Bitcoin and Ethereum might be terms you have heard before. You may also have heard that people can “invest” in cryptocurrency to make thousands or even millions of dollar. But what is the point of cryptocurrency? Or, perhaps a better question…what’s the point?
The goal of cryptocurrency is to resolve the problems caused by traditional currencies. This means that currency holders have the power, and the responsibility, to fix them. All cryptocurrencies are bound to the same 5 properties and 3 functions. They also try to solve one or several real-world issues.
Let’s take a look at cryptocurrency and discuss why more people are beginning recognizing its value.
A cryptocurrency is digital money that can be used to make secure transactions.
The principle is that transactions are public, irreversible. Most of all, unhackable. Users can also control their digital finances.
There are many advantages to cryptocurrency. Here are some facts and four reasons to care about cryptocurrency. Read more at My Power Token.
1. Everyone Can Own Cryptocurrency
Cryptocurrency functions in a similar way to any national currency but with some key differences.
A government agency creates and regulates the current “fiat money”, which all now represents debt. A “IOU” is an international obligation issued by a country to any person who has currency in that country.
Cryptocurrency cannot be considered debt. It does not represent any debt. Its value is determined only by the trade value.
How cryptocurrency’s value is determined is affected by the fact that it is decentralized.
Nobody controls or owns cryptocurrency. Its price is not affected by a country’s political decisions or central bank’s monetary policy.
Notice: Some may consider cryptocurrency’s lack or centralization a means to avoid taxes. However, cryptocurrency is an asset, just as stocks and bonds. The United States taxes capital gains on any sale or exchange of cryptocurrency.
The centralized ledger, which is an entity responsible for managing transaction records such as a national bank, exposes currencies to manipulation and corruption. Cryptocurrency operates on a “distributed leger” or shared transaction list because it is not centrally managed. This type of ledger, which is the heart and soul of cryptocurrency, is also what leads to our next reason for why cryptocurrency is so important.
2. Cryptocurrency Is Nearly Impossible to Forge
Cryptocurrency is based on the blockchain. It’s the distributed ledger we mentioned above. Understanding blockchain technology can help you understand not only what cryptocurrency is but also why it is important for the future of digital currency.
The “block” is made of blocks of encrypted data. The “chain”, which is the public database that stores the blocks and links them sequentially, is the “block”.
Every block in the Blockchain has a unique code that distinguishes it among all other blocks. This unique code, known as a “hash”, is what makes each block in the blockchain stand out from all others. A blockchain’s blocks are added chronologically. A new block is added to a blockchain immediately after the first block was created. Each block also has its unique hash.
The ledger of the blocks is simultaneously distributed around the world, spread between thousands or, in Bitcoin’s case millions of computers. This is the simplest explanation of cryptocurrency.
Now imagine someone wanted a single block to be forged on the chain. In such a case, the person would have to manipulate all blocks from a point of history forward AND update all computers that hold copies the blockchain ledger.
Although theoretically this is possible, the effort required to make it happen is nearly impossible due to the cost of power and money involved.
3. Cryptocurrency Transactions Generally are Confidential
Traditional currencies are government-issued currency that can be used to privately transact and pay in person.
A small percentage of all fiat money in circulation is made of paper, metals and cloth. Large withdrawals from physical cash are immediately flagged by central authorities like financial regulators or governments.
Notice: Monitoring large cash transactions in cash is a good thing. It helps to protect the currency’s legitimacy as well as deterring criminal activities like money laundering.
Different is cryptocurrency. It is based on well-designed math that tracks the exchange between two persons or companies. This is mostly done anonymously. While the public can view the transaction list or ledger worldwide, the transactions of those who exchange cryptocurrency are private. Digital wallets hold cryptocurrencies by definition. The private key to the wallet belongs to the owner. The currency can only be transferred digitally using anonymized wallets.
Also, cryptocurrencies are meant to be anonymous. However, advanced forensics could uncover wallet holders’ identities. Monero is one example of a crypto-project that has been designed to be indestructible to identity discovery.
4. Cryptocurrency Security grows with time and value
We talked earlier about how hacking or manipulating data would take a huge amount of money and power to accomplish. To put it another way, hackers would need to be able to control at least fifty percent the computers comprising the “consensus.” network.
The consensus network is simply the collection of all computers that has received copies of the blockchain. It is difficult to hack more established cryptos, such as Ethereum or Bitcoin.
It was easier to gain control of the majority of the cryptocurrency network’s early days because it was smaller.
Investors or users of newer crypto currencies should be aware of this important fact. Hackers are more likely than ever to hack a smaller network.
A group called BitFury put together a large amount of computers to be used for “mining” and this is an example of what almost happened with Bitcoin early in its life.
What is cryptocurrency mining exactly?
Mining is the method by which cryptocurrency transactions and their hashes are verified. It requires high computing power. Users can lend their computers and receive transaction fees in exchange for supporting the cryptocurrency.
BitFury built a verification network and mining pool that was extremely profitable as Bitcoin gained in value. But, they were just about to reach fifty percent of overall network strength in 2014.
While hacking and manipulating bitcoin was not their goal, the pool owners decided to limit their influence in the Bitcoin network. The pool owners made a promise not to exceed 40% of the overall strength of the network. As currency holders could fear a 51% attack by one operator, the pool owners made this promise to protect Bitcoin’s worth.
BitFury profits would be negatively affected if Bitcoin lost value. Another form of security in blockchain is the need to maintain a balance between potential profit, network power, and other factors. Too much network power could lead to currency instability and loss of profits.
So what is Crypto’s Point?
Imagine that you want to send money from your computer to a friend. There are many ways this transaction could go wrong. Including:
Sometimes, a bank or financial institution may experience a technical problem such as the machines or systems not working properly.
It is possible to hack your account. For instance, identity theft and denials could occur.
It could have been your account or a friend’s account that exceeded the limit.
All of these scenarios are possible due to the central point for failure: The financial institutions.
It is this reason that cryptocurrency was created.
Picture the same scenario for two people who use bitcoin or another cryptocurrency. An alert appears asking you to confirm you want bitcoins. Once you accept, the transaction can be completed immediately.
The system authenticates your identity and verifies that you have the necessary balance to process the transaction. After this, the payment will be transferred to your friend’s wallet. This transaction is faster because it does not involve any bank-related technical steps or glitches.
The objective of cryptocurrency, as it is called, is to end all issues associated with traditional banking. There are no limits on how much you can transfer with bitcoin. Accounts are almost impossible for hackers to hack, as you don’t need to use any financial institution.
International crypto transactions are quicker than traditional wire transfer, which has been around since 1872. Contrary to wire transfers, which can take several hours or even days to complete, crypto transfers only take minutes, if they are not seconds.
What Problem can Cryptocurrency Solve
Western Union and international money transfer companies can be tedious, bureaucratic, slow and cumbersome. The process of transferring bitcoins is straightforward and easy once the users are familiar with it.
Another reason why cryptocurrency can be so valuable is its one-to-1 nature. It works on a peer–to-peer network structure that eliminates the middleman. This significantly lowers transaction costs.
Fiat currencies are subjected to many risks and restrictions. Banks and other similar institutions can be affected by boom-bust cycles and bust cycles. Bank crashes can also occur in some situations, as was the case several times previously.
The upside is that crypto is autonomous, and not subject to government policies. You have total control over your money as a crypto-owner.
The robust encryption utilized throughout the blockchain network acts as a powerful safeguard against fraudsters and account tampering.
Bitcoin’s price rises annually by an average of 200% as an investment. It is impossible to match this. Stocks, real estate and gold are not comparable.
