Cryptocurrency, in essence, is a decentralised method of conducting transactions, underpinned by a system of emission distribution. It functions using blockchain technology and is secured through unique encryption. Understanding this complicated subject can be simplified by dissecting it into smaller elements.
Cryptocurrency acts as a medium of exchange, akin to money, but it is not confined to traditional banking systems and is not subjected to regulatory oversight, thereby preventing manipulation.
Emission distribution is a mechanism that enables network participants to generate coins by accomplishing specific tasks or meeting certain criteria. The two primary types of emission are: Proof of Work and Proof of Stake.
Proof of Work involves earning cryptocurrency through work done. This process, often termed as mining, requires providing computational power to decrypt network blocks. Successful decryption leads to rewards for the miner.
Bitcoin's computational difficulty has been on a consistent upward trajectory. To sustain network operations, miners collaborate in pools, dividing the rewards relative to their resource contributions.
Proof of Stake is the second approach to regulate the creation of new coins. Rather than rewarding the miners who perform calculations, the rewards for a new block are shared among all cryptocurrency holders proportionately. Both emission methods bolster the security of the Blockchain network, preventing the possibility of counterfeiting or duplicating cryptocurrencies.
Cryptocurrencies operate on the blockchain, a distributed ledger with a sequential record system. All transactions and records are stored in a new block of the chain permanently, simplifying the verification, validation, and fair use of the cryptocurrency.
In summary, cryptocurrency is a type of digital currency that is created by users rather than banks. It is encrypted, resistant to counterfeiting, and all transactions are permanently recorded in an unhackable and indestructible database.
On a technical note, various forms of digital money could be classified as cryptocurrencies, such as AdvCash and Payeer, as they meet the fundamental criteria of being electronic money protected by cryptographic encryption.
However, there are certain attributes that disqualify electronic money from being categorised as cryptocurrency:
Centralization: Electronic money is primarily centralized and governed by banks. The company owner has the power to influence exchange rates, emission, and exchange rate.
Linking to a payment system: All electronic money is tied to an exchange system. For instance, PayPal Dollars don't hold financial power outside their dedicated wallets.
Mandatory security: The emission of electronic money is restricted by the amount of physical currency invested in the payment system. These funds can be exchanged for an equivalent amount of cash upon the bank's request.
How is the value of cryptocurrencies determined?
Cryptocurrency valuation varies as it doesn't necessarily have to be backed by the dollar. The asset's value is guided by two factors: technical and fundamental.
Fundamental pricing comprises two measurements. The resources expended on decryption and the costs incurred to maintain operations. The resources include:
• Electricity used in mining.
• Equipment cost and depreciation.
• Funds devoted to the creation of new miners.
The second factor is the capitalization of an asset or its real collateral. Capitalization represents the amount of physical currency exchanged for cryptocurrency and the amount that could be retrieved at a single request.
The technical factor is more psychological:
The cost of cryptocurrency is exactly what one is prepared to pay for it.
Both factors influence Bitcoin and altcoin prices in proportion. The cryptocurrency community officially acknowledges technical pricing over fundamental pricing.
Pros and cons
Cryptocurrencies have grown in popularity due to certain advantages:
Quick transaction speeds: Transaction times depend on the network load, often taking only a few seconds.
Anonymity: The blockchain registers addresses and money transfer facts, but not personal data like names and wallet numbers.
No intermediaries: Banks do not have control and cannot charge service fees.
Nevertheless, cryptocurrencies do have their drawbacks, particularly in the technical realm:
Mining complexity: The process of mining becomes increasingly complicated over time.
Network scalability issues: As the number of participants grows, transaction times and transfer fees increase.
Volatility: Cryptocurrency values can fluctuate dramatically in short periods.
Increased user responsibility: Users bear the risk of losing funds due to erroneous transactions, hacks, or loss of wallets.
Cryptocurrencies are an innovative tool revolutionizing both the fiat and digital economies. They offer user convenience and simplicity and have introduced new ways to interact with significant financial institutions. Despite their challenges, cryptocurrencies continue to shape the future of financial transactions and investment strategies.