Confused about cryptocurrencies, like bitcoin and Ethereum? You’re not alone. Before you use or invest in cryptocurrency, know what makes it different from cash and other payment methods, and how to spot cryptocurrency scams or detect cryptocurrency accounts that may be compromised. The topics range from:
What is Cryptocurrency?
Also known as alternative coins, cryptocurrency is basically a virtual or digital currency secured by cryptography hence eliminating counterfeits and double-spends according to Michael Sonnenshein (2021). Most of them as Sonnenshein explains are decentralized networks that rely on blockchain technology that is ledge distributed and enforced by disparate networks of computers.
Notably, cryptocurrencies are not issued by central authorities hence they are theoretically free of any governmental manipulation or interference. The name comes from encryption which is a technique used in securing the networks in which the exchanges occur. Notably, blockchains remain an essential part of cryptocurrencies since they are the organizational measures used in maintaining the integrity of transactional information.
How It Works and How it is Created
Cryptocurrency systems enable secure online payments denominated virtually as “tokens” and are internally represented by ledger entries. These blockchains are used in creating digital transaction records, contracts, and certificates that only allow entries and cannot be changed or deleted; they are far much safer and secure compared to paper fillings and digital accounts. According to Alexander Sumner (2021), the platform archives the information about the seller and the buyer while recording it as a “hash” or string of numerals and characters produced by complex math functions.
These hash functions are linked to prior hash functions hence outside access is immediately detected upon altering any of them. Sumner adds that once the hashes reach as a certain number, they are converted into “blocks” that are linked to other blocks in the server, forming a chain that is updated every 10 minutes and stored on several serves all over the world. It is also noteworthy that cryptocurrencies operate in closed systems hence there are certain fixed amounts of them and new ones are only created by following strict guidelines as in the example of Bitcoin that have caps encased by a software on the number of units creatable which makes the unit more valuable.
Types of Cryptocurrency
Bitcoin: This is the most common type of cryptocurrency; it uses blockchain technology to allow its users to make transactions under decentralized peer-to-peer networks and has become the standard cryptocurrency. It is the most popular due to its market capitalization and large user base.
Litecoin: Launched in 2011, Litecoin is an open-source decentralized global network for payments. It was built as the alternative to Bitcoin and has a coin limit of 84 million while Bitcoin has a 21-million-coin limit. Litecoin is believably faster in featuring transactions and operates in a “scrypt” algorithm rather than the “SHA-256” algorithm used by Bitcoin.
Ethereum: Denoted as ETH, it is an open-source cryptocurrency developed in 2015 that uses blockchain technology.
According to Equity Trust (c2021), it majors on running any
decentralized application’s programming code enabling it to be used by app
developers to pay for fees and services over the network.
Cardano: ADA is a type of cryptocurrency that is “Ouroboros proof-of-stake” created to decentralize the similarity of financial products while also providing chain interoperability solutions, voter fraud, and the tracing of legal contracts. Its market capitalization is at $9.8 billion with one ADA trading for $0.31 as noted by Luke Conway (2021) of Investopedia.
Polkadot: Or DOT, Polkadot was created with the aim of connecting blockchains that are permissioned and permissionless including oracles by allowing their systems to work together.
Bitcoin Cash (BCH): This cryptocurrency was created to improve specific Bitcoin features such as increasing the size of blocks and allowing faster processing of transactions according to Equity Trust (c2021).
Stellar (XLM). This cryptocurrency targets enterprises by providing solutions of allowing large transactions by connecting enterprises and institutions by cutting down the time delays and intermediaries. Stellar is also open-source, allows cross-currency transfers, and requires users to hold Lumens to facilitate transactions as Luke Conway notes.
Chainlink: This decentralized oracle transaction network aims at bridging the smart contracts gap like the case of Ethereum and data that is out of it.
Things to Know Before Investing in Cryptocurrency.
They are very volatile: Their value is susceptible to changes hence investing requires calculated risk measures.
There are a lot of doubts and unknowns: Just a few even know about cryptocurrency and who controls its value; always read and listen out and wide.
They are prone to fraud. They may be transaction schemes of people escaping from bank charges and government taxes as they are not regulated.
Their rates of return are indeterminate. Relative to gambling, cryptocurrency has no standard regulations and since it is based on peer-to-peer transactions, there are no patterns for its rise or fall in its value as Chris Hogan (c2021) concludes.