What are Cryptocurrencies?

What are Cryptocurrencies?

As the name implies, a cryptocurrency is a digital currency that is secured by cryptography. Cryptocurrencies leverage on the blockchain technology, and are generally not issued by any central authority. The decentralized nature of cryptocurrencies mean that any government interference or manipulation is highly unlikely.

Since the emergence of the first cryptocurrency, Bitcoin, in 2009, there have been significant changes to the financial market. Today, there are thousands of alternate cryptocurrencies (also known as alt-coins, or alts) with various functions and specifications.


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Characteristics of Cryptocurrencies

Some of the features of cryptocurrencies include:

Trustless: Cryptocurrencies were designed so that you do not need a trusted third party like a bank or credit card company to function. Generally, most currencies preceding the advent of cryptocurrencies required the presence of a central authority for everyone to trust it before using it. In contrast, almost every segment of the cryptocurrency ecosystem can verify information from other parts of the network, without extending out of the network.

Immutable: T he concept of immutability here means that transaction, once carried out, cannot be undone.

This is founded on three basic principles:

- It should be impossible to rewrite history; as a matter of fact, you will need to compromise and take over control of the whole network to do that.

- It should be impossible for anyone else except the owner of a set of private keys to access the funds within the wallet.

- To achieve the two principles above, all transactions are documented or recorded on the blockchain.

Decentralized: No political entity can control a public blockchain network; its framework has no central point of failure because it is infrastructurally decentralized. As a result, it is fault-tolerant, attack resistant, and collusion-resistant.

Lastly, most cryptocurrencies, such as Bitcoin, do not have any intrinsic value, which means that a holder cannot redeem it for another commodity such as gold, and that the value of a cryptocurrency is usually defined by the community.

While some have argued that the price of Bitcoin should at least be equated to the cost of the electricity expended during Bitcoin mining, there have been several notable cases when that did not happen.

Cryptocurrencies also do not have a physical form because it only exists on the network, though some have printed QR codes or private key addresses on a card or physical objects for easier access. 

Benefits of Adopting Cryptocurrencies

Transaction: One of the primary benefits of carrying out a transaction with cryptocurrencies is that they are usually done on a peer-to-peer network structure, thereby eliminating intermediaries. This results in greater clarity when establishing audit trails, and a higher level of accountability. The elimination of go-betweens also translates to lower transaction costs since brokerage fees, commission, and other charges are eliminated.

Confidential Transactions: With cryptocurrencies, there is a high level of privacy of financial transactions. This is notably absent in the traditional system, where individuals have to provide their particulars to carry out any transactions. This is mainly due to the fact that the blockchain would only record the transaction amount and the addresses of the participating wallets – the user’s identity would not be divulged.

Seamless Cross-Border Transactions: As a result of adopting the blockchain's peer-to-peer mechanism, international and cross-border transactions have become increasingly seamless. However, the challenge is that some countries do not yet recognize cryptocurrencies as a legal tender.

Strong Security: cryptocurrency transactions have the features of immutability and transparency; this hedges against fraud. The encryption techniques adopted on the blockchain and crypto transaction safeguards users against fraud and tampering while promoting consumer privacy. It is estimated that to hack a cryptography key to unlock a Bitcoin wallet, it may take a normal computer up to 300 trillion years to do so.

Examples of Cryptocurrency with Market Capitalization Value

According to CoinMarketCap.com, over 6,700 different cryptocurrencies are traded publicly, with a total market capitalization value of more than $645.7 billion as of writing this post. The ten most popular cryptos are:

Cryptocurrency

Market Capitalization

Bitcoin

$632.05 billion

Ethereum

$146.15 billion

Tether

$24.8 billion

Polkadot

$14.7 billion

XRP

$13.2 billion

Cardano

$10.98 billion

Litecoin

$9.2 billion

Bitcoin Cash

$8.8 billion

Chainlink

$8.1 billion

Binance Coin

$6.34 billion



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Investing in Cryptocurrency

There is huge potential of profits to be gained by investing in cryptocurrencies, but a similarly huge risk is involved. You can have your entire wallet wiped as quickly as you could make an outrageous profit.

However, some ways to make money from investing in cryptocurrencies include:

1. Trading Crypto CFDs

2. Day Trading

3. Bitcoin Mining

4. Arbitrage

5. ICO/IEO

Cryptocurrencies are the future of commerce and the financial system. Even though cryptocurrencies became popular in the last decade, it has only recently taken over a lot of retail businesses, becoming a trusted way of shopping online. It is not only accepted in ecommerce; its uses have extended to several spheres of life: daily payment, medical bills, politics, asset management, cloud storage, and many others.

The full potentials of cryptocurrencies have yet to be tapped on, and there are a few setbacks that need to be taken care of - volatility, potential for use in illicit businesses, money laundering etc. Cryptocurrencies are definitely here to stay and we will gradually see its acceptance as a form of legal tender.

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