Cryptocurrency | Forex Basics

What is Cryptocurrency?

Cryptocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. It is a form of digital currency. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.

A cryptocurrency can be described as entries in a database that no one can change except some certain conditions are fulfilled. The cyrpto- is from the use of cryptography to secure the network.

There are different types of cryptocurrencies. Examples include bitcoin, litecoin, ethereum, dash, monero, bitcoin cash, and binance coin among others.

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How Cryptocurrency works

Cryptocurrencies are built upon a peer-to-peer network, which is decentralized with no central point. It is the use of blockchain technology which prevents counterfeiting and double spending.

Transactions in the cryptocurrency network are connected in form of blocks to previous transactions to form the blockchain. Cryptocurrency miners have a role to play in this as they are the ones that confirm transactions. They do this by solving a cryptographic puzzle (a hash) which connects the transaction to its predecessor.

Miners get rewards for confirming transactions in the form of the cryptocurrency. And this is how more cryptocurrency is added to the network without a government or central bank.

The process involved in cryptocurrency transaction is as follows:

  • Someone requests a transaction.
  • The requested transaction is broadcast to a P2P network of nodes (computers).
  • The P2P network of nodes validates the transaction and the user’s status using known algorithms.
  • Once verified the transaction is combined with other transactions. This creates a new block of data for the ledger.
  • The new block is then added to the existing blockchain in a permanent and unalterable way.
  • The transaction is complete.
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Although some cryptocurrencies vary slightly from the above, this is the underlying principle of all crytptocurrencies.

Properties

Irreversibility: Once a transaction is confirmed, it cannot be reversed by anybody. Not even by the government. If you transfer your funds to a scammer, that is all. No refund.

Pseudonymity: In the blockchain network, neither transactions are connected to real-world identities. In some, it is possible to analyze the transaction flow, while in others, it is practically impossible.

Fast and global: Cryptocurrency transactions are fast and are completely unconcerned about your physical location. This is because they happen on a global network of computers.

Secure: Cryptocurrency funds are locked in a public key cryptography system. Only someone who possesses a private key can send cryptocurrency.

Permissionless: Usage of cryptocurrency practically requires no permission from any entity. It is unhinged from any government and regulatory body.

Uses

The following are the uses of cryptocurrency.

Purchase of goods and services: In the past not many merchants were willing to accept cryptocurrencies. That is not the case today. You can find lots of sellers, both online and offline who are willing to accept cryptocurrencies. Most especially bitcoin.

Investing: It is also possible to invest (speculate on the price) in cryptocurrencies. Cryptocurrencies are high-risk investments as they are very volatile.

Advantages

The following are the advantages of crytocurrencies.

  • Cryptocurrencies are easy to use.
  • Cryptocurrencies so not have the limitation of fiat currencies in being limited to a geographical location. They are global currencies.
  • Cryptocurrency transaction fees are minimal. This is in contrast to the steep fees levied by banks for wire transfers.
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Disadvatages

The major disadvantage of cryptocurrencies lies in their almost anonymous nature. This is because they can be used by those involved in illegal activities.

In conclusion, the emergence of cryptocurrency and blockchain technology have brought a new dawn. Going into the future we will hopefully see more and more use for both.

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