Cryptocurrency: A beginner's guide

Cryptocurrency is a virtual or digital currency that can be used as an alternative form of payment and is created through an encryption algorithm. Cryptocurrency uses cryptography as a security means, making it difficult to double spend or counterfeit. Most of them exist on decentralized networks through blockchain technology. Unlike other traditional currencies used by central banks and governments, cryptocurrencies depend on cryptographic techniques for the security of transactions and to control the formation of new units. They have lately become popular alternatives for making online payments. Before one converts their real monetary currencies into different forms of cryptocurrencies, it is important to understand what cryptocurrencies are, the risks of using them, and how one can protect their investments. Below are the key aspects of cryptocurrencies.

Characteristics of cryptocurrencies

Cryptographic techniques – Cryptocurrencies use cryptographic techniques to enhance the security of transactions and control the formation of new units. They use private and public keys to transfer assets and secure ownership.

Decentralization – Cryptocurrencies function on decentralized networks and mainly use blockchain technology. This implies that they do not rely on governments, central banks, or any other central authority for their control.

Blockchain technology – Blockchain refers to a distributed ledger recording every transaction taking place across a computer network. It enhances the immutability, transparency, and security of transaction data.

Anonymity – Although transactions are anonymous and recorded on a blockchain, users remain anonymous. Their personal information is never revealed and they are only represented through cryptographic references. This enhances the users’ privacy.

Limited supply – Cryptocurrencies have a controlled supply, which means that there can only be a maximum number of units formed at a specific time. For instance, bitcoin only has a fixed supply of 21 million coins.

Types of cryptocurrencies

Bitcoin (BTC)

It is the first and most commonly known cryptocurrency. It was introduced by a group of investors or an anonymous person in 2009, through the name Satoshi Nakamoto. Its popularity in the world has continually increased since then, and has inspired developers to create many other cryptocurrencies. The competing developers either aim at replacing it as a payment system, or use it as a security token or utility in other emerging technologies and blockchains.

Ethereum (ETH)

This is an open-source, distributed, and decentralized computing platform allowing the creation of decentralized applications (DApps), and smart contracts. Ether is the original cryptocurrency facilitating transactions on Ethereum network.

Ripple (XRP)

Ripple is a digital payment protocal and network that is based on blockchain. It is mainly developed for making across the border payments and aims at facilitating international money transfers at minimal costs.

Litecoin (LTC)

Litecoin is a decentralized peer-to-peer digital currency allowing fast, almost zero cost payments to any person in the world. It was created as a modification of bitcoin and is intended to allow faster, confirmation times on transactions.

Cardano (ADA)

Cardano is a blockchain platform that is known for its attention to sustainability and security, through its combination of pioneering technologies. it was created through a peer-reviewed research and developed using evidence-based methods. it focuses on providing a more balanced and sustainable ecosystem.

Risks and challenges

Security concerns – Even though blockchain is considered secure, the users are vulnerable to fraud, hacking, and other security threats.

Regulatory uncertainty – There are varying levels of regulation and acceptance in different countries for cryptocurrencies. This poses potential legal challenges and uncertainty to the users.

Volatility – Prices for cryptocurrencies is likely to be volatile leading to unexpected fluctuations in value over short periods.

Acceptance and adoption – Cryptocurrencies have not yet attained world-wide acceptance as forms of investment and payment. There is still resistance in some sectors and this limits their usability.

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