What is cryptocurrency?
Cryptocurrency is a form of digital currency, which is being transacted within its blockchain – a database which keeps record of all the cryptocurrency transactions. What makes the cryptocurrency market unique is that it doesn’t abide by centralized banking systems. To understand the reason behind the invention of cryptocurrency, one should first understand the value of the physical money (banknotes, coins). Fiat money is what we are used to working with, because it is what for the most part our government has had power over. The supply of legal tender is controlled by a central authority, whereas virtual currency is invented in a way that there is already a known amount of the certain cryptocurrency and it is up to the people how much of it they’ll have access to.
Just like the phoenix rising from the ashes, the idea of cryptocurrency was born in times of hardships. The economic downturn after the 2008 financial crisis provoked the origination and implementation of a different financial system, which doesn’t rely on the traditional regulation institutions and practices.
Advantages and Disadvantages of Cryptocurrency
Thanks to the idea of digitizing money, the state of the worldwide economy is starting to shift in a way which will enable people with all kinds of backgrounds to take part in the world of the ever evolving crypto possibilities.
Unlike investing in stocks and other money making ventures, becoming a part of the cryptocurrency market will open more than just one door to achieving both financial freedom and stability. Since the traditional control of the government and the banking systems don’t apply to the workings of the crypto investments, exchanges and the so called hodling, crypto has put its face on the map simply because it appeals to the everyday man and not the traditional financial institutions.
Pros of cryptocurrency
- Fast and easy access – creating a crypto wallet can be easily done by anyone who possesses at least a smartphone and has a stable wi-fi connection. This process is way more convenient and faster than opening a regular bank account. No one will check your current credit score, income etc. so that you can qualify for buying and exchanging crypto.
- Lower transaction costs – if you have ever happened to send money to somebody else you are well aware of the unpleasant transfer fee that is even higher when sending money abroad. Sending crypto internationally is way less expensive than the traditional wire transfer. Although most crypto transfers already have low gas fees, a lot of work goes into reducing them even more.
- Private and safe – The public key is what identifies you as a crypto investor and trader, the address (the only piece of information that is displayed publicly) that is linked to your wallet is what makes you a part of the blockchain ledger and that is the main information you and other traders will need in order to sell or buy crypto. The only way someone can have access to your assets is by knowing your private key, which you have been assigned at the beginning of your crypto journey. Thanks to the way the blockchain is designed to function, the more people there are in the network, the more secure it is.
- Inflation-proof – most cryptocurrencies have pre-established quantities, which means that their value will be as great as the demand. For instance, every year tens and thousands of dollars are being issued by the government to the already existing amount and this diminishes the overall value of this currency, whereas no new blocks of crypto can be added to the original pool.
Cons of cryptocurrency
- High volatility – the value of the different cryptocurrencies is very unpredictable, therefore anyone who’s interested in either investing or trading must be well prepared to analyze the always changing crypto market and be able to deal with any unexpected circumstances.
- Illegal purposes – if anyone is abusing their anonymity in the blockchain and is involved in fraudulent activities, no respective authority will be able to trace down the criminal in question. Therefore the governments of countries which have adopted crypto want to enforce regulations, which would sack all questionable behaviours with cryptocurrencies.
- Hacker attacks – unfortunately, cyber intrusions happen more often than not in cryptocurrency exchanges, which leads to losing all the funds you had in your exchange account.
- Scammers – people are ready to do whatever just to earn some easy money through crypto, that may lead to some unethical practices, especially in different social media platforms, where the users are prone to being attracted by “unbelievably” good crypto offers.
- Lack of usage – not all digital currencies can be fit for buying consumer goods or are created for the common practical uses, but this is changing, so hopefully this won’t be like that for too long.
How does cryptocurrency work?
Both crypto and fiat currency need to be kept record of, whether you want to trace your personal assets or another institution wants to do so, there must be an instrument that keeps count of your financial in and- outcome. After we have cleared out the meaning and the purposes of the digital currency, it comes close to mind that the exchanges of this form of money should, too, be formally kept record of. However, there is a small twist to the way this system is bred to That’s where the blockchain technology comes in to fill in the gap in tracking all cryptocurrency transactions. This is an open-source system that constantly updates all its users about every single transaction.
The blockchain allows everyone to see the entire history of all crypto exchanges and that information is being simultaneously updated, that way the user keeps count of their own and random users’ crypto transactions. Thanks to this digital ledger the users can freely check the validity of other people’s blockchain content. It is paramount that you have access to this type of data because you can make sure that there are no violations against any crypto owner.
Proof of Work vs Proof of Stake vs Proof of Coverage
Before any cryptocurrency reaches the market, where the common man can buy and trade, it is the crypto miners who make it possible for the digital assets to reach their new owners. The following are a few of the most popular consensus mechanism used in the blockchain technology:
Proof of work (PoW)
Proof of work is a method, which implies that for the next block of transactions to be validated, the provider of the block has to prove their loyalty to the system with their work. And the “work”, in these circumstances, is the process of searching for a pre-defined encrypted message. When a crypto miner finally discovers the hash message he can prove his work to the other miners and if correct, he recieves a compensation which consists of a certain amount of crypto and gets to define the next block of transactions. Mainstream coins like Bitcoin and Litecoin use the proof of work system to validate block data.
Proof of stake (PoS)
Cryptocurrencies like Cardano and Tezos are using the Proof of Stake mechanism, Ethereum has announced that it is about to shift from the PoW to the PoS mechanism, too. The more crypto you have, the higher the chance of being chosen as a validator is. The system randomly chooses a crypto owner who can fulfil the duties of a validator. In this mechanism the validator completes the same task as the miner in the proof of work method – they get to define the next block but without having to work for it.
Proof of coverage (PoC)
The Helium blockchain functions with the proof of coverage method. Through radio frequencies the coverage of each hot spot is being validated, which provides wireless Internet access. PoC helps calculate the amount of incentives each involved hot spot will receive. The so- called Challenger requires hot spots to prove that they provide data at a certain region, then the Challengee sends data to other hot spots, which are Witnesses of the received data and report it to the Challenger. After that 10 witnesses are randomly chosen to take part in the PoC transaction, which is verified by the validators who add the transaction to the blockchain. HNT is then generated as a reward to all the participants on this block of proof of coverage.
The best way to understand how crypto works is to follow its chronological lifetime and follow the improvement of a specific cryptocurrency.
Created in 2009 by an anonymous persona under the name Satoshi Nakamoto, Bitcoin puts cryptocurrency on the map of technological advances. Its purpose is to offer a new form of digital payment system, which has no middleman like a bank or other institution. Bitcoin was invented and developed upon the blockchain technology which has kept track of all transactions ever made on the Bitcoin network. This innovative digital asset has a predetermined number of BTCs which must be “mined”, in order for any new bitcoins to be available for transacting to hopeful investors.
All cryptocurrencies that are not Bitcoin are referred to as altcoins.
Bitcoin is the pioneer in cryptocurrency but after its establishment and successful rise to fame, other crypto enthusiasts have managed to develop alternative coins, which may have different uses but one of their main goals is to overcome the problems of the current financial mainstream and to propose diverse ways of incorporating crypto in the new economic ideal of a decentralized system. Solving practical difficulties is, too, a big part of the premise of altcoins.
Next to Bitcoin, this is the second most popular and influential cryptocurrency. Something that distinguishes the ETH blockchain from the others is that it provides programming opportunities upon which new blockchain based apps are created. On the Ethereum platform you can not only buy ETH but you can swap it for other tokens.
The Helium network was invented to create coverage for wireless Internet in every edge of the world, especially in places where no regular internet provider has interest in doing so. Helium`s main purpose is to secure cheap, reliable and long-distance data transfer by creating a decentralized wireless network for IoT (Internet of things) devices. The network is made up of devices called Hot Spots that can send data over long distances using radio frequencies. The people who have set such hot spots and therefore contribute to the network, receive compensation – tokens named HNT. This currency is available for anyone to buy and the more traffic one hot spot generates, the more tokens are being created.
This open-source digital currency is based on the Peer-to- Peer network. Like its main rival Bitcoin, Litecoin offers a platform which will help you buy cryptocurrency safely and when desired transfer it to any part of the world fastly and with minimal fee charges.
How to buy cryptocurrency
Most often in order to buy any type of crypto, you should create an account in a cryptocurrency exchange website, where your crypto will be stored. When you settle on an exchange website which you find appropriate for your needs, you can now choose how to proceed with your investment goals. It is important to note that according to the (new) governmental regulations, the user has to put in some personal info when creating the exchange account .
If you are just starting out in the crypto market or you want to expand your digital assets, you can exchange fiat currency for Bitcoin or other altcoins of your choice. Crypto exchanges like Binance or Coinbase will offer you to buy, hold and trade a variety of cryptocurrencies.
How to store cryptocurrency
The most important part of dealing with any type of digital assets is finding the safest storage facility, which will ensure that no hacker can take advantage of your very own cryptocurrency. Since this form of digital currencies does not have a physical equivalent, it is very important that you take serious action into protecting what is now yours.
There are different types of cryptocurrency wallets, which have their perks and downsides, however it is mandatory that any crypto investor and trader does their research and chooses the best storage option for their needs. You should never underestimate the conniving tricks of the online pickpockets, who strive to hack and steal any type of digital currency.
For example, it is strongly suggested that you avoid leaving your crypto assets in the cryptocurrency exchange account, because the exchange has control over your private keys, and when a hacker gains access to them you can say your goodbyes to what was in the exchange. This is definitely the worst case scenario when dealing with crypto, you should always transfer your assets somewhere offline, especially when you own a significant amount of crypto. Therefore learning more about the different ways you can keep your digital asset safe is the first step to ensuring the optimal crypto investment experience.
These are digital wallets that are, of course, Internet based. Usually these are online exchange apps which allow you to put your private key and virtual currencies in a safe virtual space. If you have the ambition to trade and do it in shorter time periods, a hot wallet (of your choice) will make the trading process a total breeze due to the flexibility you’ll be granted in this online service.
Keep in mind that in order to have a successful work flow with the crypto trading, you should choose the provider of the exchange service wisely, so that no misfortunes occur during the trading and the storing processes.
Unlike the online backed up apps and websites for storage, cold wallets offer offline ways of storage. If you are opting for hodling your cryptocurrency investments, that means that you will most definitely need to keep your virtual currency in a secure space. Right after you buy your crypto, you should put both your virtual money and your private key in a cold wallet. Being stored away from the Internet, makes your digital money less prone to being stolen.
There are two types of cold storage wallets which enable you to transfer both the private keys and the cryptocurrencies offline.
The most secure option for storing crypto offline is using a special USB drive which is modified to keep your money and private keys safe. Anyone who wants to hold their virtual currencies for longer time periods, should invest in such a device, so that there are no unpleasant surprises. Some of the most used hardware wallets are Ledger Nano, Trezor and KeepKey.
This is a rather traditional way of making sure that the most important information is locked away somewhere safe. Paper wallets are just a backup option, which consists of writing down the private keys on paper and then hiding it in a safe place, where no hacker can virtually steal the hidden information.
What can you buy with cryptocurrency?
The more crypto is taking over the world and more people are gaining interest in holding and trading this type of asset, many companies have started to offer their customers paying for their services and products with cryptocurrency. Some countries have started to adopt the idea and the use of cryptocurrencies, that’s why newer and better opportunities for paying with crypto are constantly initiated and implemented for the common good. Most companies provide the option of paying mostly with Bitcoin and they usually don’t extend this offer to all the countries they operate in. Here are some examples of what is permitted to be purchased with crypto:
- Although the notorious electric car manufacturer Elon Musk does no longer allow people to buy Teslas with Bitcoin, he has informed them that they can still purchase certain merchandise pieces from the company’s online store with Dogecoin.
- The fast food chain Subway has also announced that in some of its locations, customers can pay with Bitcoin.
- Thanks to the services of Expedia you can now book a plane ticket with Bitcoins and many hotel chains, especially in the US accept cryptocurrency payments, too.
- The most convenient way to spend your crypto is when purchasing tickets for events. The options have expanded quite a bit in the last couple of years – from buying tickets to a football game to securing first row seats at a musical concert.
What is the use of cryptocurrency?
Crypto has undergone many changes throughout the years parallel to transforming the way we look at money and their use. Everyone who deals with crypto wants to have a high return rate or simply wants to earn more money than his initial investment. The main purpose of crypto is to tackle any financial barriers people have been dealing with ever since money was implemented as a universal medium of exchange for acquiring goods.
Fighting the monopolistic system governments and banks have established, crypto is used by people who want to reclaim their financial freedom and don’t want to rely on the outdated concept of centralization.
* This article provides an overview of the topic: what is cryptocurrency. The presented information should always be fact checked by the user due to the constant changes in the crypto market.
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.