What is Cryptocurrency?
Cryptocurrency is the latest fad to hit the financial markets made famous by names such as Bitcoin or Ethereum and Litecoin. As the name suggests, a cryptocurrency is digital money or an asset. It acts just like a normal currency.
This means that a cryptocurrency is a medium of exchange. The difference however is that crypto currencies exist only on the internet. A cryptocurrency also differs from the fact that it uses cryptography to maintain integrity of the cryptocurrency and its security. A cryptocurrency is also known as a virtual currency as well.
Cryptocurrency came into the limelight with the advent of the Bitcoin, which was introduced in 2009. What began as a small project quickly saw Bitcoin becoming one of the most widely accepted cryptocurrencies in the world.
While regulators and government authorities have attempted but failed to curb the rise of Bitcoin, it has become a household name and threatens the very existence of the traditional currency as we know it to be.
Despite the obstacles, cryptocurrency has given rise to many large institutional investment banking firms to pour in millions of research into how cryptocurrencies operate. This has led to the creation of what is known as block chain, which is a process that is robust, quick and anonymous.
Brief history of cryptocurrencies
Cryptocurrencies are basically an offshoot of the Bitcoin project. The faceless inventor of Bitcoin, Satoshi Nakamoto invented the Bitcoin in late 2008 and initially called it a peer to peer electronic cash system.
While many others before Nakamoto attempted to create a similar system, it was the success of Nakamoto and the Bitcoin that eventually made cryptocurrencies what they are today.
A cryptocurrency, as mentioned, works on a peer to peer network, similar to how file sharing systems worked in the past. Unlike the fiat money we know, cryptocurrencies are not centralized. Every server in the network contributes to information sharing of the transactions and checks for validity.
In return, these networks or computers (known as miners) are rewarded with the cryptocurrency (Bitcoin for example).
Cryptocurrency is often said to be complex. But if you strip down to the basics, a cryptocurrency is basically entries in a database that cannot be manipulated or changed unless it meets specific conditions.
How Bitcoin works?
Bitcoin works on the network of miners. The miners are nothing but computers or servers. In the early days, it was possible to mine for Bitcoin from a traditional desktop or a laptop with good computing power.
Since Bitcoin became popular, mining has become more difficult. At the same time there are only a limited number of Bitcoins available, which makes the cryptocurrency even more coveted by miners and traders alike.
Every peer in the cryptocurrency network has a record of the history of transactions and as a result the balance of every cryptocurrency account as well.
When a Bitcoin transaction is made between two parties, the transaction is digitally signed by a public and a private key. The miners in the network are the ones capable of validating the transactions. Once it is validated, the public key enables any of the other miners in the network to view the transaction.
Why has Bitcoin become a much sought after digital currency?
Bitcoin price chart
Bitcoin offered people something that they didn’t have so far. Anonymity! By creating a Bitcoin wallet, a customer no longer needed to identify themselves (something common when you use a credit card for example).
This anonymity allowed customers the freedom to purchase digital goods and even goods for delivery. The most famous crack down came when the FBI shut down Silk Road, a darknet where Bitcoins were widely used. One could buy drugs, arms and ammunition from the website.
Secondly, Bitcoin is not controlled by governments, unlike money. There are no taxes on Bitcoins. All these factors led to a quick acceptance of Bitcoin by Internet users worldwide.
It is not surprising then that the price of Bitcoin today trades above $2000. Between the periods of 2009 through 2013, the price of Bitcoin remained below a steady $20. But since 2013, Bitcoin prices have been sharply rising.
The advent of cryptocurrencies soon caught the attention of speculators as well. However cryptocurrency trading can be very volatile. Cryptocurrency prices such as Bitcoin have seen dramatic rise and fall in the prices.
The wide acceptance of Bitcoin soon led to further developments. Cryptocurrency exchange markets such as Coinbase, Bitstamp emerged, similar to what NYSE is for stocks or the CME Group is for futures.
While Bitcoin is not officially recognized, it is only a matter of time before which the cryptocurrency will get the official recognition. Currently, efforts are in place to develop an options market for the cryptocurrencies which only goes to show the rapid rise in the popularity of these cryptocurrencies.