Cryptocurrency - The future of currency?

Cryptocurrency

I guess each one of us know, what is a currency, why we need it and what are it's uses. Since the inception of civilized human colonization currency has played a very important role in our lives. We see currency in various forms nowadays; they could be paper notes we use everyday, they could be the money we have in credit cards and debit cards. All these currencies are controlled by some central authorities like banks and governments. Here our topic of discussion is cryptocurrency, so in case of cryptocurrency, as the name suggests you can guess it's a some kind of currency; it may be in physical form or in digital form, we will find it out later. The word 'crypto' means concealed or secret, cryptocurrency may have something to deal with it; let's dig on it.

A cryptocurrency is a digital or virtual form of money which is used as a medium for payments. Here digital form 0f money suggests that a cryptocurrency isn't backed by any physical form of money; let me explain this to you with an example. Let's assume we are, me and you, doing a transaction through amazon pay. Assume you're the sender and I'm the receiver. You send me some money from your bank account digitally through amazon pay and I receive it on my amazon pay wallet or directly in my bank account. All the money are sent and received digitally, yet they are not completely digital because the money we transacted are somewhere backed by the physical form of money, it means we may have sent or received the money digitally but the banks settle those amounts with the physical form of money. But it in cryptocurrency it isn't valid. In case of cryptocurrencies there is no physical money to back those transactions, all and everything are done digitally; that's it.

Cryptocurrencies are decentralized networks based on blockchain technology. If you're wondering what is blockchain technology, just have a look on our previous article Understanding Blockchain, we've nicely explained it there. Let's get onto our topic. To understand decentralized network just again re-read the example I've given above. You and me did some transactions through amazon pay, here amazon pay is the medium but banks are the centralized agencies who have our money., who control those money and by whom we did the transaction. It's actually what you call traditional finance, in which banks are the centralized agencies who have all the control and all the power. They can use and manipulate all those money according to their wills and you can't even get to know about it. Government also has the power to interfere or manipulate all those currencies. But in case of cryptocurrencies it's quite impossible, why? we'll discuss it later on as we progress.

Cryptocurrencies are secured with cryptography and based on blockchain technology. They are based on peer-to-peer network system, which makes them immune to any type of manipulation.

The concept of cryptocurrency was first introduced to the world with the introduction of Bitcoin by Satoshi Nakamoto in 2009. In April 2011, Namecoin was created as an attempt at forming a decentralized DNS. In October 2011, Litecoin was released.

How does Cryptocurrency work?

A cryptocurrency is a method of exchange that is digital, encrypted and decentralized. Unlike the official government recognized currencies such as U.S. Dollar or Pound, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.

Cryptocurrencies maintain their own record-keeping through the use of blockchain. Blockchains create digital records - of transactions, certificates, or contracts -that can only be added to, rather than changed or deleted. A cryptographic proof comes in the form of transactions that are verified and recorded. This independent transaction log, crypto-converts insist, is far more secure than paper records or institutional digital accounts, which could be hacked.

New cryptocurrencies can only be made by a process called mining. They operate in a closed system, meaning that there is a fixed amount of them and new units can only be mined following a strict set of guidelines. Some currencies, such as bitcoin, have a software-enforced cap on how many units can be created. This limited supply makes each unit more valuable.

What are their uses?

It is worth wondering if the popularity that cryptocurrency has garnered over the years is hollow or not. However, even though it is still nowhere near to replacing institutionalized cash, cryptocurrency, especially Bitcoin, has found wide acceptance across the world.

Initially bitcoin was developed for the purpose of online payments but it wasn't widely accepted. The scenario has changed quite a lot in the last few years. Many companies and organizations have started to recognize it as a secure mode of payment.

Cryptocurrencies, especially Bitcoin, is one of the most lucrative investment options currently present. Bitcoin is the best performed asset class over all types of asset class in the last decade. It has grown from $0.0005 to $40,000 to this date. Its value appreciation is supremely dynamic and can prove to be an excellent avenue for capital expansion. Bitcoin has now become a store of value. Most people believe it as the hedge against inflation. 

Mining a cryptocurrency

Mining is the process in which new units of a cryptocurrency are created and sent into the circulation. Mining means solving cryptographic equations through the use of computers. It requires very high computational power. Mining is quite a very complicated process and it requires highly sophisticated computers to solve those extremely complex mathematical problems. In case of mining cryptocurrencies, mining hardware is specialized computers, created solely for the purpose of mining.

Cryptocurrency mining requires huge amount of electricity. It is estimated that nearly all cryptocurrency mining farms around the world collectively spend 60 to 80% of their earnings from mining in electricity bills; that's why most cryptocurrency mining farms choose locations with less electricity charges. However, cryptocurrency mining is quite profitable especially bitcoin mining. In fact most of the cryptocurrency mining farms out there are actually bitcoin mining farms. After bitcoin mining, Ethereum mining is the next most profitable mining business.

Types of Cryptocurrencies

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Nowadays there are more than 10,000 other cryptocurrencies out there and the number is growing each day. Some of those cryptocurrencies are actually very good projects and some others are ponzi schemes. You have to do your own research to find out those good projects which has the potential and has actual real life implementations.

Cryptocurrencies other than bitcoin are known as altcoins. Altcoin refers to alternative coins other than bitcoin. Some of the famous altcoins are Ethereum, Lite coin, Binance coin, Cardano, EOS, ripple, polkadot and Vechain etc. All these mentioned altcoins are very good projects and are working towards to solve some real life problems.

The total market capitalization of all the cryptocurrencies are near to $1.7 trillion. Bitcoin leads the chart with a market cap of $700 billion with the 40% market dominance. Ethereum is at number two with a market cap of $300 billion. Then the list is preceded by names such as tether, binance coin, cardano, dogecoin, ripple, polkadot, USD coin and uniswap.

How to make money from Cryptocurrencies?

There are quite a lot of ways to make money from cryptocurrencies. We'll discuss some of them here.

I've explained what is mining before. You've understood how to make coins by mining. So I'll not discuss about it more, but it's the prime way of making money from cryptocurrencies but it's not so easy for individuals to make money in this way. So, we'll discuss the other ways to make money in it.

The first way to make money from cryptocurrencies is by investing in them; Investing for long term. Investing in them is quite easy and simple. You just have to do some researches on them find the best coins to invest for the long term. Based on your researches invest in them and forget about them. You can hold them for weeks, months and years.

Like stocks you could also make money here by trading. Trading simply involves buying and selling coins for the short term; it could be for hours, days or weeks. Day trading is quite dangerous for beginners, I would suggest you to stay away from it until you've proper knowledge on it.

People also make money in cryptocurrencies by staking them on crypto exchanges. Many top global exchanges provide the facility to stake some popular coins on their exchange and in return give some interests to peoplle on their staked amounts.

One can also make money by participating in crypto airdrops and initial coin offerings(ICOs). What are airdrop and Initial coin offering is topic of discussion for an another day.

Should you invest in them or not?

Cryptocurrencies are only 10 years old in the world and are very new to the market. Our traditional investment options such as stocks, precious metals like gold and silver, oil and commodities are present here for centuries and are easily trustable and simple to learn about them. But cryptocurrencies are completely new to everyone. So, experts hold mixed opinions about investing in cryptocurrency. Because crypto is a highly speculative investment, with the potential for intense price swings, some traditional financial advisors don’t recommend people invest at all.

One thing to have a remark on is that some cryptocurrencies are giving some kind returns in a year that takes decades for the traditional investments. Whether you invest in them or not, it's completely your choice. But I would suggest you to have some exposure to cryptocurrencies; not too much but with the money which you can lose or that amount which you can afford to lose. Do not stay completely blind to them or also don't invest too much on them without knowing what are they.

For some remarks, these are my opinions, not a financial advice.