What is Cryptocurrency: The Complete Guide

If you are yet to hear of cryptocurrency by now, we could say you are far behind trends but you are probably not alone. But if you have heard of it, then there are probably more details that you need to learn about it. Now, that you know that, let’s proceed.

Over the years since the invention of currencies, as technology increased, there have been several attempts to create mobile money, it is true that there are e-transactions now where one can send money via the internet to another entity but there is still one major limitation that has made cryptocurrency a different and a better option for most people.

One major advantage this has is the fact that it bypasses the third-party financial institutions such as the banks. It doesn’t require the endorsement of a bank or the close monitoring of Government. There is no central bank involvement to sanction anyone for having too much money. The decentralized structure of the cryptocurrency has made it a more reliable way of saving and even investing money.

Cryptocurrency works through the peer-to-peer method. This simply means that you don’t have to use your social security or credit score as collateral, it allows you to be pseudonymous because you don’t need to enter your personal bio-data, you just need a digital address (that will be explained further). In other words, cryptocurrencies are like virtual accounting systems that keep a record of all transactions. The transactions are bundled into blocks, which are cryptographically signed (hence the word “crypto” currency) and the client doing the signing gets some number of units of virtual currency (and potentially transaction fees) as a reward for doing the work of calculating the cryptographic signature.

You can make some heavy duty transfer of money to your family without any internal or international financial body restrictions. 

One other exciting thing is the fact that people can only send what they have, transactions are secured using cryptography, you can’t spend the same unit twice, and this eliminates the risk of fraud. If you are transferring units to someone else, be sure of the transfer because there is no reversal, there is no central body to oversee this kind of case. So, going further to the big question, what is cryptocurrency?

What is Cryptocurrency?

Cryptography is made up of two words, Cryptography and Currency, so before we give meaning to the word in itself, let us know what those two terms are

First, let’s define what normal currencies are; according to Wikipedia; currency is money in any form when in use or circulation as a medium of exchange especially circulating banknotes and coins. It is a system of money in common use, especially for a people in a nation.

A currency is token generally accepted in a country for transactions and as a means of exchange for goods and services. This can be in paper form or coins but now, with the invent of cryptocurrency, it can also be said to be not just in hard tokens that can be seen and touched but in a soft token which makes it virtual. So beyond what we know as money, actual money, there is the virtual money which cannot be touched or seen but the value cannot be denied.

So currencies allow people to convert their efforts into something that maintains its value, it is used to measure the value of a good or service and can be used at a later time.

Cryptography, on the other hand, is the study of secure communications techniques using codes that can only be understood by the sender and the recipient. It is converting a plain text to unintelligible codes that can only be decoded by the party it was meant for. It is a secure path restricting an unauthorized body from accessing the information that has been encrypted in the message. The recipient has a secret key that is used to convert the messages back to plain text to make it readable. This is used to secure credit card information, e-mail messages and some corporate data. The encrypted information gives authentication to the message, it cannot be copied or altered by a third party, and it can also be confirmed by the recipient.

Now that we have an understanding of what the two terms are; let us move further by defining the word “CRYPTOCURRENCY”

Cryptocurrency is a medium of exchange value(just like ordinary money, cash or coins) that is digitalized and relies on encryption, which guarantees the security of transactions. It is a new way of payment for goods and services that get rid of the intermediaries or a central financial institution represented by banks eliminating all commission fees and the unnecessary bank charges and what have you.

The core of cryptocurrency is the security of the transaction which is provided through a blockchain technology that serves as a public financial database. This is purely mathematical in nature.

It is a digital asset that uses strong cryptographical codes to secure financial transactions. Cryptography is used to monitor and control the creation of extra units and verification of the transfer of assets.

According to Jan Lansky, a cryptocurrency researcher who considers cryptocurrency a futuristic currency that would be widely used; he said Cryptocurrency is a system that meets six conditions

  • The system does not require a central authority; its state is maintained through distributed consensus.
  • The system keeps an overview of cryptocurrency units and their ownership.
  • The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
  • Ownership of cryptocurrency units can be proved exclusively cryptographically.
  • The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  • If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs, at most, one of them.

Advantages of Cryptocurrency

As it is with everything in life, there are pros and cons, advantages and disadvantages. We will be checking out quickly, some advantages of cryptocurrency. You must, however, note that what one views as a con may likely be a disadvantage to another person based on perspective, but for the sake of this study, we shall be considering the benefits as outlined below.

The Main Benefits of Cryptocurrency

Security: One of the basic characteristics of cryptocurrency is the unequalled confidentiality and the security that comes with knowing that the encrypted code can only be accessed by you and the direct party you are involved with using the public and private key to unlock, this gives less room for fraudsters to dupe you as we see happening in the actual world with physical cash.  Cryptocurrencies are digitalized and cannot be counterfeited or reversed arbitrarily by the sender, as with credit card charge-backs.

You enjoy ultimate freedom from the monitoring system of financial institutions checking every single transaction you make to ensure funds are available. Once funds are transferred, it cannot be refunded except on agreement between the sender and the recipient in the case of any mistake. This reduces the risk of fraudsters using individual accounts.

Accessibility: Cryptocurrency is easy to access by anyone provided you have internet services and good network coverage as this is the way to gain access to the market, you have to be online. Based on statistics, about 2.2billion people have access to internet facilities but do not have access to the traditional financial institutions of banking and exchange in their area so cryptocurrency is a great way to transfer and accept asset as this is done when there is internet service. All they need is to be willing to trade with the cryptocurrency which is available to serve its willing consumers once the required infrastructure has been put in place.

Direct transaction: One of the issues in the sales or purchasing of assets in the actual sense is the involvement of too many third parties, lawyers, bankers, brokers and what have you representing several agencies and on all these services rendered, there will be a little fee because of all the paperwork involved, that is excluding the cost of the property you intend to purchase. Cryptocurrencies like Bitcoin and others are done on a one-on-one basis taking place on a peer-to-peer networking structure by boycotting the middleman totally. No need for any third party witnesses as the transaction can be done directly to the one buying or selling, so there is no confusion about who should pay what to whom. There is accountability in the system. They may choose to however involve a third party and shift the continuation of the business deal to a later date.

Transaction fees don’t apply: You know how disturbing it is to see your monthly account statements from your bank and credit card company, they charge for everything you do, withdrawals, e-transfers and what have you. If you happen to do a lot of transactions in a month, the amount that you get to pay as VAT is very tangible if summed up. Transaction fees can reduce your assets a lot but not with cryptocurrencies. The miners that do the number crunching that generates bitcoin and other cryptocurrencies get their compensation from the cryptocurrency network so transaction fees don’t apply unless a third party is employed by you to handle your transactions. If you are doing it directly, you will not have to pay extra. This boycotts the bank charges, you send the exact unit you want to send without any special commission because cryptocurrency operates the “push” not “pull” like the banks do, they pull out more than you which to let go and this would be a loss on you.

Easier International Trade: Transferring assets, buying and selling across borders seems to be quite difficult and there are a lot of procedures to follow. Though  the cryptocurrency is largely unrecognized as a legal tender on national levels at present, cryptocurrencies by their very nature are not subject to the exchange rates, interest rates, transactions charges, or other levies imposed by a specific country or Government because of the nature of transaction using the peer-to-peer mechanism of the blockchain technology, cross-border transfers and transactions may be conducted without complications over currency exchange fluctuations, and the like.

Flexibility: The flexibility of Cryptocurrencies is such that there are several types owned by different individuals. There are currently over 1200 unique cryptocurrencies or altcoins in circulation worldwide with Bitcoins at the forefront and other major ones,  many are quite ephemeral, but a significant proportion has been created for specific use cases that illustrate the flexibility of the cryptocurrency phenomenon.

For example, there are “privacy coins” which help mask your identity on the blockchain, and supply chain tokens which can facilitate supply chain operations for various types of industries. We know it is almost impossible for individuals to just decide to own banks the way they may decide to be miners and own a cryptocurrency. So it is adaptable and flexible to suit the purposes it was encrypted for.

Complete Ownership: There is no traditional financial institution that you belong to which is not controlled by another person or the system involved giving them the right to close some accounts or withdraw some benefits because the individual must have broken some laws or has not followed the terms and condition given by the bank or credit card company and the person goes through a lot trying to get reinstated into the system but this is not so with the cryptocurrency. This point can be considered as the greatest advantage there is to cryptocurrency, except you have given a third party access to manage your wallet, you are the sole owner and possess both the public and private keys that make up your cryptocurrency address.

The Disadvantages and Risk of Cryptocurrency

As earlier said, practically everything that exists has its merits and demerits; that is why it is necessary to look at both sides so you can weigh your options to see if the risk is worth taking, putting in mind that there is no business without risk involved.

Fluctuating Price: The price of cryptocurrency is usually unstable, just like the value of the legal tender in the market experiencing rise and fall. It tends to be worse though because it is not yet widely accepted by international bodies and financial institutions. The price may be high today and by the breaking of a new day, it goes down. This discourages users and merchants and many do not want to take the risk. Since they cannot predict the price, many companies do not trust it enough to use it as a means for their business transaction. One way to do business is to be sure that the right value is being given and received since that is lost, it is a ‘no’ for many.

Low acceptability by merchant: There are two major reasons for this; the fact that many companies do not want to take the risk due to the fluctuation in prices and secondly, the fact that they do not know the many benefits of cryptos. This issue has made many company decline acceptance of digital money, the fact that they cannot see it makes it inconsequential and they would prefer to have it in hard currencies. Also, knowing it is not a general legal tender has its restrictions too. All these serve as a limitation to trading activities.

Still young and growing: The fact that digital money is a new though trendy topic in this century, it is still common knowledge that many people have no in-depth knowledge about cryptos and how they work, this serves as a limitation, it is true that cryptocurrencies have come to stay but we can’t deny the fact that it is yet to get to the zenith. There is much work to be done and it may take years to gain ground among the masses but it must have tested the global market and stand the test of time for many to embrace it.

Easy entry, painful exit: Joining the crypto sphere is quite easy; anybody with a good phone and internet can join. Many who started with Bitcoins when the prices were high were highly devastated when it dropped drastically, dropping out of the race is tougher because there is always hope of the market prices going high and gaining back what has been lost. Those who now make the decision to leave may realize that the tide changed just after they exited. It seems like a game of luck to many but as an investor, your number one characteristic should be risk-taking.

However, the way we view it, the pros outweigh the cons but the decision is yours, it can be risky as well as beneficial, so make proper consultation before jumping in, there are several cryptocurrencies available, knowing the best one for you is essential so there are no regrets at the end of the day. As we continue, we will give a list of some of these cryptocurrencies or altcoins so you can know a few top ones amidst the other that are available.

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