Understanding Cryptocurrency
In this era of digitalization, almost everything became virtual, and the same goes for the monetary system. And this is the idea behind Cryptocurrency or virtual currency.
You may have heard about Bitcoin and Cryptocurrency a lot lately. But what exactly is Bitcoin? Why does it matter? And why should you keep and trade it on Forex? I know this question always strikes your mind. We are going to answer all of these questions along with a useful investing guide, future prediction, and pros-cons analysis.
Well, it may be the best form of money the world has ever seen. It's digital money for the digital age. It's the scariest, most divisible, most transferable, most verifiable, and most recognizable form of money in history!
Here, in this blog, we go into the deep of the virtual currency system and its impacts on the current market and economic evolution. We will discuss everything about Cryptocurrency that answers all of your questions when you hear the word.
What is Cryptocurrency?
Cryptocurrency is one of the forms of virtual currency that you can use as a medium of exchange in place of conventional digital payment methods. Cryptography plus Blockchain Technology are the key concepts behind cryptocurrencies and token creation.
Blockchain is a system in which transaction details are combined and recorded in Blocks. Each block identifies with a unique SHA-256 Hash sequence.
Cryptocurrency is purely virtual. Unlike the physical cash in our wallets or pockets, it does not exist physically. The number of people using it determines the monetary value of Cryptocurrency. A cryptocurrency is also a form of money, just like notes or coins, which you can use for all economic transactions we make. Some popular cryptocurrencies are Bitcoin, Ethereum, Litecoin, ZCash, Polkadot, Etc.
What is Cryptography?
The abbreviation "crypto" in Cryptocurrency refers to Cryptography. Cryptography is a method of encrypting and decrypting digital forms of data to secure it from various security threats. Cryptography uses computational algorithms for encrypting the data.
The data encrypted has a public key that the user can share with anyone and a private key used for decrypting that data. The private key is usually the digital signature of the authorized user.
Evolution of Money
With time, money adapted itself as per the dynamic economic needs. Before we get into the topic, it is essential to explain the evolution of the monetary system with time.
Notes and Coins
Ever since humans learned to exchange goods and services, the medium of exchange used for exchanging those services or commodities has also grown. After the barter System of Exchange, humans learned to trade precious stones and ornaments. Further, they made gold and copper coins and finally reached the era of paper currency. From 1600 A.D onwards, the modern paper currency gained widespread acknowledgment and became an essential part of the global monetary system.
The conventional money which we use today comprises paper notes and coins, demand deposits, Cheques, Etc.
Plastic Money
After the development of modern paper currency, money grew to plastic money. The invention of Plastic Money, which includes Debit and Credit Cards, significantly gained popularity that allows people to perform simple banking transactions whenever they want to, with minor or no restrictions. People also use Virtual Credit Cards for transactions.
Digital Money
The concept of Digital Money severely reformed the transaction methods which we used to follow in the past. Digital Money allowed people to perform banking transactions at ease, at any time, and with minimum restrictions such as maintenance charges.
Development of Cryptocurrency
The digital form of money gradually changed to virtual currencies over time. Thus the concept of Cryptocurrency came into existence, which eliminated all the limitations and drawbacks of the traditional money forms, and allowed people to perform transactions without worrying about security or restrictions in any form.
How Crypto differs from the Traditional currency system?
Traditional money may have several limitations, but most authorities like the Government and Central Banks regulate it for its decent admissibility. Thus it is backed up by securities in economic forms. Such type of money is called Fiat Money. Fiat Money has a tangible existence that can be used in any financial transaction and also has massive acceptability by everyone.
Cryptocurrency is the evolved version of Digital Currencies, which is entirely decentralized, and no one can artificially regulate it. One drawback of using it can be that any economic security does not back it up. The number of people using them influences the monetary value of cryptocurrencies. For instance, Bitcoin is currently the most valuable form of Cryptocurrency as many people use it.
Which is better?
Let us assume a scenario where someone wants to withdraw money using a digital wallet. Now, what if the transaction cannot proceed due to some errors?
What could've gone wrong?
There is a limit to your monthly and daily transactions.
The transaction may not proceed due to some technical issues.
The bank systems may be down at the moment.
The trade may have been interfered with by some unauthorized person.
Now let us understand how the use of Cryptocurrency eliminates these possibilities:
No limitations or ceiling on transactions
No security concerns as the data are encrypted
Minimum chances of technical failures
No involvement of the bank.
The table below will highlight some significant differences between Traditional and Cryptocurrency:
Is Cryptocurrency Legitimate To Use?
As of Feb 2020, Bitcoin was legal in most developed countries like the United States of America, the United Kingdom, Japan, Etc. Despite its vast advantage, there are still restrictions in several countries on the use of cryptocurrencies and Bitcoin in the global economic markets and foreign exchanges. However, the status of legality varies from country to country. Cryptocurrency is still uncertain in many countries, while it's also declared illegal in several countries like Turkey and Nigeria.
Even in countries where Cryptocurrency is legal, the government has put many restrictions and regulations on its use.
In general, it concludes that country-specific laws should be kept in consideration for the legal use of Cryptocurrency.
Cryptocurrency Terminologies
Before investing in cryptocurrencies, it is essential to understand some basic terms and phrases related to them.
Address: Address is the destination where the transaction amount is to be received or sent, just like a Bank Account.
Arbitrage: Arbitrage refers to the differences between two exchanges in Cryptocurrency.
Bonds: Digital or Crypto Bonds are like common physical bonds, but their presence is intangible. They are faster and easier to exchange than regular bonds.
Block: Cryptocurrencies often use blocks; they are individual transactions that are confirmed and combined.
Bear/Bearish: People who think the value of assets will decline shortly are considered bears. Emotionally, this sentiment can refer to the "Bearish" nature.
Bull/Bullish: People who think the value of assets will rise in the near future are considered bulls. This kind of market leader is known to us as the "Bullish" one.
Distributed Ledger: Distributed Ledger is a system of monitoring and recording transactions across various devices.
Exchanges: Exchanges are the digital market places, where cryptocurrencies are bought or sold.
FOMO: FOMO is the abbreviation for "Fear of Missing Out." This refers to a scenario where investors buy a particular Cryptocurrency based on their price expectations. It can be dangerous as one may fall victim to market manipulation.
FUD: Fear, Uncertainties, and Doubts.
Mining: Mining is the process of producing Cryptocurrency units.
How Cryptocurrency Works?
Now you know what cryptocurrencies are, but you are amazed to know how does it work? We are dividing the topic into parts – How Cryptocurrency works and How to generate it.
Cryptocurrency is decentralized money. The identity of parties involved in the payment remains anonymous, making it the most secure payment method currently available. The transaction records are stored in the distributed ledger systems, making it easier to hold the payment details.
Cryptocurrencies are generating through token creation or Mining, which uses robust computer systems to perform complex mathematical problems that create crypto units. These kinds of currency units can be bought or sold in online Exchanges.
Cryptocurrencies – Pros and Cons
Now let's take a deep analysis of the significant advantages and drawbacks of Cryptocurrency.
Advantages
Anonymity: By using Cryptocurrency for payments, some third person or party. Virtual systems hold no information about the parties involved in revenues, as Addresses are used instead of Bank Accounts.
Secure: Since the transactions remain anonymous, thus there is no threat to the security of users. Cryptocurrency is the most secure payment method till today, although there are some myths.
Fast: The transactions can be processed within minutes or seconds, from any location in the world, without any restrictions or limitations.
Disadvantages
Limited Acceptance: Despite its usefulness, the use of cryptocurrencies is still minimal. A transaction involving Cryptocurrency can also be processed if both parties have availability and knowledge of them.
Potential for Large Loses: People invest considerable amounts in Bitcoin and other cryptocurrencies every day. The uncertainty of profit or loss makes people hesitate while instilling in them since their value fluctuation is very high.
Why are Cryptocurrencies booming in the market?
Acceptance of cryptocurrencies has significantly grown over the years of their development; that is why Cryptocurrencies are booming in markets and exchanges. Many countries have also minimized restrictions on Bitcoin and other cryptocurrencies. Thus, investors are putting a large pool of money in cryptocurrencies like Bitcoin and Ethereum to get high returns. The value of Bitcoin has immensely risen over the recent months. That is why investors are willing to gamble their money in Bitcoins. The value of Bitcoin is growing at a breakneck pace, that even governments cannot ignore the importance of this asset. Bitcoin has now become more valuable than several currencies in the world!
People are moving towards a cashless society. No one wants to maintain dozens of records for their everyday transactions. So, Cryptocurrency has met their diverse needs and has proved to be the best form of money currently available.
How to Buy Cryptocurrencies?
To start buying cryptocurrencies from online exchanges, you will require a "Digital Wallet" to hold your virtual currency. After creating your digital wallet, you can transfer real money to it and buy cryptocurrencies from that amount of money. You can buy most of the cryptocurrencies with your Dollars & cents. You are also accessible to converting your currencies to others.
Once you have purchased some cryptocurrencies, you can start trading online. Before investing and trading in Cryptocurrency, you must take some possible steps to protect yourself from frauds and thefts.
How to Invest Safely in Cryptocurrencies?
Before investing in cryptocurrencies, take care of the points mentioned below:
Identify the owner. Is it a legitimate person or company?
Are there other people who are willing to invest in it? It would be best if you can do proper research on a large share.
Check the portfolio of the currency and its market status properly.
Before going any further, check all Forex documents related to that particular currency.
These are the minimum concerns you must keep in consideration before buying or investing in any Cryptocurrency. The scope of awareness isn't limited to these points; thus, you must always gain as much information as possible before proceeding with investments.
Popular Cryptocurrencies
As of January 2021, there are more than 4000 cryptocurrencies in the market. Some of them are extremely popular among investors, while some have little to no trade value. The list below comprises the top cryptocurrencies in the market.
Bitcoin
Ethereum
Binance Coin
Ripple XRP
Tether
Cardano
DogeCoin
Polka Dot
Uniswap
Litecoin
Statistics derived from https://coinmarketcap.com/.
NOTE: As a matter of market changes dramatically every second. There are high chances these statistics may not be the same at the time you may read this article.
History and Evolution of Cryptocurrency
The concept of Cryptocurrency drags the people's minds in the year 2008 when a pseudonymous person or group known as Satoshi Nakamoto published an article in an online cryptography forum describing its meaning and working.
Bitcoin – is the first form of a truly digital currency. Bitcoin was created for the age of information and rectified many of the drawbacks of natural and electronic money. Bitcoin is the first deficient digital resource ever to exist. By design, Bitcoin will never exceed the value of 21 million. Bitcoin is decentralized just like the internet; any single person does not own it.
After Bitcoin, a new Cryptocurrency known as Ethereum gained widespread attention in the global market. This fantastic form of money kept growing, and there are around 4000 cryptocurrencies as of January 2021.
The Future of Cryptocurrency
Bitcoin and Cryptocurrency is the keyword that booming internet and the global markets today. Is the future awaiting this money form is bright? Or is it a mountain of gambles? Well, it is very likely to assume that Cryptocurrencies are irreplaceable assets. Suppose developments will occur, and people willingly acknowledge this digital currency. In that case, it has the potential to reform the current monetary system. With Cryptocurrency, the transaction costs of making conventional physical money, getting it to the right place, controlling its supply, Etc. can be eliminated.
Many people are proposing to replace physical money with Cryptocurrency worldwide, but reforming a whole financial system from scratch isn't a one-day task. Suppose the attention and support continue to grow. In that case, we might be able to see cashless digital transactions in the future.
Thus, at this point, we can conclude that Cryptocurrencies are undoubtedly the future of the Modern Economy.
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