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CC#1.7. Understanding Cryptocurrencies

April 29, 2022

We’re sure most of you have heard of cryptocurrencies, but in this article we’ll go back to basics in order to make it easier for those who might be new to this topic or need some more understanding around it.

What is a cryptocurrency and how does it work?

The word cryptocurrency speaks for itself: it is a digital currency protected by cryptography, which means that it uses crypto algorithms in order to ensure its safety. Essentially, cryptocurrencies are virtual currencies that are made up of digital strings of code and were originally developed to act as a medium of exchange online.

In order to understand this concept better, we first need to look at the nature of traditional currencies, such as gold coins or paper money (see CC#1.1). Our regular currencies gain their value by being regulated by a particular central entity, which validates their existence and makes them legal tender. This can either be a government or an authority within the country.

Cryptocurrencies work differently than regular currencies in many ways. They rely on a decentralized network of computers to securely verify transactions, rather than being regulated by an authority like the government or central bank. This makes them very secure and difficult to counterfeit, which is why they are gaining in popularity as a means of exchange and investment.

One thing to keep in mind when thinking about cryptocurrencies is that they don’t physically exist anywhere, there are no coins or bills. They exist purely online and gain their validity from the blockchain. As we were explaining in CC#1.6, a blockchain is a decentralized ledger that records all cryptocurrency transactions, constantly updated by computers around the world, which are working to verify these transactions. As there is no central authority regulating cryptocurrencies, they are instead governed by the network of users who own them.

Cryptocurrencies gain their value from the blockchain/project behind them, from the fact that they are useful as a means of exchange and that they are limited in supply. Their value is always changing in accordance with market conditions, which is why they are popular investment tools, albeit risky.

Cryptocurrencies are often bought and sold on “exchanges”, which are dedicated platforms for this exact purpose. Similar to the stock market, these exchanges have their own set of rules and features which determine how transactions work and what fees users must pay.

Cryptocurrencies - Advantages & Challenges

One of the main benefits of cryptocurrencies is that they offer a secure and convenient way to conduct transactions online. Unlike traditional currencies, which can be stolen or duplicated by hackers, cryptocurrencies use cryptography to protect against these kinds of attacks.

Another advantage of cryptocurrencies is that they are decentralized, meaning that there is no central authority or government regulating them. This gives users more control over their funds, as well as making transactions much faster and more efficient. Additionally, it also reduces the risk of fraud and chargebacks, as there is no central authority that can reverse transactions.

Finally, cryptocurrencies are also very limited in supply, which helps to keep their value stable. In contrast, traditional fiat currencies can be printed at will by central banks, leading to inflation and depreciation in value.

Still, there are some concerns about their safety and stability – because they aren’t regulated by any central authority, their value can fluctuate significantly over time. Another one of the main concerns is security – with so many different cryptocurrencies on the market today, it can be difficult for users to know which ones are trustworthy.

Therefore, it is important for cryptocurrency investors and other users to do their research before making any transactions or investments. This includes thoroughly examining a coin’s history and pedigree, as well as its underlying technology and development team.

Cryptocurrencies then and now

There are many different types of cryptocurrencies on the market today, including Bitcoin, Ethereum, Litecoin, Ripple, and Dash. Each one has its own underlying blockchain that determines how it works and what properties it can have, so users must decide which one(s) they would like to invest in based on their individual needs.

Bitcoin was the first cryptocurrency,  and it is still the most well-known one. It was created in 2009 by an anonymous person or group of people known as Satoshi Nakamoto. Bitcoin is not backed by any government or central bank.

The idea behind Bitcoin was to create a decentralized currency that could be used anywhere in the world without the need for a central authority. This was driven by a desire to create an alternative and more efficient form of payment. While Bitcoin is often used as a speculative investment tool, it also has many practical applications. In fact, some merchants are now starting to accept cryptocurrency payments for products and services.

While cryptocurrencies are gaining in popularity as a medium of exchange, they can still be difficult for the average person to use and understand. Many retailers do not yet accept cryptocurrency payments, and it can be difficult to keep track of their value in relation to traditional currencies.

In order to use cryptocurrencies, users must first install a special software wallet on their devices in order to send and receive payments. In some cases, users may also need to link their wallets to a bank account or credit card for purchases. The process is still rather complex, but with cryptocurrency on the rise, more and more people are becoming familiar with how it works, especially through using new apps that make it quick and easy for users to purchase goods online or in store. As more retailers start accepting cryptocurrencies, the overall market cap for these currencies is projected to continue growing.

Despite these challenges, it seems clear that cryptocurrencies are  an exciting new innovation in the world of finance and digital payments and are here to stay. As more people become aware of the benefits of digital currencies – including enhanced privacy, security, and efficiency – their popularity is likely to continue rising in years to come. Whether you’re looking to invest in cryptocurrency or use it to make purchases, there are plenty of resources out there to help you get started.

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