All You Need to Know About Cryptocurrency in 2021
Cryptocurrencies are the most revolutionary thing to have happened in the financial industry in over a decade. What made them so significant is the fact that they are not tied to any traditional banking institutions or governments.
They rely on cryptography for the security and regulation of all operations. The first, and most famous, crypto BTC was introduced to the world back in 2009. Nowadays, there are over a thousand cryptocurrencies on the market. You can buy, sell or trade on the price movement as you do with any other asset. They are, however, a bit different from fiat currencies in other ways.
Initially, they were designed as an alternative online payment method. Nevertheless, they are not accepted by many businesses to this day. The technology was meant to be independent of any government, so it is influenced and monitored by the p2p internet protocol instead. It consists of encrypted strings of data that are encoded to represent one unit of currency. As a result, it’s much more volatile than fiat currencies, which makes it an unacceptable payment method for many.
Bitcoin, like all other cryptocurrencies, is managed with the help of a blockchain transaction database, which is essentially a distributed public registry. It was the first-ever currency decentralized through blockchain. It is known to have been created by Satoshi Nakamoto. To this day it remains unclear whether the name belongs to one person or a team of developers.
One thing all cryptos have in common is the fact that they are meant to be limited in production. Only a certain amount of currency will ever be created, which makes them similar to precious metals. The rules for each currency are different. While BTC is supposed to not go over 21 million, ETH, on the other hand, is limited to 25% of supply a year (which is approximately 18 million tokens).
These limits are meant to create a deficiency, which will raise the value. The limits make mining more and more difficult, while the reward is also doubled down every couple of years. Sooner or later it will inevitably hit zero.
What makes cryptocurrency so unique?
There are a few factors that make this asset so drastically different from others. One of them is cryptography. "Cryptography originated during World War II as a solution for the need to maintain the security of communication. Modern cryptography is, unsurprisingly, something completely different. The digital revolution has turned it into a discipline that is mostly based on computer science and mathematics. It also strongly relies on communication science, electrical engineering, and physics.
There are two cryptography principles that apply to crypto: hashing and digital signatures. Each of them takes care of an important task. Hashing is used to hold up the blockchain structure and encode personal information. It also verifies the legitimacy of all data. Hashing is what makes mining real by generating cryptographic puzzles.
Digital signatures are pretty self-explanatory. The technology allows one to verify confirm the fact that they own a piece of encrypted data without actually revealing the data. This makes it possible for currency owners to complete transactions that warrant verification of their agreement to proceed with a trade.
Essentially, a blockchain is a publically available decentralized database of a currency’s transactions. Blocks that contain information on the previous operations are registered and permanently added to the blockchain in chronological order. Crypto traders and miners follow the protocol of block validation and download a copy of the blockchain. As a result, everything can be tracked down without any centralized institution or system. The key factor is the fact that no record can be altered without the agreement of each network participant. The technology is now widely used for other purposes that have nothing to do with finance.
While the idea of trading crypto is simple to grasp, mining seems to confuse a lot of people. Mining describes the process of attaching new transaction records in form of blocks to the blockchain. The process generates new coins which add up to their total amount. All you need for mining is software that will be able to solve math puzzles and validate the transactions that the blocks consist of. As blocks are attached to the chain, the miner is rewarded with a set amount of the currency. The quicker your software can process the puzzles, the higher are the chances of it validating the transaction and earning the reward. While there are hundreds of cryptocurrencies available, there are ones you need to know about. Let’s take a look at them.
It is the first and most famous crypto out there. What makes it unique is the fact that its attributes make it more similar to commodities than fiat currencies. As a result, most view it as an investment opportunity rather than a payment method. In June 2018 already there were over 17 million BTC circulating on the market. They can now either be purchased through an exchange or used for price speculations via CFDs.
ETH has launched not so long ago in the year 2015. The technology is rather similar to the one BTC uses in a way that traders can exchange tokens that represent the currency’s value through an open network. The purpose of the currency is to provide smart contracts rather than be used as a payment. Smart contracts are scripts that are used in the blockchain. Its limits are also significantly different from BTC. ETH has a yearly limit of 18 million tokens per year, which results in a yearly decrease of relative inflation.
BTC cash, or BCH is a cryptocurrency and payment network created in 2017. It was created as a result of a serious disagreement among network participants regarding the idea of increasing block size. Whenever something like this happens, the blockchain divides into two and conditions miners to decide which crypto they are after. When this incident took place, one BTC cash token was awarded for every BTC owned. Some exchanges still refuse to acknowledge bitcoin cash.
LTC, created by an ex-Google employee, was introduced to the world in 2011. The idea behind it was to create a coin for transactions of smaller value than those typically processed with bitcoin. It is extremely similar to BTC with only a few slight alterations. First of all, it is capable of processing blocks up to 4 times faster than BTC. While it requires significantly more advanced mining technology, it also has a much larger limit of 84 million coins to it.
Ripple, or XRP, is a system that enables any transactions (including fiat) all over the globe. The network was developed for the purposes of safe and fast operations that do not require high fees. The technology is much faster and safer than BTC, while it also has lower transaction minimums. Its efficiency can be proved by the fact it is now widely used by banks. Naturally, the network has its own Ripple coin.
Although each of them has strong potential, cryptocurrencies are not widely used or accepted to this day. Countless limitations and regulations make the technology inconvenient for many. Some find that cryptocurrencies will be used more and more over the next years, whereas some think that it’s a part of the financial bubble that will inevitably blow up. No matter the drawbacks, the technology has not only revolutionized the financial market but has also created space for development in countless other fields and disciplines.