Everything You want to know
Cryptocurrency occupies a unique place in the history of the evolution of the digital world. Some have hailed it as money- how it will be a few years or decades down the line. Others have compared the volatile nature of its value as a 440-Volt danger sign. The natural thought that emerges in the minds of netizens yet to be acquainted with cryptocurrencies; is which line of thinking do they follow?
For people worldwide where cryptocurrencies are legal, the more significant conundrum is whether they should try to invest in the same.
There is no dearth of opinion, analysis, and strategies regarding cryptocurrencies. And while the tech behind it is indeed complicated, it stands out by its accessibility, making the opinions and strategies surrounding it easily accessible. Almost everyone can understand it, unlike many other investment options. This accessibility is the primary reason behind the runaway popularity of cryptos, as people usually refer to them. Additionally, the “fear of missing out” factor makes the topic so dynamic and familiar. It has found its way into mainstream media and everyday conversations. If lack of information left you mumbling in one such recent conversation, going through this article will set things right. It will give an insight into why cryptos are becoming a popular investment option.
What is Cryptocurrency?
This article is not in any way a technical exploration of cryptos but a beginner’s guide. Accordingly, we will follow the keep it simple rule.
In its very essence, cryptocurrency is digital money. And it is digital in its very literal sense as there are no physical notes or bills or coins. And yes, the coin part of Bitcoin is plain figurative use.
Absence of Physical Assets and Volatility
Another distinguishing feature of cryptocurrencies is that they do not represent physical assets of value. And this is the very fact that makes cryptos so volatile. Just consider the following stats:
In 2019 July, the price of Bitcoin fell by a significant 5% (USD 530) in the course of just forty minutes on an otherwise sedentary or flat day. You and I and cryptocurrency experts are on the same page when answering why that happened; there is simply no accurate answer.
Then again, last February, the price of one Bitcoin soared to an all-time high of $50,000. In this case, also the whys’ and hows’ remain uncertain.
Physical assets like bonds, stocks, property, art, precious metals, and gems have a use. They are valuable in the actual physical world. In contrast, cryptos don’t have any such value.
The Gold Analogy
One analogy that some crypto experts use to explain them is to compare them with gold. They would not be unlike each other if it were not because gold can be used for several purposes like use in jewelry and electronics other than simply currency. The supply is limited, but it has use and value beyond it.
On the other hand, cryptos cost you money solely because someone else has it and won’t part with it without money.
Drawbacks of Physical Currencies
Due to their inherent nature, physical currencies suffer from two primary drawbacks:
- There must be a central institution responsible for regulating the currency’s production, value, and authenticity.
- It is vulnerable to counterfeiting.
Bitcoin As A Currency Without Regulated Authorities
These are the exact flaws that Bitcoin, one of the first and most popular cryptos, was designed to address. It is achieved through the innovative blockchain system in sync with high-level encryption.
The automated nature of Bitcoin and the high levels of encryption makes it possible to do without any central regulating authority. It need not and CAN’T be regulated, and there is no possibility of fraudulent transactions through the Bitcoin system.
The Tech Behind Cryptocurrencies
For an adequate understanding of cryptocurrency, it is necessary to understand the basic concepts of the following systems and tech:
- Cryptography
Cryptography refers to the use of technology to ensure the confidentiality of information. What it essentially does is hide and reveal the relevant information securely and privately. Cryptos use this tech to ensure the safety and anonymity of transactions.
- Blockchain
Any person even remotely connected with tech must have heard or read about the mention of Blockchain. Essentially a blockchain is a variant of the implementation of DLT or Distributed Ledger Technology. DLT refers to a database that spreads over several operators. Again, such operators themselves can come in many shapes, like computing devices and nodes. Blockchains are the very backbone of cryptos. It performs the function of a ledger that records and ensures that accounts, transactions, and balances are accurate and verified.
Besides cryptocurrency, the concept of blockchains has revolutionized fields like:
- Tracking ownership of artistic works
- Supply chain management
- Digital collectibles
- Node
Though node is essentially a part of the blockchain system in the crypto world, it an indispensable part of the same and deserves individual attention. It is the building block of the blockchain data structure. Nodes are what make a blockchain possible. No nodes, no blockchain.
The three tech mentioned above and concepts make it possible to perform critical financial processes like creating coins, ensuring transactions are legitimate, and making the whole system safe and secure.
- De-centralization
In the crypto world, when we are talking about decentralization, it refers to the fact that there is no single authoritative system in such systems. On the contrary, such power is distributed amongst all network peers. Hence, there are no single points that are vulnerable to failure.
In terms of theory, a hacker would need to hack a whopping 51% of all large nodes which power the currency. It is something of an impossibility for a sizeable blockchain-based cryptocurrency like Bitcoin.
- P2P
Don’t be intimidated by the acronyms. We are simply talking about the peer-to-peer concept. Two individual people can transact without the need of a third party having to act as a broker. However, one still needs to fund pay for the network. Still, thanks to its design, the processing fees are negligibly low compared to current payment services like banks, PayPal, or Zelle.
The Two Types of Cryptocurrencies
There are two distinct variants of cryptocurrencies, which are coins and tokens. Let’s discuss them a bit more deeply:
- Coins
You can only buy coins and not tokens. Coins are a distinct cryptocurrency equipped with their own blockchain systems like Ethereum, Bitcoin, Ripple, and Litecoin.
- Token
Tokens, on the other hand, make use of blockchain systems of other coins. We need to elaborate a bit further on tokens.
Tokens, like the name suggests, are representative assets or utilities. Such tokens are unique to projects and are the first public sale of the relevant project termed ICO or an Initial Coin Offering. Its stock market counterpart would be Initial Public Offering.
Note: A word of warning-there is plenty of fraudulent ICO’s out there, and many international governments are trying to keep track of the same.
Another thing to know is that tokens come in two variants- security and utility as discussed below:
Utility tokens– They allow you to buy purchase products or avail services from a specific platform or company issuing them.
Security tokens– A security token is a digitized form of financial security. It represents a share of an actual value of a business.
As might be expected from a form of financial security, security tokens have the following benefits:
- Pay off dividends.
- Pay interest.
- Share profits
- Invest in other assets, including tokens.
However, to be accepted as a security token, digital assets need to fulfill three criteria:
- Monetary investment.
- The total funds raised must go to a single individual business.
- Investors expect income from the third party’s work.
There are several international legal compliances that security tokens must abide by.
Should One Invest in Cryptocurrency?
The buying and selling of cryptocurrency are not legal in all countries. In the nations where it is legal to buy and sell them, they are undoubtedly hot property. Their price volatility is the exact reason behind their attraction. It is the modern gold of a treasure hunt. Trading in cryptocurrency in the short term can too be profitable enough to blossom into a profession. For those thinking of short-term investment options investing small amounts through cryptocurrency trading bots might be worth exploring.