Cryptocurrency

What is cryptocurrency

Crypto currency is a digital or electronic currency. But there is more to it than that. Here we explain how crypto currencies work and why they could revolutionize finance.

There is a lot of talk in the media right now about what cryptocurrency is. But the topic is certainly not an easy one. Therefore, in this article, we shed some light on the subject and answer questions about cryptocurrency. Cryptocurrency is a form of universal digital money that you can use to buy goods or services. You can also trade and invest in cryptocurrencies – but as they are very volatile, they are not for the faint of heart. 

So what differentiates cryptocurrencies from traditional currencies like the dollar or the euro? A basic requirement is trust. The word "crypto" comes from the cryptographic techniques used for cryptocurrencies. These techniques ensure that transactions in cryptocurrencies can be processed securely. In addition, these techniques allow transactions to be carried out without the supervision of a third party such as a bank.

 

This is one of the main reasons why crypto currencies are so popular. A decentralized financial system that does not rely on banks or influential bodies has some advantages. It can be faster, cheaper, fairer and more transparent. However, this is still a vision for the moment and there are still some challenges for cryptocurrencies to overcome. 

How does cryptocurrency work?

Many cryptocurrencies are based on blockchain technologies. This enables the verification and approval of all transactions in a decentralized network. A blockchain is a type of digital ledger that all users of the network receive a copy of. If a user tries to edit or change the blockchain on their own, this version will be rejected by other users.

Basically, the blockchain is a database that stores large amounts of information and does not allow any changes. However, cryptocurrencies use a decentralized peer-to-peer network to verify new transactions. They are thus based on the mutual trust of users, which fundamentally distinguishes them from conventional currencies.

While traditional currencies are issued and regulated by a bank or central authority, there is no central body that manages typical cryptocurrencies like Bitcoin or Ethereum. Also, there is no trusted third party (like a bank) monitoring transfers between two parties. While this is part of the appeal of cryptocurrencies, it can cause problems when making payments.

This is how you can pay with cryptocurrencies

You can actually pay for your purchases with cryptocurrencies - after all, they are real currencies. Many websites and online shops now accept Bitcoin as a payment method. You can use other cryptocurrencies to buy anything from an NFT to a virtual lot in an online video game.

To make a digital purchase using cryptocurrency, you need a crypto wallet. You can safely store cryptocurrencies in a crypto wallet. Each wallet contains private keys and public keys (public and private keys) that can be used to pay and receive cryptocurrencies. The public key is a code that all users within the system know. The private key is only known to one user at a time and is used to verify transactions. 

How many cryptocurrencies are there?

According to research there are currently almost 6,000 different cryptocurrencies. However, 20 of these currencies have a 90% market share. 

It is relatively uncomplicated to create a cryptocurrency, which explains the sharp increase in the number of cryptocurrencies in recent years - in 2013 there were e.g. B. still less than 70 cryptocurrencies. The most popular cryptocurrencies include Bitcoin, Ethereum and Litecoin.

How is the value of each cryptocurrency determined?

Compared to other financial markets, the market for cryptocurrencies is subject to relatively strong fluctuations. To put it mildly: the value of cryptocurrencies can increase dramatically within days or even hours – but they can also fall again just as quickly.

Many cryptocurrencies like bitcoin have no intrinsic value. Instead, their value is based on supply and demand. If many people want to buy a cryptocurrency when there is a shortage of supply, the value increases. Bitcoin and many other cryptocurrencies have a limited number of tokens, which is why the supply doesn't outstrip the demand - at least for now.  

What is cryptocurrency mining?

Crypto mining is all about introducing new crypto units into the market. Users can "mine" units by verifying transactions and adding them to a blockchain.

In this system, users update and secure the network continuously and receive cryptocurrencies such as Bitcoin in return. All you need to start mining is a computer and internet access, but it's not always lucrative. The mining success rate depends on what cryptocurrency you are “mining”, how powerful your computer is and how much electricity you are using.

With Bitcoin, the mining process works like a lottery. Any company or individual wishing to engage in mining must attempt to solve a special code before anyone else involved. This code confirms the transaction and stores the details on the blockchain. The winner then receives new bitcoins as a reward.

How to invest in cryptocurrency

Nowadays there are websites that serve as cryptocurrency exchanges – here you can buy and sell cryptocurrencies. These include websites from companies such as Binance, Coinbase Exchange or Huobi Global. Many of these exchanges charge fees for different types of transactions. So be aware of this and inform yourself early on what these fees can mean for your possible winnings. 

 

Is Investing in Cryptocurrencies Risky?

In a word: yes. Investing in cryptocurrency is very risky.

If you only invest in one cryptocurrency, the risk is concentrated in that one currency. You may be able to reduce risk somewhat by buying various cryptocurrencies through an exchange traded fund (ETF). This allows you to invest in several currencies at once, but this is not a safe investment option either. The entire crypto system is still unstable and does not offer long-term security. So do some research before you invest large sums.

Why are cryptocurrencies so popular?

People are interested in cryptocurrencies for different reasons - but there are also many skeptics. Here are some possible reasons why cryptocurrencies are gaining popularity among die-hard fans.

Less fees

One reason for the popularity of certain cryptocurrencies is the comparatively low fees. Fees are often lower compared to the cost of traditional banking as there is no central authority managing payments. 

efficiency

The availability and speed of transactions is also part of the appeal of various cryptocurrencies. Transactions can be completed within minutes - 24 hours a day, 365 days a year. You do not have to stick to opening hours and there is no additional processing by third parties. So dealing with the currencies is straightforward and they are very accessible.

Security

Blockchain technology is the system responsible for the transaction of many cryptocurrencies. This makes it very difficult to change transaction data once it has been entered into the system. This security feature has contributed to increased demand. 

Another reason is the lack of human involvement - the computer network shares the data going into the database, reducing the risk of errors.

No government involvement

The lack of any government regulation also appeals to some. Various cryptocurrencies therefore seem more stable and less endangered if e.g. B. riots occur in a certain region. 

Profitability as an investment

Of course, the possibility of making profits is also attractive. The cryptocurrency market is very active. As banks invest in projects introducing blockchain technology, cryptocurrencies could become an important part of the financial industry in the future.

You can also read the advantages and disadvantages of cryptocurrency 

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