An overview of Cryptocurrencies

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“All money is imaginary”

– Catherynne M.Valente, The Girl Who Soared Over Fairyland and Cut the Moon in Two

 

Cryptocurrency is money that exists only on computers. Although you can use it to pay goods and services, it doesn’t have any physical equivalent in the real world. It uses cryptography which makes it difficult to counterfeit this currency.

The first cryptocurrency called the Bitcoin was launched in 2009 by a group or an individual under an alias, Satoshi Nakamoto. It was developed to create an electronic payment system to prevent Double-Spending – a potential flaw in the digital currency system in which a digital token can be spent more than once. The traditional solution was a third party that kept a record of every user’s account information and validated payments, which would also require the users to pay them a processing fee. Cryptocurrencies leverage Blockchain technology to operate on a decentralized system to avoid the need for an external authority to validate transactions.

 

More about Bitcoins and how they work

To invest in Bitcoins, you need to have a Bitcoin Wallet. In India, one can avail it at providers like ZEBPAY, UNOCOIN and so on. You can buy bitcoins from an exchange with a bank account, or buy them from a trusted person, or accept them as a payment for goods and services. The value of Bitcoins depends on its supply and demand. In March 2010, the cost of one Bitcoin was 0.03 USD. As of Jan 2019, its value is 4,020 USD. Every bitcoin wallet has a unique address and one or more private keys. While transferring bitcoins, the amount is always sent to the receiver’s wallet address.

Bitcoins operate on blockchain technology. It is like a public ledger which keeps a record of all these transactions in chronological order. On the blockchain network, every node or computer has a copy of this ledger which gets updated whenever new payments or transfers are approved. So, how do these entries get added in the ledger? Well, that’s this role that Bitcoin Miners play.

On initiating a transfer, an encrypted digital signature gets generated. Using this signature, the nodes or computers on the network verify the transaction. The verification process primarily checks if the sender actually had those many bitcoins before they were sent and if the sender has the private key for those bitcoins.

The miners look for such transactions and compete against each other to group them into a block by solving a complicated mathematical puzzle called the Proof of Work. They use high-performance computers equipped with mining hardware and software to generate the correct Hash (a unique identification code) for the block. The first miner who solves the puzzle gets rewarded in bitcoins. The block is then linked to the blockchain, where all the nodes on the network update their ledgers with the new record of transactions.

Advantages of Cryptocurrencies

  • Can be accessed and transferred globally
  • Works faster than fiat currency transfers
  • Free from any third-party systems for validating and securing transactions (decentralized)
  • Works on peer-to-peer algorithms and remains anonymous to other users on the network
  • The underlying framework of blockchains ensures Integrity, Security, and Confidentiality

Demerits of Cryptocurrencies

  • Can be difficult to understand due to the complicated technology
  • The market is highly unpredictable, and it’s not advisable to invest without understanding the risk factors
  • Although it’s a global concept, some countries have not legalized the use of cryptocurrency
  • If a user forgets the wallet password, it’s not possible to recover the data due to the tight security integration

There are well over thousand cryptocurrencies in existence. There’s Ethereum, Ripple, Litecoin, EOS and so on; while Bitcoin remains by far the most popular cryptocurrency. Many investors consider it a technology that can potentially change the world of trade. It is a quick and comfortable means of payment with its worldwide scope and is also secure from any political influence.

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