Cryptocurrency: Definition, Objective, Working, Advantages, Disadvantages

Cryptocurrency

It is an encrypted data string that denotes a unit of currency. It is monitored and organized by the peer-to-peer network called a blockchain and also serves as a secure ledger of transactions. It is also sometimes known as crypto-currency or crypto, which is in the form of currency that exists digitally or virtually and uses cryptography to secure transactions. It is used to store value and as a means of exchange between two parties doing business with each other.

The objective of Cryptocurrency

The main objective of using cryptocurrency is to remove all the issues that come with traditional banking and be able to fix the problems of the traditional currencies by putting the power and responsibilities in the currency holders’ hands. There are no limits to the money you can transfer using bitcoin, accounts are almost impossible to hack because you are not using a financial institution and there are no central points of failure.

Working procedure

Cryptocurrencies are not controlled by the government or central regulatory authorities. It works outside of the banking system using different brands or bitcoin being the major player.

Mining

Cryptocurrencies are digital and completely generated through the process called mining and it is a complex process. Normally, miners are required to solve certain mathematical puzzles especially equipped with computer systems to be rewarded with bitcoins in the exchange for an ideal world and it would take a person just 10 minutes to mine one Bitcoin, but in reality, the process takes an estimated 30 days.

Buying, Selling, and Storing

Today’s users can buy cryptocurrencies from the central exchanges,  brokers, and individual currency owners or sell them to them. The exchange or platforms like a Coin base are the easiest ways to buy or sell cryptocurrencies. It can be stored in digital wallets. Digital Wallets may be hot or cold. Hot means the wallet is connected to the internet makes it easy to transact but vulnerable to thefts and frauds. Cold storage is very safer but it makes it hard to transact.

Transacting or investing

Cryptocurrencies like bitcoin can be easily transferred from one digital wallet to another by using only a smartphone. They can use them to buy goods or services to trade in them in exchange for cash. The easiest way to use bitcoins for purchases is the debit card type transactions which use a debit card to withdraw cash just like an ATM.

Advantages 

Protection from inflation 

Inflation has been caused by many currencies getting their value declining with time. Almost all the cryptocurrencies at the time of their launch are released with a fixed amount. The source code specifies the amount of any coin there are only 21 million released in the world, so as the demand increases its value will also increase which will keep up with the market and in the long run prevent inflation.

Self-governed and managed 

The Governance and maintenance of any currency is a major factor in its development. The cryptocurrency transactions are stored by the developers or miners on their hardware, and they get the transaction fee as a reward for doing so. The miners are getting paid for it, so they keep the transaction records accurate and up to take, by keeping the integrity of the cryptocurrency and the records decentralized.

Secure and private

Privacy and security have always been major concerns for cryptocurrencies. The blockchain ledger is based on different mathematical puzzles, which are very hard to decode. So it makes a cryptocurrency more secure than ordinary electronic transactions. Cryptocurrencies use pseudonyms for better security and privacy that are connected to any user, account or stored data that could be linked to a profile.

Currency Exchange

Cryptocurrency can be bought by using many currencies like the US dollar, European euro, British pound, Indian rupee, or Japanese yen. By using the different cryptocurrency wallets and exchanges one currency can be converted into the other by trading into cryptocurrency, across the different wallets, and with minimal transaction fees.

Decentralized

The major role of cryptocurrencies is that they are mainly decentralized. A lot of cryptocurrencies are controlled by the developers using the people who have a significant amount of the coin or by the organization to develop it before it is released into the market. The decentralization helps to keep the currency monopoly free and to check so that no one organization can determine the flow and the value of the coin, which will keep it stable and secure are controlled by the government.

Disadvantages

Illegal transactions 

Although the privacy and security of the cryptocurrency transactions are high it’s hard for the government to track down any user by their wallet address to keep tabs on their data. Bitcoin has been used as a mode of exchanging money in a lot of illegal deals in the past such as buying drugs on the dark web. Cryptocurrencies are also used by some to convert their illicitly obtained money through a clean intermediary to hide its source.

Data loss 

The developers wanted to create a virtually untraceable source code with strong hacking defenses and impenetrable authentication protocols. This would make it safer to put the money in cryptocurrencies than the physical cash or bank vaults. The wallet will remain locked away along with the number of coins inside it. This will result in the financial loss of the user.

Adverse effects

Mining cryptocurrencies requires a lot of computational power and electricity input making it highly energy-intensive. The biggest culprit in this bitcoin requires an advanced computer and a lot of energy. It cannot be done on ordinary computers. Major bitcoin miners in countries like China use coal to produce electricity. This has increased China’s carbon footprint tremendously.