How does cryptocurrency work – and why do we use it?
Cryptocurrency is a kind of digital currency designed to be secure and, in many cases, anonymous.
It is a currency associated with the Internet that uses cryptography, the process of converting readable information into almost indecipherable code, to track purchases and transfers.
Cryptography was born out of the need for secure communication, but it has evolved in the digital age with elements of mathematical theory and computer science to become a means of securing communications, information and money online.
The first cryptocurrency was Bitcoin, which was created in 2009 and is still the best known. There has been a proliferation of cryptocurrencies over the past decade and there are now thousands available on the internet, but Bitcoin remains the most well-known.
Here’s everything you need to know about cryptocurrencies.
How do cryptocurrencies work?
Cryptocurrencies use decentralized technology to allow users to make secure payments and store money without needing to use their name or go through a bank. They operate on a distributed public ledger called a blockchain, which is a record of all transactions updated and held by currency holders.
Cryptocurrency units are created through a process called mining, which involves using computer power to solve complex mathematical problems that generate coins. Users can also buy the currencies from brokers and then store and spend them using crypto wallets.
Cryptocurrencies and applications of blockchain technology are still emerging in financial terms and more uses are to be expected. Transactions comprising bonds, stocks and other financial assets could potentially be traded using technology.
What are the most common cryptocurrencies?
- Bitcoin: Bitcoin was the first and is the most commonly traded cryptocurrency to date. The currency was developed by Satoshi Nakamoto in 2009, a mysterious figure who developed his blockchain. Supporters say institutional investors are buying the coin as a store of value, similar to gold, but critics say the coin is in a bubble and basically worthless.
- Ethereum: Developed in 2015, ether is the monetary token used in the ethereum blockchain, the second most popular and valuable cryptocurrency. Ether has had an eventful journey. After a major hack in 2016, it split into two currencies. It has proven to be extremely popular as a launching pad for other cryptocurrencies, with other digital coins using Ethereum’s blockchain to build payment applications and services.
- Ripple: Ripple is another distributed ledger system that was founded in 2012. Ripple can be used to track more types of transactions, not just cryptocurrency. The company behind it has worked with banks and financial institutions, including Santander.
- Litecoin: This currency is most similar in form to bitcoin, but has evolved faster to develop new innovations, including faster payments and processes to allow for many more transactions.
Why would you use cryptocurrency?
Cryptocurrencies are known to be secure and provide a level of anonymity. Transactions carried out there cannot be tampered with or canceled and fees are generally low. Their decentralized nature means that they are accessible to everyone, although they can be complicated to set up and few stores accept them for spending.
Perhaps the most popular use of cryptocurrency is as a speculative investment, with users buying the coins in the hope that they will rise in value, or that they may one day be useful as an alternative to coins. traditional currencies.
Bitcoin’s volatile price has resulted in sudden spikes in interest as its value increases. This has resulted in an increase in the number of professional and amateur speculators investing in bitcoin and other cryptocurrencies, seeing them either as a quick way to generate returns or as part of an investment portfolio.
Are there any concerns about cryptocurrency?
There are great concerns about digital coins as a source of fraud. They are also completely unregulated and some are open to market manipulation. Speculators buying digital coins should be aware that they could lose all of their money, according to UK regulators.
Although Bitcoin is decentralized, it is very volatile and is known to move when popular individuals, such as Tesla CEO Elon Musk, even mention the names of digital coins.
Other smaller pieces can be even more volatile. Some have been accused of being outright fraudulent. Others have seen investors spend their money on digital coins only for developers to get by with the money on their own.
One of the most common practical uses of cryptocurrency is to fund illegal activities, such as buying illegal goods on the dark web. Many black market internet stores accept cryptocurrency payments because they can be very anonymous and don’t require money to change hands.