Looking into forex and stock exchange for a while, you probably already heard of Bitcoin, which has been running all up for some time now. Bitcoin is a cryptocurrency – a currency that is used for exchange in the digital media. But what exactly is a cryptocurrency and the hype that surrounds its name? In this article, we are going to tackle about cryptocurrencies, their drawbacks and notable characteristics.
What is a cryptocurrency?
A Cryptocurrency is a digital or virtual currency that is designed to work as a medium of exchange with no central authority. This type of currency is a subset of digital currencies and also of alternative currencies. It is based on a peer-to-peer network with no central exchange system to follow.
Cryptocurrency is difficult to counterfeit because it uses a security feature called cryptography. Its decentralized feature makes it theoretically immune to any type of interference or manipulation. This feature prevents any company or government to produce new units, thus making cyrptocurrency supplies limited.
Most cryptocurrencies have an ultimate cap on the total amount of currency that would be in circulation, which mimics the characteristic of precious metals. An example is Bitcoin, which supply decreases with time and is predicted to reach its final supply in around the year 2140.
The first cryptocurrency that made it big on public was Bitcoin. It was launched in 2009 by a group or an individual under the pseudonym of Satoshi Nakamoto. Since then, Bitcoin flourished in the market up to the present, its success is followed by the spawn of a number of competing cryptocurrencies such as Litecoin, Ripple, and Ethereum, which are frequently called altcoins, as a blend of bitcoin alternative.
Characteristics, process, and drawbacks
Cryptocurrencies are used to transfer funds between 2 parties. This transaction is facilitated by public and private keys for security purposes. The process also requires minimal fees, which is a huge advantage compared to wire transfer through banks and financial institutions.
A cryptocurrency like Bitcoin consist of a network of peers. Every peer in the network has a record of the complete transaction history, and also the balance of every account. Each transaction should be signed by the holder’s private key before it can be processed, thus making sure that each process has the consensus of both peers. After confirmation, the transaction is broadcasted on the network and is permanently recorded in the block chain. These transactions can no longer be reversed as soon as they are stored.
Bitcoin and all the other cryptocurrencies use a decentralized control, which is related to the use of a blockchain transaction database in the role of a distributed ledger.
The downside of cryptocurrencies, however, also stems from its loss of a central repository. Because of this, the balance of the cryptocurrency can be easily wiped out by a computer crash. This could happen if a backup copy of the holdings does not exist. Another drawback is the exposure to wide exchange rate fluctuations since cryptocurrency prices are based on supply and demand.
And just like anything processed over the digital world, cryptocurrencies are not immune to the threat of hacking. Just looking at Bitcoin’s history, over 40 theft incidents have already been recorded. Despite this, many spectators still look at cryptocurrencies as hope that a currency can exist far from manipulation by having a value on its own.
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