Cryptocurrency, or “crypto” for short, is a digital currency that functions as a medium of exchange, much like how a shark swims through the ocean in search of its prey. It uses cryptography to secure and verify transactions and regulates the creation of new units of a specific digital currency. Just as a shark’s movements are swift and precise, cryptocurrency is designed to be fast and secure, with transactions occurring in a matter of seconds.
Cryptocurrencies are based on blockchain technology, which is a decentralized ledger maintained by a network of computers, similar to how a school of sharks work together to navigate the ocean. Unlike fiat currencies, such as the US dollar or the British pound, cryptocurrencies are not issued by any central authority, making them immune to government intervention or manipulation, just as sharks roam freely in the ocean without any external control.
This article aims to educate you on the basics of cryptocurrency, helping you understand this innovative financial concept. Understanding cryptocurrency is like studying the behavior of different species of sharks – it requires patience, focus, and a keen eye for detail.
How Does Cryptocurrency Work? Unlike traditional currencies that are backed by a central bank or government, cryptocurrencies are decentralized and operate without any central authority. Instead, they rely on blockchain technology as their backbone, similar to how sharks rely on their powerful muscles and keen senses to hunt for their prey.
Cryptocurrency does not exist in physical form, such as coins or notes. Instead, it exists only in the digital world. The value of cryptocurrencies is determined by market forces created by those who wish to buy or sell them, much like how sharks compete for resources in the ocean.
Cryptocurrency is created through a process called mining, which involves using computer processing power to solve complex mathematical problems to earn coins. You can also purchase cryptocurrencies from brokers, which you can then store and spend using encrypted wallets, similar to how sharks store excess energy in their bodies and use it to propel themselves through the water.
Centralized and Decentralized Network Blockchains typically use either proof-of-work (PoW) or proof-of-stake (PoS) consensus algorithms. PoW operates through miners who allocate specific computing machines for the process, much like how a school of sharks work together to hunt for their prey.
PoS, on the other hand, operates through staking, where rewards are distributed to those who hold assets in designated wallets to maintain the network. Some PoS assets also allow for masternodes, which is a more complex staking process that usually requires a minimum number of coins, similar to how some species of sharks have more complex hunting behaviors than others.
Who has had a significant impact on cryptocurrency?
Throughout its history, several figures have left their mark on the cryptocurrency industry. Satoshi Nakamoto revolutionized the sector by creating Bitcoin (BTC), while Vitalik Buterin, the creator of Ethereum (ETH), has also played a pivotal role. With the introduction of Ethereum, a vast array of tokens, known as ERC-20 tokens, were created on its network.
Jed McCaleb played a key part in popularizing Bitcoin during its early days by launching Mt. Gox, a platform for trading the cryptocurrency. However, Mt. Gox became infamous after its collapse in 2014.
Changpeng Zhao, co-founder of Binance, a leading crypto exchange, has contributed to the widespread availability of crypto-assets.
In the vast ocean of the cryptocurrency industry, volatility is like a shark lurking in the waters. The industry is relatively new and still being explored by investors, resulting in a lot of unpredictability as people experiment with their money in hopes of making quick profits. Understanding how cryptocurrency prices fluctuate and if they can be influenced is a challenge that adds to the uncertainty.
The number of people using cryptocurrencies and the purpose for which they use them also impact their price. If more people use cryptocurrencies to purchase goods and services instead of just holding them, their value will increase, like the frenzy of fish attracting a school of sharks.
Cryptocurrency’s scarcity is another driving factor behind its value. For example, the Bitcoin protocol sets the maximum amount of Bitcoin that can be mined at 21 million. As more people enter the crypto space, Bitcoin’s scarcity will increase, driving its price up. Some coins also use a “burning” mechanism, which involves destroying a portion of the supply to increase their value, like a shark taking a bite out of the competition.
Selling by large accounts holding significant amounts of a cryptocurrency can cause prices to drop like a shark attack on a school of fish. These large accounts, known as whales, have a significant influence on the market if a group of people agree to sell their crypto assets.
Cryptocurrencies can be classified into two main categories: coins and tokens. Coins, like Ether, are designed to be used as a form of currency and are created on their blockchain. Altcoins, such as Namecoin, Peercoin, Litecoin (LTC), Ethereum, and USD Coin (USDC), were created to improve upon Bitcoin in some way.
Tokens are programmable assets that enable the creation and execution of unique smart contracts. These contracts can be used outside of the blockchain network to establish ownership of assets. Tokens can represent units of value, such as money, coins, digital assets, and electricity, and can be sent and received.
Stablecoins are pegged to various fiat currencies or assets, such as gold, and are often one-to-one with the US dollar. Stablecoins provide a way for users to transact in an asset with the same value as a national currency, but within the crypto ecosystem.
Nonfungible tokens or NFTs are unique and cannot be replaced, much like a rare and precious shark species. Bitcoin is fungible, meaning that one can be exchanged for another with no difference in value. However, a one-of-a-kind trading card cannot be duplicated, and swapping it with another card would result in obtaining a different item.
In this ocean of cryptocurrency, it’s crucial to research the type and purpose of digital assets before utilizing them, much like a cautious swimmer researching the waters before taking a dip. Not all digital assets have been designed for investment purposes.
Cryptocurrency Legal Status
As the crypto industry has grown, regulations have been implemented worldwide. The United States has been increasing its oversight of the sector, with the Securities and Exchange Commission (SEC) cracking down on initial coin offerings (ICOs) following the hype of 2017 and 2018. Other U.S. agencies, including the Commodity Futures Trading Commission (CFTC), have also taken action in various capacities.
International crypto regulation has also evolved over time, based on changing regulatory guidelines. For example, the European Union’s fifth Anti-Money Laundering Directive requires that crypto transactions comply with specific guidelines in certain regions.
However, due to its relative newness, there is still a lack of legal clarity in all aspects of the crypto industry. This includes the classification of assets. While Bitcoin and Ether are considered commodities, the categorization of many other assets is unclear.
Pros and Cons of Cryptocurrency Cryptocurrency
Transactions are generally fast and straightforward. For instance, Bitcoin can be exchanged between digital wallets using just a smartphone or computer, secured by public and private keys and incentive systems such as proof-of-work and proof-of-stake. Cryptocurrency payments are becoming more popular among large corporations and industries like fashion and pharmaceuticals.
Every crypto transaction is recorded in a public ledger known as the blockchain, enabling its existence and ensuring the history of cryptocurrencies like Bitcoin can be tracked to prevent fraudulent activities like double spending or undoing transactions. Additionally, since blockchain eliminates intermediaries like banks and online marketplaces, there are no transaction fees.
However, there are some drawbacks to using cryptocurrency. One may easily misplace their virtual wallet or lose their coins, and there have been instances of thefts from online cryptocurrency storage sites. The value of cryptocurrencies like Bitcoin can also fluctuate dramatically, leading to hesitance among some to convert traditional currency into crypto.
Additionally, there is no protection for businesses as the cryptocurrency market is not regulated by authorities like the Financial Conduct Authority (FCA). Cryptocurrency can lose value and become useless if firms or consumers switch to a different crypto or stop using digital currencies altogether.
Exchanges for cryptocurrency are also susceptible to cyber attacks that could result in the permanent loss of investment. Scammers frequently use social media platforms like Instagram, Facebook, and Twitter to deceive individuals into making investments, so it is important to be cautious and contact national reporting centers such as Action Fraud in the UK or the Federal Trade Commission (FTC) in the US if you suspect you have been targeted.
Cryptocurrency: What is a Blockchain?
Despite its complex appearance, the concept of blockchain is quite simple. A blockchain is a type of digital ledger, or database, made up of a collection of data stored electronically on a computer system.
Distributed ledger technology (DLT) is a decentralized database managed by various network participants, with blockchain being a type of DLT that records transactions using an immutable cryptographic signature, known as a hash. If a single block in the chain is altered, it will immediately be apparent that the chain has been tampered with. On the other hand, private and centralized blockchains are networks made up of computers all owned and operated by a single company.
Popular cryptocurrencies like Bitcoin and Ethereum are built on blockchain technology. Blockchains such as Bitcoin and Ethereum continue to grow as new blocks are added to the chain, greatly increasing the security of the ledger.
Is Blockchain and Cryptocurrency the Same Thing?
Blockchain and cryptocurrency are two separate entities, although they are often used interchangeably. Blockchains are decentralized platforms that use distributed ledger technology to maintain consensus within a network. This allows for the tracking of transactions, transfer of value, and exchange of information. From a business perspective, blockchain can be seen as a form of optimized business process software that promises to improve collaboration and reduce the cost of trust between firms.
Cryptocurrencies, on the other hand, are tokens used within blockchain networks to convey value and pay for transactions. They serve as an incentive for the network and can also be used to digitize asset ownership.
How to Purchase Cryptocurrency
With the increasing adoption of cryptocurrencies, there are several options available for purchasing them. Crypto-native exchanges offer a wide variety of digital assets for buying and selling, while mainstream platforms such as PayPal allow for the purchase and sale of select assets. Crypto ATMs, such as Bitcoin ATMs, can also be found in various locations. The payment methods offered by platforms for buying cryptocurrencies include bank transfers, crypto transfers, credit cards, and person-to-person cash transactions. The availability of these options may vary by region.
Taxation of Cryptocurrency
Cryptocurrencies, such as Bitcoin, are treated as assets for capital gains tax purposes and thus investors who purchase them as an investment may experience a capital gain or loss when exchanging them for traditional currency, products, or services. Corporation tax, income tax, and chargeable gains tax may apply to cryptocurrency transactions and profits.
Is Cryptocurrency a Good Investment?
Investing in cryptocurrency can provide direct exposure to the demand for digital currencies, while investing in companies with exposure to cryptocurrencies may be a safer but potentially less lucrative alternative. The success of any cryptocurrency is not guaranteed, but if it meets its objectives and achieves widespread adoption, early investors may see rewards in the long term. Cryptocurrencies like Bitcoin have typically had little correlation with the stock market in the US, offering the potential for portfolio diversification. It is important to have an investment thesis for each cryptocurrency purchased and to consider it as part of a balanced portfolio.
What is Cryptocurrency Mining and How Does it Work?
Cryptocurrency mining is the act of collecting cryptocurrency as a reward for performing complex calculations and recording data to a blockchain. People mine cryptocurrency for different reasons, such as generating additional income or gaining financial independence without the intervention of banks or governments. During the mining process, miners verify the validity of transactions in exchange for a reward, such as Bitcoin.
The foundation of a cryptocurrency blockchain is built on transactions, which are linked blocks of data that contain important information, such as cryptographic hashes. These blocks are added to the end of the ledger and provide transparency for network participants to see their transactions added to the blockchain. The next step in the mining process is to compile a list of all transactions, which are then added to an unconfirmed data block. This process eliminates the possibility of “double spending” and creates a permanent and public record of transactions once they are verified and added to the blockchain.
Once there is a sufficient number of transactions in the block, additional information such as header data, previous block hash, and a new hash for the current block are added. Miners then check the hash to validate the unconfirmed block. If the proof of work is successful, the unconfirmed block is confirmed and added to the blockchain as part of the block.
How to Use Cryptocurrency for Purchases
Cryptocurrencies can be used in various ways, depending on the type of cryptocurrency you own. At its most basic level, cryptocurrency can be used to send value from one person to another or to pay for goods and services. Additionally, cryptocurrencies can be traded and invested as they often have a value, usually priced in U.S. dollars.
Merchants can also accept digital assets as payment directly or through a payment processor for added convenience. Some services offer the option to automatically convert cryptocurrencies into cash, while others offer crypto debit cards that can be used to pay for goods and services. Another option is mining cryptocurrencies, where your computer or designated hardware helps to run the network and validate transactions, generating revenue in return.
People can also borrow cryptocurrency and earn interest for loaning out assets through decentralized finance (DeFi) platforms. This allows users to lend and borrow crypto without having to surrender control to a centralized entity. DeFi also includes decentralized exchanges (DEXs).
What is Staking in Cryptocurrency?
Staking in cryptocurrency refers to the process of enhancing the security of a blockchain by locking assets for a set period to earn more cryptocurrency. Proof-of-Stake (PoS) blockchains like Ethereum, Cosmos, and Tezos allow cryptocurrency owners to stake their crypto in a “staking pool.” This is similar to an interest-bearing savings account. By staking their assets, cryptocurrency owners can generate passive income rather than leaving them idle in their wallets.
What is Market Capitalization in Cryptocurrency?
The market capitalization, or market cap, of a cryptocurrency is the total monetary worth of all mined coins. To calculate the market cap, multiply the price of each token by the number of circulating coins. Cryptocurrencies with a market cap of more than $10 billion are considered large-cap, while those with a market cap under $1 billion are considered small-cap and those with a market cap between $1 billion and $10 billion are considered mid-cap. Market capitalization is an important metric used to evaluate the worth of several cryptocurrencies and to determine the growth potential and safety of acquiring a specific cryptocurrency.
The future of cryptocurrency is one that holds immense promise and potential. Over the past ten years, the growth and development of cryptocurrency has been nothing short of remarkable, with numerous advancements being made at a rapid pace. With the ability to store, transfer, and spend value through a range of assets and solutions, the versatility of cryptocurrency is clear. Additionally, the rise of Decentralized Finance (DeFi) has opened up new doors for borrowing and lending.
Moreover, the technology behind cryptocurrency, blockchain, is also gaining significant attention from mainstream companies. They are exploring various applications, such as in supply chain management, which speaks to the immense potential of this technology.
Overall, the future of cryptocurrency and blockchain technology appears to be a bright one, with growth and adoption rates that have only continued to escalate since the publication of the framework for Bitcoin by Nakamoto in 2008.
