The world of cryptocurrencies has exploded in the past decade or more. When Satoshi Nakamoto published the Bitcoin whitepaper in 2008, no one could have imagined the disruption it would cause in the financial world. Cryptocurrencies have gone on to become one of the most profitable assets in the world. And as a result, you must be coming across some or the other crypto news daily.
Their impact has been such that global conglomerates, governments, financial institutions, etc., are looking at ways to incorporate them. And if, for some reason, you are still unsure about the potential of cryptocurrencies, read our detailed guide on cryptocurrencies below.
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What Is Cryptocurrency?
Cryptocurrencies are a form of digital currency that does not exist in the physical world. Unlike traditional fiat currencies, they are not issued by any centralized authority, financial institutions, banks, etc. Cryptocurrency gets its name because it is secured using cryptographic methods and exists on the blockchain network.
Hence, a cryptocurrency is a blockchain-based digital currency that can be used just like traditional currencies. Cryptocurrency is unregulated and exists on a distributed ledger that involves hundreds and thousands of nodes (computers) connected in a peer-to-peer blockchain network globally.
How Does Cryptocurrency Work?
A cryptocurrency works on a peer-to-peer blockchain network without the need for an intermediary or central authority. All transactions and data about the transactions done using cryptocurrencies are publicly recorded and stored on the blockchain.
In order to use any cryptocurrency, you need to have a wallet to store your assets and the address of the wallet you want to send your assets to. Cryptocurrencies work just like fiat currencies and can be used for lending, borrowing, trading, etc. The only difference is the fact that they operate on the blockchain.
Types of Cryptocurrencies
- Utility Tokens: These tokens allow users to perform specific tasks on their blockchain network and the decentralized applications built on them.
- Governance Tokens: The governance tokens give voting rights and the right to participate in the decision-making process of their blockchain network.
- Transactional Tokens: These kinds of tokens are used for making payments; e.g., Bitcoin is a transactional token.
- Platform Tokens: This kind of token supports the DApps built on the blockchain network.
- Security Tokens: The crypto tokens have underlying assets like stocks, commodities, etc., and provide ownership.
- Non-Fungible Tokens: NFTs are unique tokens that act as proof of ownership of digital art, real-world assets, etc.
Pros and Cons of Cryptocurrency
- Cryptocurrencies remove the middlemen or central authority.
- They can be used to make transactions globally almost instantaneously.
- One of the most profitable assets to trade.
- Transactions done using cryptocurrencies are transparent and easily verifiable.
- The transactions are done in a pseudonymous manner and can be used for criminal activities.
- Their prices are highly volatile.
- Prone to cyber-attacks and other nefarious activities as they are unregulated.
Is Cryptocurrency Safe?
While crypto is considered safe, all the information and data about it is secured using cryptography, but it does not mean that they are totally safe. One of their biggest risks is the high volatility in their prices.
Another major issue associated with them is that in case of a wrong transaction, there is no way to reverse them. Moreover, since they are unregulated, any losses due to cyber attacks, rug pulls, etc., cannot be recovered.
Cryptocurrencies only exist digitally, and hence require digital wallets that can be used to store them. Digital wallets can be primarily of two types: Hardware Wallets and Software wallets.
A hardware wallet, also known as a cold wallet as it is not connected to the Internet at all times, is a USB-like device that can be used to take crypto tokens offline. Software wallets are in the form of mobile applications, browser extensions, etc., and are called hot wallets as they are connected to the Internet at all times.
Cryptocurrencies and blockchain technology are two of the most path-breaking inventions of the 21st century. While they have proved to be a very good asset to trade and earn passive income, their true potential remains untapped.
If you go and look for the crypto news today, you will find that they are slowly but steadily gaining mainstream use cases. And once mass adoption occurs, they have the potential to change the financial landscape of the world.