Please explain cryptocurrency

Cryptocurrency, then, removes all the problems of modern banking: There are no limits to the funds you can transfer, your accounts cannot be hacked, and there is no central point of failure. As mentioned above, as of there are more than 1, cryptocurrencies available; some popular ones are Bitcoin, Litecoin, Ethereum, and Zcash.

And a new cryptocurrency crops up every single day. Moving forward, let us discuss what is cryptocurrency. What is Cryptocurrency? A cryptocurrency is a coded string of data representing a currency unit. Peer-to-peer networks called blockchains monitor and organize cryptocurrency transactions, such as buying, selling, and transferring, and also serve as secure ledgers of transactions. By utilizing encryption technology, cryptocurrencies can serve as both a currency and an accounting system.

A cryptocurrency is a digital or virtual currency that is meant to be a medium of exchange. It is quite similar to real-world currency, except it does not have any physical embodiment, and it uses cryptography to work. Because cryptocurrencies operate independently and in a decentralized manner, without a bank or a central authority, new units can be added only after certain conditions are met. For example, with Bitcoin, only after a block has been added to the blockchain will the miner be rewarded with bitcoins, and this is the only way new bitcoins can be generated.

The limit for bitcoins is 21 million; after this, no more bitcoins will be produced. Benefits of Cryptocurrency With cryptocurrency, the transaction cost is low to nothing at all—unlike, for example, the fee for transferring money from a digital wallet to a bank account. You can make transactions at any time of the day or night, and there are no limits on purchases and withdrawals.

And anyone is free to use cryptocurrency, unlike setting up a bank account, which requires documentation and other paperwork. Wire transfers take about half a day for the money to be moved from one place to another. With cryptocurrencies, transactions take only a matter of minutes or even seconds.

What is Cryptography? Cryptography is a method of using encryption and decryption to secure communication in the presence of third parties with ill intent—that is, third parties who want to steal your data or eavesdrop on your conversation. Cryptography uses computational algorithms such as SHA, which is the hashing algorithm that Bitcoin uses; a public key, which is like a digital identity of the user shared with everyone; and a private key, which is a digital signature of the user that is kept hidden.

Attend masterclasses from experienced faculty and earn your prestigious IIT Kanpur certificate. Cryptography in Bitcoin Transactions In a normal bitcoin transaction, first, there are the transaction details: whom you want to send the bitcoins to and how many bitcoins you want to send.

Then the information is passed through a hashing algorithm. Bitcoin, as mentioned, uses the SHA algorithm. The digitally signed output is then distributed across the network for other users to verify. After this is done, the transaction and several others are added to the blockchain, where the details cannot be changed.

The SHA algorithm looks something like in the image below. Ethereum You now know that Bitcoin is a digital currency that is decentralized and works on the blockchain technology and that it uses a peer-to-peer network to perform transactions. The Ethereum network uses blockchain technology to create an open-source platform for building and deploying decentralized applications.

Similarities Bitcoin and ether are the biggest and most valuable cryptocurrencies right now. Both of them use blockchain technology, in which transactions are added to a container called a block, and a chain of blocks is created in which data cannot be altered. For both, the currency is mined using a method called proof of work, involving a mathematical puzzle that needs to be solved before a block can be added to the blockchain.

Finally, both bitcoin and ether are widely used around the world. Differences Bitcoin is used to send money to someone. The way it works is very similar to the way real-life currency works. Ether is used as a currency within the Ethereum network, although it can be used for real-life transactions as well. Bitcoin transactions are done manually, which means you have to personally perform these transactions when you want them done.

With ether, you have the option to make transactions manual or automatic—they are programmable, which means the transactions take place when certain conditions have been met. As for timing, it takes about 10 minutes to perform a bitcoin transaction—this is the time it takes for a block to be added to the blockchain. With ether, it takes about 20 seconds to do a transaction. There is a limit to how many bitcoins can exist: 21 million.

This number is supposed to be reached by the year Ether is expected to be around for a while and is not to exceed million units. Bitcoin is used for transactions involving goods and services, and ether uses blockchain technology to create a ledger to trigger a transaction when a certain condition is met.

The Future of Cryptocurrency The world is clearly divided when it comes to cryptocurrencies. On one side are supporters such as Bill Gates, Al Gore and Richard Branson, who say that cryptocurrencies are better than regular currencies. Krugman and Shiller, who are both Nobel Prize winners in the field of economics, call it a Ponzi scheme and a means for criminal activities. Since several cryptocurrencies have been linked with terrorist attacks, governments would want to regulate how cryptocurrencies work.

On the other hand, the main emphasis of cryptocurrencies is to ensure that users remain anonymous. Futurists believe that by the year , cryptocurrencies will occupy 25 percent of national currencies, which means a significant chunk of the world would start believing in cryptocurrency as a mode of transaction.

That wraps up our cryptocurrency tutorial. Our experts will get back to you at the earliest. FAQs 1. How Do You Buy Cryptocurrencies? Bitcoin may be traded on exchanges, which provide investors with a safe and secure platform. The future has here with cryptocurrencies. To begin investing, you must first choose a reputable cryptocurrency exchange where you may buy, sell, and trade cryptocurrencies like Bitcoin, Ethereum, Tron, and others.

Select a Broker or a Crypto Exchange. You must first select a broker or cryptocurrency exchange to purchase bitcoin. Then you must create and validate Your Account. Make a cash deposit to begin investing, and then place your cryptocurrency order. Choose a Storage Method. What Is the Point of Cryptocurrency? Anyone can send and receive money anywhere, using the peer-to-peer payment system. In the real world, cryptocurrency transactions are not carried around and exchanged as tangible money but as digital entries to an online database that identifies specific transactions.

The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency. What are the risks to using cryptocurrency? Cryptocurrencies are still relatively new, and the market for these digital currencies is very volatile. Since cryptocurrencies don't need banks or any other third party to regulate them; they tend to be uninsured and are hard to convert into a form of tangible currency such as US dollars or euros.

In addition, since cryptocurrencies are technology-based intangible assets, they can be hacked like any other intangible technology asset. Finally, since you store your cryptocurrencies in a digital wallet, if you lose your wallet or access to it or to wallet backups , you have lost your entire cryptocurrency investment. Follow these tips to protect your cryptocurrencies: Look before you leap! Before investing in a cryptocurrency, be sure you understand how it works, where it can be used, and how to exchange it.

Read the webpages for the currency itself such as Ethereum , Bitcoin or Litecoin so that you fully understand how it works, and read independent articles on the cryptocurrencies you are considering as well. Use a trustworthy wallet.

It is going to take some research on your part to choose the right wallet for your needs. If you choose to manage your cryptocurrency wallet with a local application on your computer or mobile device, then you will need to protect this wallet at a level consistent with your investment.

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Gold remained the dominant form of money up until the Italian Renaissance from around when the one weakness in gold - the difficulty of transporting large amounts - was addressed with the introduction of Paper Notes, redeemable at a bank for the gold it represented. This continued until , when US President Richard Nixon changed the rules, allowing governments to create money without any mechanism for converting it into an equivalent amount of gold.

The Gold StandardRefers to the backing of notes and coins in circulation with an equivalent of gold lodged with a central bank. Money supply can only grow if an equivalent amount of gold is added to bank reserves. Of course we now know that this breaks one of our golden rules of sound money - scarcity.

The new system instead requires us to simply trust our governments to decide how much money should be created and for what purpose. This is known as Fiat Money, which literally means - this is money because the government says its money. In retrospect we should have known that the combination of trust, government and money would end badly.

The reason scarcity matters is that creating more money known as increasing the money supply makes the money you might have saved worth less; this is called inflation. In countries that totally lose control of their money you get hyperinflation, when your money is worth nothing. Instead of a central authority, cryptocurrency monetary systems instead rely entirely on maths - more specifically, on a branch of maths called cryptography. The first and most important cryptocurrency is Bitcoin.

Bitcoin was the first cryptocurrency to find a successful solution that ticks all the boxes of sound money with none of the risks of a single controlling authority. Bitcoin solves the trust issue by taking control of the monetary system out of one pair of hands - the central authorities' - and into many hands of a wide network of dispersed users, none of whom have ultimate control.

This is what the term decentralised means. These users also known as Nodes are incentivised to support the network and maintain its accuracy. The use of cryptography secures transactions against fraud and theft, while allowing anyone to mathematically verify the correctness of all transactions in the system. China has banned cryptocurrency exchanges and mining within its borders. India was reported to be formulating a framework for cryptocurrencies in December. Cryptocurrencies are legal in the European Union.

Derivatives and other products that use cryptocurrencies will need to qualify as "financial instruments. Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. This stance implies that cryptocurrency's legal status may become subject to regulation.

Although cryptocurrencies are considered a form of money, the Internal Revenue Service IRS treats them as a financial asset or property. And, as with most other investments, if you reap capital gains in selling or trading cryptocurrencies, the government wants a piece of the profits. On May 20, , the U.

How exactly the IRS would tax proceeds—as capital gains or ordinary income—depends on how long the taxpayer held the cryptocurrency. Are Cryptocurrencies Safe Investments? Cryptocurrencies have attracted a reputation as unstable investments, due to high investor losses as a result of scams, hacks, and bugs. Although the underlying cryptography is generally secure, the technical complexity of using and storing crypto assets can be a major hazard to new users.

In addition to the market risks associated with speculative assets, cryptocurrency investors should be aware of the following risks: User risk: Unlike traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent.

By some estimates, about a fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses. Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, with many governments seeking to regulate them as securities, currencies, or both. A sudden regulatory crackdown could make it difficult to sell cryptocurrencies, or cause a market-wide price drop. Counterparty risks: Many investors and merchants rely on exchanges or other custodians to store their cryptocurrency.

Theft or loss by one of these third parties could result in the loss of one's entire investment. Management risks: Due to the lack of coherent regulations, there are few protections against deceptive or unethical management practices.

Many investors have lost large sums to management teams that failed to deliver a product. Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms assumes the risk that a bug or exploit in these programs could cause them to lose their investment.

Market Manipulation: Market manipulation remains a substantial problem in the cryptocurrency space, and some exchanges have been accused of manipulating prices or trading against their customers. Despite the speculative nature of the asset, some have been able to create substantial fortunes by taking on the risk of investing in early-stage cryptocurrencies. Advantages and Disadvantages of Cryptocurrency Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure.

As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation. Some advantages and disadvantages of cryptocurrencies are as follows. Advantages Cryptocurrencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries, such as banks and monetary institutions, are not necessary to enforce trust and police transactions between two parties.

Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world, such as the one that was triggered in by the failure of institutions in the United States. Cryptocurrencies promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake.

Because they do not use third-party intermediaries, cryptocurrency transfers between two transacting parties are faster as compared to standard money transfers. Flash loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without backing collateral, can be executed within seconds and are used in trading. Cryptocurrency investments can generate profits. The remittance economy is testing one of cryptocurrency's most prominent use cases.

Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to streamline money transfers across borders. Thus, a fiat currency is converted to Bitcoin or another cryptocurrency , transferred across borders, and, subsequently, converted to the destination fiat currency.

This method streamlines the money transfer process and makes it cheaper. Disadvantages Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens.

Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts , who ran a marketplace to sell drugs on the dark web, is already well known.

Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities. In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume.

The expensive energy costs coupled with the unpredictability of mining have concentrated mining among large firms whose revenues running into the billions of dollars. Though cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of "coins" stolen.

Cryptocurrencies traded in public markets suffer from price volatility. Some economists thus consider cryptocurrencies to be a short-lived fad or speculative bubble. How Do You Buy Cryptocurrencies? Any investor can purchase cryptocurrency from popular crypto exchanges such as Coinbase, apps such as Cash App, or through brokers.

Another popular way to invest in cryptocurrencies is through financial derivatives, such as CME's Bitcoin futures, or through other instruments, such as Bitcoin trusts and Bitcoin ETFs. What Is the Point of Cryptocurrency? Cryptocurrencies are a new paradigm for money.

Their promise is to streamline existing financial architecture to make it faster and cheaper.