Bitcoin and Ethereum are two terms you may have heard. You may have heard of cryptocurrency investing, and how it can make you thousands, if certainly millions, of dollars. What is cryptocurrency? Oder, a better question: What’s the point of cryptocurrency?
The purpose of cryptocurrency is to solve the problems associated with traditional currencies, by giving currency holders the power and responsibility. All cryptocurrencies follow the 3 functions and 5 properties of money. Each tries to solve a specific real-world problem.
Let’s talk about cryptocurrency and the reasons why more people are starting to value it.
A cryptocurrency is a digital currency that offers a safer way to exchange money.
The idea behind this is that transactions are public, irreversible and almost unhackable and can be controlled by people. Users and their digital financial accounts are therefore more secure.
There are many benefits to using cryptocurrency. Here are four reasons you should care about cryptocurrency.
1. Everybody Can Own Cryptocurrency
With a few key differences, cryptocurrency works in the same way as any national currency.
The current “fiat currency”, which is the actual equivalent of debt, is created and controlled by a government body. An “IOU” issued to a country by the country is issued to anyone who owns its currency.
Cryptocurrency is not a form of debt. It is a representation of itself and the value it has is determined by how someone trades for it.
Decentralization plays an important role in determining cryptocurrency’s currency value.
A cryptocurrency is not owned or controlled by anyone. Its value does not depend on a country’s political decisions or the central bank’s monetary policies.
Notice: Some might view cryptocurrency’s lack centralization as a way to avoid taxes. But, cryptocurrency, just like bonds and stocks, is an asset. It is subject to capital gains tax in the United States if it is sold or exchanged.
Human manipulation and corruption are possible with currencies that operate on a central ledger. This refers to a single entity who manages the transaction records, such as a national central banking institution. Decentralized cryptocurrency works on a distributed ledger, or a shared transaction listing. This ledger is what is at the heart of cryptocurrency, and it leads to the next reason why cryptocurrency matters.
2. It’s almost impossible to forge cryptocurrency
The blockchain is the distributed ledger that powers cryptocurrency. Understanding blockchain technology will allow you to understand cryptocurrency and the reasons it is so powerful.
The “block” is made up of bits of encrypted data. The public database where the blocks are stored is called the “chain”. It contains the sequentially related blocks.
Each block in the blockchain is assigned a unique code that makes it stand out from all others. This unique code is known as a hash. The chronological order of the blocks of information added to a blockchain is important. The next block is created immediately after the previous block, and each block has its own unique hash.
The ledger, or database of blocks in the blockchain, is simultaneously distributed across thousands of computers worldwide. In Ethereum’s case, this could be millions. This is an easy explanation of cryptocurrency.
Let’s say someone wanted to create a single block on the chain. They would need to modify all blocks starting at a certain point in the history and update all computers that have copies of the blockchain ledger.
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Although theoretically feasible, it is almost impossible to achieve.
3. Cryptocurrency Transactions are (Mostly) Confidential
You can use physical cash to transact privately or pay in person with traditional currencies that are issued by governments.
Only a small fraction of fiat money is made up of paper, metal, cloth and plastic currencies. A central authority, such as governments or financial regulators, will quickly identify large withdrawals of physical money and review them.
Notice: It is a good idea to monitor large cash transactions. It protects the currency’s legitimacy and discourages money laundering.
Cryptocurrency is a different kind of currency. It relies on mathematically-designed math to track and trace the exchange between two individuals or companies. It happens mostly anonymously. The ledger, or list of transactions, is publically viewable globally. However, the parties that exchange cryptocurrency are more private. Digital wallets are used to store cryptocurrencies electronically. The private key to the wallet is held by the owner. Digital currency can be exchanged from anonymous wallets that are mostly owned by users.
Another note: Although cryptocurrencies are anonymous, advanced forensics may be able to uncover the identities of wallet holders. Monero, a crypto project, is designed to resist identity discovery.
4. Cryptocurrency Security Increases with Time and Value
We discussed earlier how hacking or manipulating computers would require a lot of money and power, making it almost worthless. For example, hacker would have to control more than fifty percent of computers that make up the “consensus network.”
The consensus network simply refers to all computers that have copies of the distributed ledger or blockchain. The cryptocurrency networks for more well-known cryptos such as Bitcoin and Ethereum are so large that hacking is almost impossible.
It was easier to get the majority of control in the early days cryptocurrency because the network was smaller.
Investors and users of newer cryptocurrency cryptocurrencies should remember this fact. Hackers are more likely to target networks that are smaller than they are.
This is what almost happened to Bitcoin in the early days: BitFury, a group that gathered a lot of computers for “mining,” was almost a victim of this.
What is cryptocurrency mining?
Mining is the process by which cryptocurrency transactions can be verified and blocks are assigned hashes. This requires lots of computing power. The cryptocurrency network of validators rewards users who lend their computers. These transactions fees are paid in the cryptocurrency they support.
BitFury established a verification network or mining pool, which was very profitable as Bitcoin’s price rose. They were close to achieving fifty percent of the network’s strength in 2014.
Although hacking and manipulating blockchains was not their goal they decided to limit their influence on Bitcoin’s network. They promised to never increase the strength of the pool beyond forty percent. This was done to protect Bitcoin’s currency value, as currency holders could be afraid of a 51% attack by one operator.
BitFury would suffer if Bitcoin’s value plummeted. Another form of blockchain security is to find the right balance between profit potential and network power. Too much network power can lead to loss of profit or instability of the currency.
What’s the point of Crypto?
Imagine that you are trying to send money online to your friend. This could lead to a transaction going wrong in many different ways. Including:
A technical error can occur at a bank or financial institution, such as machines not functioning properly or systems going down.
An attacker could hack your account, causing identity theft or denials of service.
The limit could have been exceeded by your friend’s account, or your own account.
These are all possible outcomes because of a central point: The financial institution.
That is why cryptocurrency was created to be the future of currency.
Imagine the following scenario: Two people use a bitcoin application. A pop-up asks you to confirm that you wish to send bitcoins. The transaction will be processed immediately if you accept.
The system authenticates the user and checks if you have sufficient funds to complete the transaction. The payment is then transferred to the wallet of your friend. This transaction is much easier because it doesn’t involve any technical glitches and procedural steps that banks require.
The goal of cryptocurrency is to eliminate all problems associated with traditional banking. You can send bitcoin unlimited amounts, there are no restrictions on how much money you can transfer, and accounts are virtually impossible to hack since you don’t use a financial institution. There is also no central point of failure.
International crypto transactions are also faster than traditional wire transfers, which have been around for years. Crypto transfers are faster than wire transfers which can take hours, or even days. Instead, they take minutes, if any, to complete.
What problem does Cryptocurrency solve?
Western Union and other international money transfer firms can be slow, cumbersome and bureaucratic. Once you are comfortable with the process, it is easy to do the same thing with bitcoin.
Another reason cryptocurrency is so valuable is because it is one-to-1. This means that transactions are done on a peer to peer network structure.
Fiat currencies can be subject to many restrictions and risks. Banks and similar institutions, for example, are susceptible to boom and bust cycles in the economy. In some cases, these situations can lead to bank crashes as has happened several times before.
Crypto is independent, as its value does not depend on any government policies. As a crypto owner, your money is in complete control.
The robust encryption used throughout the blockchain network is a strong safeguard against fraud and account tampering.
Bitcoin’s value as an investment also rises by 20% annually. This is unmatched. Nothing can match that, not even stocks, real estate, or gold.