What is a cryptocurrency?
To begin with, cryptocurrency is a digital or virtual currency that is secured by cryptography, making it almost impossible to counterfeit or double spend. Therefore many cryptocurrencies are decentralized networks based on blockchain technology, a distributed ledger applied by a network of computers. A defining characteristic of cryptocurrencies is that they are generally not issued by any central authority. This makes them theoretically immune to government interference or manipulation.
In short, cryptocurrencies are more like a digital form of cash. You can generally use them to pay your friends part of a restaurant bill or to buy a desired product. As a result cryptocurrency is digital, it can also be sent to friends and family anywhere in the world.
How does cryptocurrency work?
Cryptocurrencies operate on a distributed public ledger called the blockchain, a record of all transactions that is updated and governed by the coin holders.
Cryptocurrency units are created through a process called crypto mining. Mining involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy coins from exchanges. As a result they can be stored and spent using crypto wallets. Some of the most popular crypto exchanges are Binance, Gemini, Robinhood, but there are also local variants such as COINZIX. Whether you are an investor or crypto trader you need a reliable exchange because you don’t own anything tangible. What you do own is a key that allows you to move a record or unit of measure from one person to another without a trusted third party. You also need a crypto wallet where you store your funds securely.
Although bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms. More uses are expected in the future. Transactions that include bonds, stocks and other financial assets could eventually be traded using this technology.
What is Bitcoin?
Firstly Bitcoin is a decentralized digital currency created in January 2009. It briefly follows the ideas set out in a white paper by author Satoshi Nakamoto. The identity of the person who created the technology is still a mystery that is still discussed today on crypto reddit or other platforms. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms. Compared to government-issued currencies, it is operated by a decentralized authority.
Secondly Bitcoin is a cryptocurrency because it uses cryptography to keep itself secure. There are no physical bitcoins! Just balances kept in a public ledger that everyone has transparent access to. In other words every record is encrypted. All Bitcoin transactions are verified by a massive amount of computing power through a process known as crypto mining. Bitcoin is not issued or backed by any bank or government. Despite not being a legal means of payment in most parts of the world, Bitcoin is very popular. This has triggered the launch of hundreds of other cryptocurrencies, collectively known as altcoins. Bitcoin is commonly abbreviated as BTC when traded.
What are altcoins?
Altcoins are cryptocurrencies other than Bitcoin. They share common features with Bitcoin, but are also different in other ways. For example, altcoins use a different consensus mechanism to produce blocks or to validate transactions. Or they differ from Bitcoin in that they offer new or additional capabilities. Such as smart contracts or low price volatility. All coins operate using blockchain technology.
Therefore thousands of new altcoins, or alternative coins, have been created and added to the crypto ecosystem. Ethereum is the most popular altcoin. People use the full name (Ethereum) when talking about the wider blockchain network. And Ether (ETH) to discuss the coin itself.
So there are more than 17,000 types of cryptocurrencies as of February 2022, according to price-tracking site CoinMarketCap. Bitcoin accounts for almost half of the total crypto market cap, and Ethereum for almost a quarter. Altcoins take up the rest of the market share (about 40%).
Are cryptocurrencies legal?
Fiat currencies get their authority as a means of trading from the government or monetary authorities. For example, each one dollar bill is backed by the Federal Reserve.
As a result cryptocurrencies are not backed by any public or private entity. Therefore, it has been difficult to argue for their legal status in different financial jurisdictions around the world. It doesn’t help that cryptocurrencies have largely operated outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in everyday transactions and exchanges. In June 2019, the Financial Action Task Force (FATF) recommended that electronic transfers of cryptocurrencies be subject to the requirements of the Travel Rule. Which requires compliance with anti-money laundering rules.
Cryptocurrencies are legal in the European Union. Derivatives and other products using cryptocurrencies will need to qualify as “financial instruments”. In June 2021, the European Commission published Markets in Crypto-Assets (MiCA). This sets out regulatory safeguards and rules for companies or providers offering financial services using cryptocurrencies.
The Chicago Mercantile Exchange in the United States is the largest and most sophisticated financial market in the world. This is where cryptocurrency derivatives such as Bitcoin futures can be found. The Securities and Exchange Commission (SEC) has stated that Bitcoin and Ethereum are not securities.
Advantages of using cryptocurrencies
First of all cryptocurrencies are permission-free. So no one can stop you from using cryptocurrencies. On the other hand, centralized payment services can freeze accounts or prevent transactions from taking place.
Secondly, they are censorship-resistant. As a result of the way the network is designed, it is virtually impossible for hackers or other attackers to shut it down.
Thirdly, it is a cheap and fast payment method. So when you make a transaction with someone on the other side of the world, the money can arrive in seconds. Also at a fraction of the cost of an international bank transfer.
Moreover transfers are made through traditional online payment gateways, which are owned by organizations. They hold the money and you have to ask them to transfer it on your behalf when you want to spend it.
Thanks to cryptocurrencies, there is no organization. You, your friends and thousands of others can act as your own banks by running free software. Your computer or phone connects with other people’s computers or phones. Which is direct communication so there is no need for intermediaries!
To use cryptocurrencies, you don’t have to sign up to a website with an email address and password. You can download a wide variety of apps to your smartphone to start sending and receiving within minutes.