Cryptocurrency: Understanding Cryptocurrencies

What Exactly Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is protected by cryptography, making counterfeiting or double-spending nearly impossible. Many cryptocurrencies are decentralized networks based on blockchain technology, which is a distributed ledger enforced by a network of computers. Cryptocurrencies are distinguished by the fact that they are generally not issued by any central authority, making them theoretically immune to government interference or manipulation.

IMPORTANT TAKEAWAYS

  • A cryptocurrency is a type of digital asset that is based on a network that is distributed across many computers. Because of their decentralized structure, they can exist independently of governments and central authorities.
  • The term “cryptocurrency” derives from the encryption techniques used to secure networks.
  • Many cryptocurrencies rely on blockchains, which are organizational methods for ensuring the integrity of transactional data.
  • Many experts believe that blockchain and related technology will have a significant impact on many industries, including finance and law.
  • Cryptocurrencies have come under fire for a variety of reasons, including their use in illegal activities, exchange rate volatility, and vulnerabilities in the infrastructure that supports them. They have been praised, however, for their portability, divisibility, inflation resistance, and transparency.

Cryptocurrency Fundamentals

Cryptocurrencies are online payment systems that are denominated in terms of virtual “tokens” that are represented by ledger entries within the system. The term “crypto” refers to the encryption algorithms and cryptographic techniques used to protect these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Cryptocurrency Types

Bitcoin was the first blockchain-based cryptocurrency, and it is still the most popular and valuable. There are thousands of alternative cryptocurrencies available today, each with its own set of features and specifications.

Some of these are clones or forks of Bitcoin, while others are entirely new currencies. Bitcoin was created in 2009 by an individual or group who went by the alias “Satoshi Nakamoto.”

As of August 2021, there were over 18.8 million bitcoins in circulation, with a total market cap of approximately $858.9 billion, with the figure constantly updating. There are only 21 billion bitcoins in existence, which prevents both inflation and manipulation.

Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS, are some of the competing cryptocurrencies spawned by Bitcoin’s success. By August 2021, the total value of all cryptocurrencies in existence will be more than $1.8 trillion—Bitcoin currently accounts for approximately 46.5 percent of the total value.

Facts To Note:

Despite the fact that cryptocurrency bills itself as a form of money, the Internal Revenue Service (IRS) considers it a financial asset or property. And, like most other investments, if you profit from selling or trading it, the government wants a cut of the profits. The United States Department of the Treasury announced a proposal on May 20, 2021, that would require taxpayers to report any cryptocurrency transaction worth $10,000 to the IRS. The manner in which the proceeds are taxed—as capital gains or ordinary income—depends on the length of time the taxpayer held the cryptocurrency.

The Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds between two parties without the need for a trusted third party such as a bank or credit card company. Instead, these transfers are protected by the use of public and private keys, as well as various incentive systems such as Proof of Work or Proof of Stake.

A user’s “wallet,” or account address, in modern cryptocurrency systems has a public key, while the private key is known only to the owner and is used to sign transactions.

Fund transfers are completed with minimal processing fees, allowing users to avoid the high wire transfer fees charged by banks and financial institutions.

Disadvantages

Because cryptocurrency transactions are semi-anonymous, they are ideal for a variety of illegal activities such as money laundering and tax evasion. However, cryptocurrency advocates frequently emphasize the importance of anonymity, citing benefits such as protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies have a higher level of privacy than others.

Because forensic analysis of the Bitcoin blockchain has assisted authorities in arresting and prosecuting criminals, Bitcoin is a relatively poor choice for conducting illegal business online. However, more privacy-oriented coins exist, such as Dash, Monero, and ZCash, which are far more difficult to trace.

Particular Considerations

Blockchain technology is central to the appeal and functionality of Bitcoin and other cryptocurrencies, as it is used to keep an online ledger of all transactions that have ever occurred, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making forging transaction histories nearly impossible.

Many experts believe that blockchain technology has significant potential for applications such as online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) believe that it has the potential to lower transaction costs by streamlining payment processing. However, because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out if a hard drive is lost or destroyed and no backup copy of the private key exists. Simultaneously, no central authority, government, or corporation has access to your funds or personal information.

Cryptocurrency Criticism

Because cryptocurrency market prices are determined by supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate greatly, as the design of many cryptocurrencies ensures a high degree of scarcity.

Bitcoin’s value has fluctuated dramatically, reaching as high as $17,738 per Bitcoin in December 2017 before plummeting to $7,575 in the months that followed.

As a result, some economists believe that cryptocurrencies are a passing fad or speculative bubble.

There is concern that cryptocurrencies such as Bitcoin are not based on tangible goods. According to some research, the cost of producing a Bitcoin, which requires an increasing amount of energy, is directly related to its market price.

Although cryptocurrency blockchains are highly secure, other aspects of a cryptocurrency ecosystem, such as exchanges and wallets, are vulnerable to hacking. Several online exchanges have been hacked and stolen in Bitcoin’s 10-year history, with millions of dollars in “coins” stolen in some cases.

Despite this, many observers see potential benefits in cryptocurrencies, such as the ability to preserve value against inflation and facilitate exchange while being easier to transport and divide than precious metals and existing outside of the influence of central banks and governments.

In a Nutshell, What Is Cryptocurrency?
Cryptocurrencies are systems that enable secure online payments and are denominated in terms of virtual “tokens.”

How Do You Acquire Cryptocurrency?
Cryptocurrency can be purchased by any investor using cryptocurrency exchanges such as Coinbase, Cash app, and others.

What Is the Purpose of Crypto?
Many experts believe that blockchain technology has significant potential for applications such as online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) believe that it has the potential to lower transaction costs by streamlining payment processing.

What Is the Business Model of Cryptocurrency?
Cryptocurrencies enable secure online payments denominated in terms of virtual “tokens,” which are represented by ledger entries within the system. Investors can profit from cryptocurrency by mining it or simply selling it at a profit.

What Are the Most Well-Known Cryptocurrencies?
By far the most popular cryptocurrency is Bitcoin, which is followed by Etherum, Litecoin, and Cardano.

For Further Reading:

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