What is cryptocurrency?
Cryptocurrency has played a major role in modern-day investment and trading. It is a moving train that a lot of people have gotten on board with. But there is a major hindrance that people face when trying to hop on this train: Lack of proper knowledge. This article will be explaining all you need to understand, how it works, its pros, and cons.
Cryptocurrency: What does it mean?
Cryptocurrency is a virtual or digital currency used to carry out direct transactions. The success of cryptocurrency is owed to the fact that it uses decentralized technology. Imagine a technology that allows you to transfer money to any part of the world within a shorter time frame than that of banks. This technology also offers lower transactional fees and trading services. This is cryptocurrency in a nutshell. In the discourse of cryptocurrency, one word is often mentioned: Decentralization. Cryptocurrency is said to be decentralized because it has no central authority. There is no certain individual or group that accounts for cryptocurrency. This feature has maintained anonymity, less fraud, and manipulation. The technology responsible for decentralization is ‘Blockchain’. With Blockchain, transactions are made public making records almost impossible to manipulate.
Evolution of cryptocurrency
Decentralized cryptocurrency has evolved since it was launched in 2009. People often think that it came out of nowhere and started soaring just like that. Cryptocurrency went through different phases from its price being below $1 to thousands of dollars now. Bitcoin was the first cryptocurrency founded by a programmer under the pseudonym of ‘Satoshi Nakamoto’. Since then, Bitcoin has paved the way for other cryptocurrencies in existence. Bitcoin is the largest cryptocurrency by market capitalization. It makes up 44% of the total market cap of cryptocurrency. The other part is made up of altcoins. Altcoins, also known as alternative coins are coins other than Bitcoin. After Bitcoin was created, the creation of altcoins like Litecoin followed suit. Bitcoin now has a top contender, Ethereum. They are often compared to each other. Experts say Ethereum has the potential to replace Bitcoin. Ethereum has the second-largest market cap. It is not only used for transactions but also widely known for smart contracts. Apart from Ethereum, different cryptocurrencies have gained balance in the crypto space with their unique technology.
How safe is cryptocurrency?
When dealing with finance, people often desire safe and secure platforms. With all that has been mentioned, it is not wrong to question the safety of cryptocurrency. The decentralized technology allows for security but to an extent. The government does not account for cryptocurrency so they won’t bear the loss if anything were to happen. Protection meted on traditional financial systems are not meted out to cryptocurrency because it is not backed by government authority. Cryptocurrency is also very volatile so the investment can be very risky but also rewarding. Volatility in cryptocurrency simply means that its value could have a drastic change unexpectedly. The concept of volatility is what crypto trading is based on. Suppose you buy a coin for $10 and later on the value of the coin increases to $20. You can sell the coin at that price and gain a profit of $10. In this scenario, you have made a profit. But if you buy a coin for $10 and its value reduces to $5 later on, you have made a loss. In this scenario, a trader has made a loss. Sometimes, prices increase and reduce drastically. Dipping is a fear to many investors. Dipping is a term used to describe a decline in the price of a coin. With cryptocurrency volatility, prices of coins can reduce unexpectedly causing losses to traders. Conversely, the prices of coins could also increase which could lead to a huge profit.
How to get started
A crypto wallet is required to start making transactions with cryptocurrency. A crypto wallet is a software that stores public keys, private keys, and records of transactions. A public key encrypts data while a private key decrypts data. These keys encode information and keep them secure. The public key converts plain text to ciphertext. A ciphertext cannot be understood until it has been decrypted. This is where private keys come in. They decrypt data for it to be accessible and understood. To decrypt data, a secret key is required. Only those with the secret key can decrypt the particular data and gain access to it. This is why emphasis is laid to keep your private keys safe at all times. If you lose or forget your private key, you cannot gain access to your wallet. This means that transferring and receiving cryptocurrencies would not be possible. Crypto wallets can be classified into two: Hot wallets and cold wallets. Hot wallets require an internet connection while cold wallets do not. Hot and cold wallets contain different types like Software wallets, Hardware wallets, and Paper wallets. All of these have their unique features, pros, and cons. It is advisable to weigh all the options and pick the best crypto wallet that suits you.
Advantages and Disadvantages
Here are the advantages of cryptocurrency: Cost-effective: Little or no transaction fees are required. This is very different from banking institutions where transaction fees are way higher than that of cryptocurrency. Decentralization: No central authority is needed. And the fear of manipulation of records is lessened. Instead of banks and governments having control, traders now have the power in cryptocurrency. Anonymity: Cryptocurrency ensures privacy and anonymity. Your identity does not have to be revealed before making transactions. Here are the disadvantages of cryptocurrency: Low scalability: Scalability is the number of transactions per second that a cryptocurrency can cope with. Bitcoin can make about 7 transactions per second. This is relatively low in comparison with banks. Poor store of value: Due to the volatility of cryptocurrency, it might not be a very good store of value. Cryptocurrencies rise and fall sporadically. If one intends to just keep their money in crypto for saving, its value could reduce in comparison to when it was first bought. No regulation: Cryptocurrency is not backed by any individual or body so there are no regulations. This is why lots of illegal activities are carried out. Also, if a user needs to complain, there would be nobody to complain to as a result of its decentralization. Cryptocurrency undoubtedly comes with various risks. It is important to be well-informed about those risks. There are also a large number of advantages in cryptocurrency. These advantages have propelled cryptocurrency to the point it is today. Cryptocurrency is a fast-growing and evolving technology with massive potential to lead in the future.