What Is Cryptocurrency?

Cryptocurrency is a next-generation unit of account, store of value, and medium of exchange in the history of money. It is a digital or virtual currency that doesn't require a bank or medium to send and receive funds. Everyone on the network has a ledger, and the transactions are updated on every copy of the ledger in real-time. All transactions are updated in all copies of the ledger, and they are visible to everyone on the network. Yet they are not controlled by anyone, and there is no need for trust to use the cryptocurrencies.

Cryptocurrency is therefore referred to as digital or virtual currencies because you cannot see them, and they exist as digits on your computer. Funds are sent to the recipient's public key, who must sign the transaction with their private key to prove ownership and receive the funds. To send money, you simply broadcast on the network by entering the transactions on your wallet. The private key is as important as the crypto stored in your wallet, and if you lose it, you have lost your funds forever.

A typical transaction says that your account should be reduced by $20 and the receiving account be increased by the same amount (or vice versa). In a typical transaction, computers on the network check from the first transaction on the network to verify that there are transactions in which you received up to the amount you wish to send. So to send $20, you must have received an equivalent amount or more in previous transactions.

Summary of Important Points

  • Cryptocurrency is an innovative form of money, also known as virtual currency.
  • Mining is the known way to increase the coins or tokens in circulation for most cryptocurrencies.
  • Mining cryptocurrency is possible with the proper hardware.
  • Cryptocurrencies are founded on the advanced principles of computer science and mathematics.
  • Cryptocurrency transactions are immutable, public, transparent, trustless, and secure.
  • Cryptocurrency transactions do not rely on any centralized entity to continue transactions and the network.
  • There are two classes of cryptocurrencies: Coins are the main blockchain network virtual currencies like Bitcoin, while tokens exist on compatible main blockchains like Ethereum.
  • Other subcategories of tokens include fuel, shares, rebase, meme, governance tokens, and LP tokens.

Mining Cryptocurrency

Miners exist to protect cryptocurrency networks from problems resulting from the time differences in transactions and the order of transactions. Although miners are rewarded, the criteria for becoming a miner are the same for everyone, and there are no restrictions to participation in cryptocurrency mining. New transactions are put into blocks like new pages of a ledger, and mining helps connect the new page with other ledger pages. The process involves solving a puzzle by hashing the text of the block or previous ledger page with a random guess to get a number less than a target value.

The mining process requires a lot of computational power, and the difficulty of solving the puzzle required to generate a new page gets more complicated as the network grows. So profitable miners mostly form pools where they combine their computational power to solve a new page or block and share the rewards. Crypto is secured by math which forms the logic behind the codes written by developers to create the token.

The only way most cryptocurrencies can be created is through mining. However, some networks require that you deposit more of the crypto token to qualify for block verification or opening new ledger pages. Technically, the way the network agrees to create new blocks or ledger pages is called a consensus mechanism, and the most popular of these are the proof-of-work and the proof-of-stake.

Types of Cryptocurrencies

Though there are subcategories of cryptocurrencies (fuel, shares, rebase, meme, governance tokens, and LP tokens), the two broad categories are tokens and coins:

Tokens

A token is the unit of account and medium of exchange issued by a project on another blockchain. The issued tokens comply with the blockchain standards on which they are issued and may sometimes migrate to their main chain in the future.

Coins

A coin, by contrast, is the native currency that serves the same purpose on such a blockchain where tokens can also exist. Ethereum, for example, is a coin, while other projects built on Ethereum can issue similar assets like ETH, known as tokens.

Advantages of Cryptocurrency

  1. Decentralized
  2. Cheaper transactions with lower fees than traditional banking transactions
  3. Users retain ownership of their funds through non-custodial wallets
  4. Stored in hardware wallets which are currently the most secure means of storage
  5. The blockchain is a more challenging path for hackers than traditional computers
  6. Protects the identity of those who execute transactions on the blockchain
  7. Consumes less energy than conventional banking

Disadvantages of Cryptocurrency

  1. Prices are extremely volatile
  2. Not yet entirely accepted as a means of payment by many individuals and traditional governmental and economic institutions
  3. May be environmentally unfriendly
  4. Anonymity allows for possible hacker or criminal hideouts
  5. If you lose your private key, you have lost your funds forever
  6. Difficult to navigate for new or average users
  7. Unscrupulous developers and projects sprout from time to time

Legality of Cryptocurrency

Bringing cryptocurrency within the ambit of the law has amounted to several problems that are yet irreconcilable, such as:

  • Discrepancy Mostly between smart contracts and traditional contracts.
  • No jurisdiction Nodes exist in several locations scattered across the globe, making it hard to ascertain their jurisdiction.
  • Criminal activity The anonymity offered by cryptocurrency poses security risks and high levels of criminal activity. Additionally, since cryptocurrency is decentralized and collectively owned, it is hard to point out defendants culpable in cases requiring legal actions.
  • Tax Tax and cryptocurrency volatility are considerable concerns, making it difficult to compute the amount due.

For many of the above reasons, cryptocurrency is banned in the following countries:

  • China
  • Ecuador
  • Columbia
  • Indonesia
  • Russia
  • Egypt
  • Vietnam
  • Algeria
  • Saudi Arabia
  • Morocco
  • Bolivia
  • Bangladesh
  • Iran

Malta, Portugal, Luxembourg, Lithuania, Switzerland, Estonia, and the United States have friendly laws, although the regulations vary with a jurisdiction like states within the US.

How to Obtain Cryptocurrency

The known ways to get cryptocurrency are mining, airdrops, or purchasing from an exchange. Centralized exchanges like Binance, Kraken, CoinBase, Huobi, and others allow anyone to sign up and buy cryptocurrency after undergoing necessary AML (anti-money laundering) and KYC (know your customer) procedures.

There are also P2P transactions between friends and other financial service providers that allow the purchase of cryptocurrency using bank cards. The most popular reason for buying cryptocurrency is trading. Although there are risks in trading cryptocurrencies, many people are so excited by the potential upside that the downsides are not considered enough.

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