Cryptocurrency – What it Is & How it Works

Bitcoin and cryptocurrency graphOver the years, technology-focused fads come and go, sometimes creating a buzz that is more hype than anything else. But in some rare cases, a shiny, new application, tool, or software brings a wave of excitement that is difficult to ignore. Cryptocurrency is one of those topics, but many are more confused by it than interested in how it works.

In the simplest of terms, cryptocurrency is a digital currency, sometimes described as virtual currency, that uses cryptography as a security measure. That means encryption techniques are used to control the currency’s use and its movement. Individual users who rely on the power of the Internet work to guarantee a cryptocurrency’s value and verify transactions which use it. But the most interesting aspect of any cryptocurrency is its decentralized state. Instead of being offered by large, powerful financial institutions in a centralized manner, like the currency we all know and love, cryptocurrency is organic in how it is created and cannot be regulated or controlled by any government or financial authority.

Because of these unique attributes and undeniable mystery, cryptocurrency is alluring to more and more people throughout the world each day.

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A Brief History

Cryptocurrency was first created in 2009 by a developer only known as Satoshi Nakamoto. Called Bitcoin, the first cryptocurrency used a set of cryptographic hash functions designed by the NSA and transactions were based on complex mathematical functions run through a network of computers. This network shares a large, public ledger that uses blockchain technology to record and validate all Bitcoin transactions. Today, there are more varieties of cryptocurrencies that follow a similar process, including Namecoin, created in 2011, Litecoin, also making its first appearance in 2011, Ethereum and Ripplecoin. Each type of cryptocurrency uses the same decentralized structure to create value for those who own it, although the specifics of how the digital currency is acquired and used varies slightly.

Advantages and Drawbacks of Cryptocurrency Use

The use of cryptocurrencies in everyday financial transactions has its benefits, at least according to those who consistently use it. First, cryptocurrency is digitalized, similar to credit and debit card transactions, but in the decentralized world, the information that identifies the currency cannot be stolen or used by anyone other than the owner. That’s because cryptocurrency only requires transmission of the amount the owner wants to send to a recipient – not sensitive account data or other identifying information about the payor. Only the owner has access to the digital key that unlocks the value of cryptocurrency, making it untouchable by any individual, bank, or government entity.

Additionally, the use of cryptocurrency does not come with transaction fees like traditional, centralized currency, and transactions cannot be reversed. Utilizing the ledge of blockchain technology makes it nearly impossible to stop payment or defraud another user, adding a layer of security for all parties involved. Finally, cryptocurrency is accessible to anyone with a connection to the Internet, and so there is no need to use a conventional financial institution to complete transactions.

While cryptocurrency has its positives, there are downsides just the same. The masses have yet to start accepting cryptocurrency as a major form of payment for goods or services. The number of businesses and individuals using cryptocurrency is far smaller than the several million credit and debit card users to date. Virtual currency also comes with a great deal of volatility, making exchange rates widely unpredictable. The value of cryptocurrency can swing without much notice because the market for its use is still in its infancy. That newness also means that some types of cryptocurrency used today may not exist in the future, leaving some users at a loss.

In an upcoming article, we’ll dive into how to buy and use cryptocurrencies in today’s marketplace, as well as what the future of virtual currency may resemble in the next few years.

Posted on November 28, 2017 by in Personal Finance

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