you can start trading crypto instantly.
Decentralized nature: There is no central authority to control the flow of money. Each participant is considered equal no one has authority over the other.
Boundary less: When transferring crypto, you are not restricted by any boundaries. You can send and receive your preferred crypto instantly to any location on earth.
Fast and low cost transactions: Unlike the time-consuming traditional methods of payment, crypto doesn’t take days to process. All the processing (verification and recording) in done on the blockchain and the transaction happens instantly.
Secure: Crypto is quite secure. It is encrypted using cryptography. It is quite difficult for your wallet to be comprised, and often it is due to human negligence we hear cases of wallets being hacked.
Disdvantages Of Cryptocurrency
There are certain disadvantages of trading crypto. it is not perfect and has some flaws. We will discuss them here:
High risks: Crypto market is very volatile and is subject to lots of price movements. Guessing right is quite tough and most often you will lose money initially.
Risk of Cyber attacks: Since the whole blockchain network is on the internet, there is a security issue. Even though it is protected by cryptograpghy, crypto is still vulnerable to cyber attacks. We’ve all heard about exchanges getting hacked and losing millions of dollars.
Still not widely accepted: Cryptos are yet to acheive the mass adoption that was desired. Even though bitcoin is being accepted by many companies but other cryptos are yet to catch up. People need to realise the benefits that crypto privides.
Irreversible transactions: Sometimes, you may accidentally transfer funds to a wrong address and there is no way to reverse it. In this case, if the receiver doesn’t send you the funds back, there is nothing you can do about it.
In this guide, our aim was to give you a complete overview on concurrency.
We gave you a definition on crypto, explained its history, gave an explanation on the common terms on cryptocurrency, explained the features of cryptocurrency, and finally listed the advantages and disadvantages of cryptocurrency.
Crypto trading is profitable and our guides will help you achieve that.
Mobile was Internet 2.0. It changed everything. Crypto is Internet 3.0.