Cryptocurrency is the emerging form of virtual currency, which is undoubtedly also the talk of the hour, perceiving the massive amount of attention it is seeking globally. It uses encryption to prevent counterfeiting. Most cryptocurrencies are intangible, but some have ventured into the physical realm through credit cards.
Although it is still not legally recognized in many countries, it has received significant exposure in the past few years and has received legal status from many countries like the USA, Canada, Australia, Denmark, France, etc. However, investing in cryptocurrency can be a gamble if it is done without proper research. You can easily learn cryptocurrency trading with a reliable course online though knowing its fundamentals is a prerequisite before enrolling for a specialization course.
If you want to get an overview of how does cryptocurrency work and understand the technology that drives it, keep reading this article.
How does cryptocurrency work?
Blockchain technology is what runs the show for cryptocurrency. It records transactions and keeps track of who owns what cryptocurrency. The computer is used to solve complex mathematical problems through a technique called mining. This helps in earning coins that, in turn, aid in the construction of cryptocurrency units. Users purchase the currencies from brokers and use encrypted wallets to store and spend them suited to their needs. Many people also learn cryptocurrency trading to invest in better opportunities.
Records are preserved across several computers on a network using a blockchain’s distributed ledger. Each computer is referred to as a node. These nodes do the verification and storage of data. When new transactions are concluded, they are added to a “block” of data, which is subsequently added to the chain. As new transactions occur, the entire ledger can be updated.
What is Blockchain technology?
In order to understand how does cryptocurrency work, you must comprehend the basics of blockchain technology.
A blockchain is simply a digital ledger of transactions. It is replicated and distributed across the blockchain’s complete network of computer systems. Blockchain is significant because it eliminates the risk of fraudsters tampering with your data. Besides being used in cryptocurrency, it is also used in many other industries like banking, real estate, pharma, etc.
Advantages of using cryptocurrency
Security is a major concern for most people when it comes to cryptocurrency. The blockchain ledger is built on many mathematical problems that are difficult to decode. Hence your privacy and security are never at risk. It is also interesting to note that cryptocurrency uses pseudonyms that are not related to any user, account, or stored data that may be traced to a profile. So it has a very tight security system.
Cryptocurrency transactions are typically lightning fast. Not only domestic transactions but also cross-border transactions are completed conveniently. This is possible because there are minimal barriers to overcome.
Cryptocurrencies are mostly decentralized. Many cryptocurrencies are under the control of the creators who use them and people with a considerable amount of coins. Sometimes, it is also controlled by a firm to develop it before it is launched into the market. Decentralization contributes to the currency being free from monopoly and also in restraint because no single entity can determine its value and flow. This helps in keeping the coin stable and secure.
The cryptocurrency market is growing at an exponential rate. Projections of its growth indicate an increase of 16.43% annual rate (CAGR 2022-2027), resulting in a total of US$74.30 billion by 2027.
The charges per transaction are much lower in cryptocurrency. Usually, cross-border transactions can be expensive due to the high charges charged by the companies assisting transactions. On the other hand, cryptocurrency transactions are cost-effective, affordable, and much lesser when compared with conventional financial services.
Safeguard against inflation
Cryptocurrencies act as a kind of inflation protection. Various cryptocurrencies like Bitcoin incorporate supply-control systems and can operate as an inflation hedge. For example, the total amount of coins that will ever be produced in Bitcoin has a strict limit. As demand grows for Bitcoin, its value rises, keeping up with the market, and, in the long term, this helps prevent inflation.
Disadvantages of Cryptocurrency
Subject to price volatility
Investing in the crypto market can be a challenging game. Since this market thrives on speculation, it is subject to price volatility. While your profits might skyrocket, you must also be prepared to accept losses.
While the privacy maintained in cryptocurrency is beneficial, it also has a downside. Due to the high privacy standards, governments often fail to trace users’ details. This results in illegal transactions and poses a threat to society at large.
Although it is an advantage that the security system is extremely robust, if any user forgets their login credentials, they will practically never get back their coins. The coins they have in their wallet will remain as they are. This can result in serious financial losses.
No chance of retrieval of money
Sometimes, users might carry out transactions by mistake. In cryptocurrency, funds are not getting back even if the transfer was made by mistake. Due to this, fraud can become rampant, and any steps cannot be taken against related entities because their details cannot be tracked.
No proof of long-term profitability
Although the projections about the cryptocurrency market look very bright, it has been around only since 2008. This time frame is insufficient to prove that cryptocurrency is a wise long-term investment decision.
While most of us might have heard of the widely talked about cryptocurrency- ‘Bitcoin’, several others are gaining prominence with time. Here is a list of some popular cryptocurrencies-
The second most heard cryptocurrency is Ethereum. It is often seen as an alternative to Bitcoin. Like all other cryptocurrencies, Ethereum is dependent on Blockchain technology. Ethereum’s purpose is to establish a decentralized suite of financial products that anybody on the planet can freely access.
Dogecoin was introduced in 2013 when its creators, Billy Markus and Jackson Palmer, launched it as a joke reflecting on the cryptocurrency market’s huge speculation. Dogecoin, unlike its contemporaries, is considered to be an inflationary coin. You can trade in Dogecoin with merchants who accept it.
Litecoin has innovated and established speedier payment systems and processes to allow for more transactions. Litecoin is a digital currency that enables low-cost payments to anyone on the earth. Like other cryptocurrencies, Litecoin is a transnational payment network that is open source and entirely decentralized.
Polkadot is a Proof of Stake (PoS) cryptocurrency. The purpose of Polkadot is to provide compatibility with other blockchains. The protocol is connected to blockchains with and without permission and oracles. This allows the collaboration of systems under one entity.
Tether is a stablecoin that aims to smooth out price fluctuations to attract users who may otherwise be wary. The price of Tether is set at $1 per coin. Tether is widely employed as a middleman when traders move from one cryptocurrency to the other. They use Tether instead of returning to dollars.
XRP is a cryptocurrency supported by the XRP Ledger and introduced by Ripple, its parent company. While its validation software is available to anyone, it maintains distinct node lists.
If you want to invest in cryptocurrency, you must learn crypto currency in detail with Blockchain Certificate Program by upGrad. It will not only help you make wiser investment decisions when it comes to putting your money in cryptocurrency but also learn more about blockchain technology and its applications in various other industries.
- Learn more about Ethereum and Hyperledger Fabric.
- Learn about Blockchain applications in banking, pharmaceuticals, and real estate.
- Mentorship from industry professionals on an individual basis.
- Obtain certification from a Top 10 US Public University.
Venturing into cryptocurrency needs fundamental conceptual knowledge based on blockchain, its parent technology. This can only be achieved through extensive study that a reliable online course or detailed books can offer you. While our list works as a great kickstart to tickle your interest in cryptocurrency and blockchain, blockchain and crypto programs from educational platforms like upGrad can be a wise decision. Following the growing demand for crypto professionals, starting today would help you future-proof your career.
Is it wise to invest in cryptocurrency?
Cryptocurrency can be a fantastic investment, yielding astronomically huge returns overnight; nevertheless, one can lose money too. Before investing anywhere, one should conduct extensive research on it.
Is blockchain used by all cryptocurrencies?
Blockchain networks secure almost all cryptocurrencies, including Bitcoin, Ethereum, and Litecoin.
What is the goal of blockchain?
A blockchain serves as the foundation for irreversible ledgers or records of transactions that cannot be changed, edited, or destroyed. It aims at enabling digital information to be recorded and distributed but not altered.