Most of us have heard or read about the cryptocurrencies, at least about bitcoin, the most popular kid of the lot.
It is common to miss out on this since it is not very widely used today among the general population. You might have heard about Bitcoin, even if you have not heard about cryptocurrency. Bitcoin is the most popular cryptocurrency available today.
Understanding cryptocurrency can be a bit confusing, but it is much easier if you think about it as digital money. The whole value of money lies in the name attached to the person owning it.
Think about this. Imagine you have 1 crore rupees in your bank account. What makes it your money? It’s the record in the bank that states the money belongs to you. In an unpredictable scenario, think of the bank accidentally changes that record to a different person. Now the money belongs to him. Money is all about a verified entry in some kind of database of accounts, balances, and transactions.
Cryptocurrencies have to follow this same principle if it has to be of value. But the way it is done here is much more advanced and based on certain core values that money cannot fulfill.
What is a Cryptocurrency?
Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.
Their name is because the consensus-keeping process is secured by strong cryptography. They are not secured by people or by trust, but by math.
Not controlled by any one entity
You might be thinking then what is the difference between cryptocurrency and regular money other than that it is in digital form. I understand I had the same confusion.
The biggest difference is that crypto is not controlled by any central authority, unlike money. We know that money is controlled by financial institutions, majorly banks. They determine the interest rates, when they want to print it to push it more into the market, or when to control it by charging higher interest rates. There is nothing wrong with it. The government and the central bank has to do this to maintain and control the economy. They do it to adjust inflation and deflation. This means that there is someone who controls it.
Crypto works oppositely. There is no central authority to control it, but the power lies equally in everyone. It uses blockchain technology.
How it works?
I will give you an example of how it works.
Vignesh has to transfer a bitcoin to Charu. Now Vignesh initiates the transaction. A transaction is a file that says Vignesh gives a bitcoin to Charu and is digitally signed by Vignesh.
Once signed, the transaction is broadcasted to the network sent from one to every other peer, this is standard P2P technology. After a specific amount of time, the transaction gets confirmed. Only miners can confirm transactions. This is their job in the cryptocurrency network.
Miners take the transactions, confirm they are legitimate, and spread them in the network. After confirmed by the miner, every node has to add it to its database. It has to become part of the blockchain. For doing this job, miners are rewarded with cryptocurrency, eg. bitcoins.
Anybody who has a great computing power can become a miner. A miner has to compete with other miners to solve a cryptographic puzzle. After finding the solution, the miner can confirm the puzzle and add it to the blockchain after which they are rewarded.
This way the independent miner are incentivized to maintain the legitimacy of the transactions. Once the transactions are confirmed, it is kind of set in stone. It is irreversible, so there is no possibility of forging.
Major cryptocurrencies
Bitcoin -This is the first and most popular cryptocurrency. It was introduced by Satoshi Nakamoto. Bitcoin has gained massive popularity and value in the following years. The current price of bitcoin is USD8876.17(6,73,390.64 INR).
The major drawback of bitcoin, cryptocurrencies in general is their volatility. Bitcoin has touched USD19650.01 on 15 Dec 2017. You can see the unpredictability in its value.
Ethereum – There are certain variations in their application of the blockchain technology in each of these cryptocurrencies. Ethereum can not only process transactions but also complex contracts and programs.
Other commonly used cryptocurrencies are Ripple, Litecoin, Monero. There are cryptocurrencies introduced around the world these days.
One major improvement in this scene is the introduction of the digital Yuan, the cryptocurrency version of Chinese currency, Yuan. This is still in the testing phase.
The initiative by the second-largest economy in the world shows the strong current in favor of cryptocurrency and the trust in blockchain technology.
This shows that cryptocurrencies are here to stay.
I would like to hear your view on cryptocurrencies. Do you think it is a potential investment opportunity?
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