What is a Cryptocurrency
In this article, let us understand what is Cryptocurrency and how does cryptocurrency work.
Cryptocurrency is a digital currency used to make payment of any monetary value without any transaction fees or without involving middlemen in the transaction.
The cryptocurrency runs a decentralized ledger kept and handled my miners who powerful electronic devices especially computers have abilities to crunch transactions and reward the users in terms of bitcoins, altcoins, etc. The cryptocurrency is invented by an anonymous name popularly known as Satoshi Nakamoto in 2008. A series of efforts to understand his genuine identity has been failed without conclusive evidence.
According to the survey undertaken during the mid of 2017, there were around 16.7 million bitcoins were in circulation and each bitcoin was valued at $14000. Bitcoin has seen a peak of $20000 to stabilize around $14000. As on 29th August 2020 @ 17:26 hours Indian Standard Time, each Bitcoin valued at $11468.
Now, most people who are dealing with cryptocurrency are considering this from an investment point of view assuming that the value may go up. Some retail outlets, Food joints accepting Bitcoin as a valid source of payment. However, whatever the speculations around, those who are buying bitcoins must consider the following points before making investment decisions.
- Cryptocurrencies are volatile. Sometimes, the volatility is more than the derivative instruments. The ups and downs in Bitcoin are often scary.
- There are a lot of unknowns about cryptocurrency including the one who invented this currency. When the inventor is unknown and endorsements are a very few, how can we trust Bitcoin as a digital currency?
- There are incidents of using Bitcoins for fraudulent activities
- The rate of return on Bitcoin is not established. There are no proven track records of any existing millionaires making money through cryptocurrency. Even if they made money through cryptocurrencies, they are not confident in disclosing it.
- Hackers have utilized high profiled twitter and LinkedIn accounts including Elon Musk, Apple, and more to ask for Bitcoins. The shocking fact is that these accounts not only have millions of followers but also a whole lot of people who trust them. Hackers may ask you to give Bitcoins since it leaves no trace behind the deal.
You need to be careful when someone requests you or propose to give you Bitcoins for the products and services bought/sold.
How does Cryptocurrency Mining Work?
As mentioned earlier the blockchain is a decentralized ledger- a record of transactions and balances in its true sense. When the cryptocurrency transaction is executed by the user, it is generated and sent to all the users who are hosting a copy of the blockchain ledger. A unique category of users known as “miners” attempts to solve the cryptographic puzzle which enables them to add something called “block” of transactions to the ledger. Whoever solves the puzzle earlier gets a few newly minted coins as rewards for their victory. Often these miners pool computing power and share the new coins. The algorithm depends on unanimity. If most users attempting to solve the puzzle all submit the same transaction data, then it proves that the transactions are accurate. Additionally, the security of the blockchain has faith in cryptography. Each block is linked to the data in the last block via one-way cryptographic codes known hashes which are intended to make manipulating with the blockchain very hard. Tendering new coins as rewards, the complexity of breaking the cryptographic puzzles, and the amount of work it would take to add incorrect data to the blockchain by falsifying consensus or manipulating with the blockchain helps to safeguard against bad actors.
Remember! individuals who are handing hardware and software targeting at confirming transactions to the digital ledgers are known as cryptocurrency miners. Their main job is to solve the puzzles using software to facilitate the activity of mining bitcoins. When they solve puzzles earlier than others, they are entitled to earn bitcoins as rewards.
Having understood how cryptocurrency works, let us move on to understand how cryptography works with cryptocurrency.
The keys that push balances all around the blockchain use a type of one-way cryptography called public-key cryptography. The “hashes” use a comparable type of cryptography. In the Meantime, transaction data sent and stored on the blockchain is tokenized. The key to recognizing these layers of encryption which ensure a system like Bitcoin’s is found in one-way cryptographic functions. The central idea is that cryptocurrency utilizes a type of cryptography that is easy to compute one way, but hard to compute the other way without a “key.” Very lightly you can think of it like this, it is easy to establish a strong password if you are in your net banking account, but very difficult for others to suppose a strong password following it has been generated.
To quickly summarize the details above:
- Cryptocurrency is a digital currency like PayPal account balance or your bank account balance.
- Cryptocurrency transactions are recorded in a decentralized ledger.
- The individuals who create bitcoins are called miners.
- Mining is just the process of creating new coins through the process of solving puzzles using the software.
- Cryptocurrencies are traded and hence can be bought and sold through the brokers and currency dealers.
- There are many other types of cryptocurrencies beyond Bitcoins and Altcoins.
- Unlike the banking system, in cryptocurrency, a decentralized network regulates and controls the circulation of bitcoins which removes the need for an intermediary.