Cryptocurrency: Everything You Need To Know About It

According to Wikipedia, a cryptocurrency is a digital asset that is designed to work as a medium of exchange using cryptography to secure its transactions. Additional units are also created using various algorithms. The transfer of the assets is also verified using cryptography. Any cryptocurrency can a type of a digital currency, an alternative currency or a virtual currency. Cryptocurrencies use decentralized control as opposed to the centralized electronic money or the central banking systems. The control over the decentralized currencies is maintained through a blockchain, which is a public transaction database, functioning as a distributed ledger. No one person or company has control over the ledgers of the cryptocurrencies. Bitcoin was the world’s first cryptocurrency, working on a decentralized platform. The various other cryptocurrencies that have been created ever since are grouped under altcoins, a blend of alternative coins.

According to Jan Lansky, a cryptocurrency is a system that meets all of the following six conditions:

1. The system does not require a central authority, distributed achieve consensus on its state.

2. The system keeps an overview of cryptocurrency units and their ownership.

3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.

4. Ownership of cryptocurrency units can be proved exclusively cryptographically.

5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.

6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

Blockchain

The validity of each cryptocurrency’s coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each of these blocks typically contains a hash pointer as a link to a previous block, a timestamp, and transaction data. They are very secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. It solves the double spending problem without the need of a trusted authority or central server, thereby, making the achievement of the decentralized consensus possible. Once recorded, the data in any given block cannot be altered retroactively without alteration of all subsequent blocks, which requires the collusion of the network majority.

Decentralized vs Centralized

A centralized coin will have a definitive authority or personnel who controls the various aspects of the coin, including the market value and the distribution. On the other hand, a decentralized coin will have no controlling authority and the control is maintained through blockchain. There are many coins available in the market under both the categories. A person who is looking to invest in the system should always prefer investing in a decentralized currency as giving someone the control of your investment is not considered to be an intelligent choice.

Mining

Since a decentralized network has no authority to delegate the task of the distribution of coins, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. The system would break immediately if someone created thousands of peers and spread forged transactions all over the network. Satoshi foresaw this problem and set a rule that the miners need to invest some work of their computers to perform this task and everybody could be a miner. Their task is to find a hash that connects the new block with its predecessor and this is known as the Proof of Work. For Bitcoin, the algorithm that is used to perform this check is the SHA 256 Hash Algorithm, which is basically a cryptographic puzzle that miners compete to solve. After finding the solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.

Bitcoins can only be created if miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer power the whole miner’s invest, there is only a specific amount of cryptocurrency token that can be created in a given amount of time. This is part of the consensus no peer in the network can break.

Monetary Properties:

1. Controlled supply

There is always a limited supply of the tokens in almost every cryptocurrency. In Bitcoin, for instance, the supply decreases over time and it is estimated to reach its final number somewhere in around 2140. The supply of a token is controlled by a schedule written in the code of the cryptocurrency.

2. No debt but bearer

The Fiat-money in your bank account is created by debt and the number that you see on your ledger represents nothing but the debts. It is a system of IOU. On the other hand, cryptocurrencies do not represent debts but they just represent themselves. They are money as hard as coins of gold. They are permissionless, irreversible, and pseudonymous means of payment and are an attack on the control of the banks and governments over monetary transactions of their citizens. No one can hinder someone to use Bitcoin, prohibit someone to accept a payment, or undo a transaction.

Cryptocurrencies attack the scope of the monetary policy as they are limited in a supply and are not changeable by a government, a bank, or any other central institution. They take away the control of central banks on inflation and deflation.

The Top Coins:

Bitcoin – Buy Bitcoin

Bitcoin is the world’s first decentralized digital currency and the idea came up to remove the middleman in the peer-to-peer transactions, keeping them directly between users. It was developed by an unknown person or group of people under the name Satoshi Nakamoto and released as an open-source software in 2009. Satoshi Nakamoto mined the first ever block on the blockchain of Bitcoin in January 2009 and it was known as the genesis block. Today, the market cap of the very first cryptocurrency ranks at number one in the market at $185,380,263,200. The funds are not tied to real-world entities but rather bitcoin addresses, which are basically a valid random private key. It has become quite popular within the last few years and this is the reason that the number of selling transactions has decreased as people want to keep the coins for themselves as an investment.

Ethereum – Buy/Sell Ethereum

Ethereum is the brainchild of crypto-genius Vitalik Buterin. It has ascended to the second position in the hierarchy of cryptocurrencies. Other than Bitcoin its blockchain does not only validate a set of accounts and balances but of so-called states. This means that Ethereum can not only process transactions but complex contracts and programs.

This flexibility makes Ethereum the perfect instrument for blockchain -application. But it comes at a cost. After the Hack of the DAO – an Ethereum based smart contract – the developers decided to do a hard fork without consensus, which resulted in the emerge of Ethereum Classic. Besides this, there are several clones of Ethereum, and Ethereum itself is a host of several Tokens like DigixDAO and Augur. This makes Ethereum more a family of cryptocurrencies than a single currency.

Ripple: Buy/Sell Ripple

Maybe the less popular – or most hated – project in the cryptocurrency community is Ripple. While Ripple has a native cryptocurrency – XRP – it is more about a network to process IOUs than the cryptocurrency itself. XRP, the currency, doesn‘t serve as a medium to store and exchange value, but more as a token to protect the network against spam.

Ripple Labs, the company running the Ripple network, created every XRP-token and is distributed by them on will. For this reason, Ripple is often called pre-mined in the community and dissed as no real cryptocurrency, and XRP is not considered as a good store of value.

Banks, however, seem to like Ripple. At least they adopt the system at an increasing pace.

Litecoin: Buy/Sell Litecoin

It was one of the first cryptocurrencies after Bitcoin and tagged as the silver to the gold. It is faster than Bitcoin, has a larger amount of token, and a new mining algorithm. All this made Litecoin a real innovation, perfectly tailored to be the smaller brother of Bitcoin. “It facilitated the emergence of several other cryptocurrencies which used its codebase but made it, even more, lighter“. Examples are Dogecoin or Feathercoin. While Litecoin failed to find a real use case and lost its second place after bitcoin, it is still actively developed and traded and is hoarded as a backup if Bitcoin fails.

The Dawn of New Economy

Mostly due to its revolutionary properties cryptocurrencies have become a success their inventor, Satoshi Nakamoto, didn‘t dare to dream of it. While every other attempt to create a digital cash system didn‘t attract a critical mass of users, Bitcoin had something that provoked enthusiasm and fascination. Sometimes it feels more like religion than technology. Cryptocurrencies are digital gold. Sound money that is secure from political influence. Money that promises to preserve and increase its value over time. Cryptocurrencies are also a fast and comfortable means of payment with a worldwide scope, and they are private and anonymous enough to serve as a means of payment for black markets and any other outlawed economic activity.

But while cryptocurrencies are more used for payment, its use as a means of speculation and a store of value dwarfs the payment aspects. Cryptocurrencies gave birth to an incredibly dynamic, fast-growing market for investors and speculators. Exchanges like Okcoin, poloniex or shapeshift enables the trade of hundreds of cryptocurrencies. Their daily trade volume exceeds that of major European stock exchanges.

At the same time, the praxis of Initial Coin Distribution (ICO), mostly facilitated by Ethereum‘s smart contracts, gave life to incredibly successful crowdfunding projects, in which often an idea is enough to collect millions of dollars. In the case of “The DAO”, it has been more than 150 million dollars. In this rich ecosystem of coins and token, you experience extreme volatility. It‘s common that a coin gains 10 percent a day – sometimes 100 percent – just to lose the same at the next day. If you are lucky, your coin‘s value grows up to 1000 percent in one or two weeks.

While Bitcoin remains by far the most famous cryptocurrency and most other cryptocurrencies have zero non-speculative impact, investors and users should keep an eye on several cryptocurrencies. The market of cryptocurrencies is fast and wild. Nearly every day new cryptocurrencies emerge, old die, early adopters get wealthy and investors lose money. Every cryptocurrency comes with a promise, mostly a big story to turn the world around. Few survive the first months, and most are pumped and dumped by speculators and live on as zombie coins until the last bagholder loses hope ever to see a return on his investment.

Markets are dirty. But this doesn‘t change the fact that cryptocurrencies are here to stay – and here to change the world. This is already happening. People all over the world buy Bitcoin from cryptocurrencies exchange to protect themselves against the devaluation of their national currency. Mostly in Asia, a vivid market for Bitcoin remittance has emerged, and the Bitcoin using darknets of cybercrime are flourishing. More and more companies discover the power of Smart Contracts or token on Ethereum, the first real-world application of blockchain technologies emerge.

The revolution is already happening. Institutional investors start to buy cryptocurrencies from exchange. Banks and governments realize that this invention has the potential to draw their control away. Cryptocurrencies change the world. Step by step. You can either stand beside and observe – or you can become part of history in the making.

If the trend continues, the average person will not be able to afford to purchase one whole bitcoin in 2 years. As global economies inflate and markets exhibit signs of recession, the world will turn to Bitcoin as a hedge against fiat turmoil and an escape against capital controls. Bitcoin is the way out, and cryptocurrency as a whole is never going away, it’s going to grow in use and acceptance as it matures.