What is a Cryptocurrency?
Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Bitcoin became the first decentralized cryptocurrency in 2009. Cryptocurrency is a type of digital currency that uses cryptography for security and anti-counterfeiting measures. Public and private keys are often used to transfer cryptocurrency between individuals. Cryptocurrency transactions are anonymous, and untraceable. For cryptocurrency enthusiasts, this anonymity is a superior technology, as it empowers individuals rather than institutions. Cryptocurrencies typically feature decentralized control and a public ledger which records transactions.
Cryptocurrency works much like a medium of exchange using cryptography to secure the transactions and to control the creation of new units. These are frequently called altcoins, as a blend of bitcoin alternative. Cryptography is used to secure the transactions and to control the creation of new coins. The first cryptocurrency to be created was Bitcoin back in 2009. Today there are hundreds of other cryptocurrencies, often referred to as Altcoins.
Gavin Andresen, says that cryptocurrency is designed to bring back a “decentralized currency of the people,” taking centralized banks out of the equation. Because bitcoins must be cryptographically signed each time they are transferred, each bitcoin user has both public and individual private keys.
While hundreds of different cryptocurrency specifications exist, most are derived from one of two protocols; Proof-of-work or Proof-of-stake. All cryptocurrencies are maintained by a miner’s community that has set up their computers or ASIC machines working intensively in the validation and processing of transactions.
History of Cryptocurrency
The first cryptocurrency was Bitcoin. Bitcoin was created in 2009 by a pseudonymous developer named Satoshi Nakamoto. Bitcoin uses SHA-256, which is a set of cryptographic hash functions designed by the U.S National Security Agency. Bitcoin is a cryptocurrency that is based on the proof-of-work system.
Namecoin, was the first altcoin and was launched in April 2011; it was created with a new concept – to form a decentralized DNS to make internet censorship more difficult. Litecoin, came second in October 2011. The altcoin was released and became the first successful cryptocurrency to use scrypt as its hash function rather than SHA-256. This gave miners the ability to go back to their old desktop mining machines to mine for litecoins without the purchase of specific hardware.
After these two a lot of innovations have been made with new alternative crypto coins. A lot of copy cats have been launched and some have been quite successful.
As of March 2015, hundreds of cryptocurrency specifications exist; most are similar to and derived from the first fully implemented decentralized cryptocurrency, bitcoin. Within cryptocurrency systems the safety, integrity and balance of ledgers is maintained by a community of miners: members of the general public using their computers to help validate and timestamp transactions adding them to their specific Blockchain in accordance with a particular timestamping scheme.
Cryptocurrency is produced collectively by the entire cryptocurrency system: his production comes at a rate which is defined when the system is created and which is publicly known. The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger, having financial incentive to do so.
Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This can mimic the scarcity (and value) of precious metals and avoid hyperinflation. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies are less susceptible to seizure by law enforcement. Existing cryptocurrencies are all pseudo-anonymous, though additions such as Zerocoin and its distributed laundry feature have been suggested, which would allow for true anonymity.
There are many perceived assumptions that cryptocurrencies need to reach before they can be considered as a mainstream currency. Because cryptocurrencies do not fully meet some features of fiat currency, few merchants accept them, and this weakens the value of cryptocurrency. While cryptocurrencies are digital currencies that are managed through advanced encryption techniques, many governments have taken a cautious approach toward them, fearing their lack of central control and the effects they could have on financial security. Regulators in several countries have warned against their use and some have taken concrete regulatory measures to dissuade users.
Many people accuse cryptocurrencies to be the lair of scammers, drug dealers and other criminals. And, unfortunately, this is a sad reality. Some cryptocurrency systems are pre-mined, have hidden launches, or have extreme rewards for the first miners. Pre-mining means currency is generated by the currency’s founders prior to mining code being released to the public. The community refers to it as a deceptive practice, but it can also be used as an inherent part of a digital cryptocurrency’s design, as in the case of Ripple.
There are innumerous ways to permanently lose cryptocurrency from local storage due to malware or data loss. This can also happen through the destruction of the physical media, effectively removing lost cryptocurrencies forever from their markets.
Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction and this can be very good but sometimes can also become a pain. One of the features cryptocurrency lacks in comparison to conventional methods of payment is consumer protection against fraud, such as chargebacks to credit cards.
Unlike cryptocurrency, traditional financial products have strong consumer protections; if a cryptocurrency is lost or stolen, there is no intermediary with the power to limit consumer losses.
The cost of entry is not too high for casual miners who getting in digital currency, however, with a lot of technological advancement many cryptocurrencies, are already using specialized hardware and software to produce cryptocurrency coins such as Litecoins and this weakens the market.
Many have been expressing concerns that cryptocurrencies are extremely risky due to their very high volatility and potential for pump and dump schemes, but, when you come to think of it – doesn’t Bitcoin works like that? All digital currencies, cryptocurrencies, or alternative coins carry a lot of investing risks. They are all too volatile to say that it’s not. Investing in cryptocurrency, can make you a lot of profits, but it can also can give you a lot of losses.