Understanding Cryptocurrency: A Comprehensive Guide

What is cryptocurrency, crypto-currency and crypto? What does these terms mean? Yes, we've heard that it is a digital or virtual form of currency, but what can it be used for, is it a legal tender and what's the craze about it anyways? These and many more are the questions that might echoing in your head everyday! But hey, we have all the answers to your questions in this article.

What is Cryptocurrency?

Cryptocurrency, sometimes called crypto-currency, or crypto, is a digital or virtual form of currency that that works as a medium of exchange similar to the dollar, but in a digital form using a computer network that doesn't depend on a central authority such as a government or bank, to maintain or regulate it.

The term "cryptocurrency" combines two concepts: cryptography and currency. It uses cryptography to secure transactions by encrypting information into an unreadable format, thus, providing security and safety. A Cryptocurrency is stored in a digital wallet.

Types of Cryptocurrency

There are over 4,000 cryptocurrencies in existence! Sounds many right? But don't let that number intimidate you. While that number sounds true, not many of those cryptocurrencies dominate the market. Let's explore a few key players.

Bitcoin (BTC): Founded in 2009, this is the first, most recognized and widely used cryptocurrency. It was developed by Satoshi Nakamoto, an unknowm term for an individual or group of people who haven't made their identity known to the public.

Without doubts, Bitcoin is regarded as the gold standard of crypto.

Ethereum (ETH): If Bitcoin is seen as digital gold, then Ethereum will be considered digital oil.

Founded in 2015, Ethereum is a blockchain platform with its native cryptocurrency called Ether, the second largest crypto by market capitalisation. 

Ripple (XRP): Ripple focuses on providing real-time payment settlements and currency exchange services to financial institutions such as banks and payment processors. Its native cryptocurrency, XRP, is used as a bridge currency in these transactions.

Litecoin (LTC): Often considered the silver to Bitcoin's gold, Litecoin offers faster transaction confirmation times and a different hashing algorithm. It's a popular choice for individuals who value speed and efficiency.

Cardano (ADA): Cardano is a platform like Ethereum that is designed to allow smart contracts for financial applications. It's differentiated by a commitment to peer-reviewed scientific research as its basis.

Why Use Cryptocurrency?

Now that we know what cryptocurrency is and the types, the next question that naturally follows is, "Why use it?" What makes cryptocurrency special when we already have cash and some other form of payments available?

Cryptocurrencies are decentralized. In other words, they are not controlled by the banks or government. But then, they also offer faster and cheaper transactions too, especially for international transfers.

Moreover, transactions made with cryptocurrencies are pseudonymous. Transactions history are stored in the blockchain, the identities of the people involved in the transactions, however, aren't publicly disclosed. This way, it provides some level of security which the traditional payment systems lacks.

Cryptocurrency and its uses?

If cryptocurrency is indeed a medium of exchange, then what can you buy with it? Cryptocurrency is still new and even though the number of adoption rate is growing, it hasn't gotten close to what we see with the traditional payment systems. Lets look at some things in which cryptocurrencies can be used for.

1. Online Shopping:

Unlike the first few years of crypto, many online retailers are now accepting payments in the form of cryptocurrency. Companies such as AT&T, Microsoft, Shopify, Home Depot, overstock, and many other companies accept Bitcoins and other cryptocurrencies as for payment.

2. Investing and Trading:

Cryptocurrencies has grown and become a new asset class and can be used for investing and trading. The volatile nature of their prices has opened up many opportunities for traders looking to profit from price swings.

3. Remittances: 

Sending money abroad do come with the hefty fees and lengthy time in processing it. However, crypto transfers are fast and just cost a fraction.

4. Smart Contracts: 

Platforms like Ethereum have enabled the creation of 'smart contracts', which automatically execute transactions when certain conditions are met. This has profound implications for industries like real estate and law.

5. Decentralized Finance (DeFi):

DeFi is a fast growing sector within the crypto industry. It aims to do what the structures of traditional finance does, such as lending and borrowing, but in an improved way, while cutting of intermediaries such as banks.

What Makes Cryptocurrency Attractive?

With its increasing popularity amongst global investors, cryptocurrency is solidifying its position in the financial world. For instance, Bitcoin makes it simpler to transfer funds without the involvement of banks and other financial intermediaries.

Here are a few more compelling benefits of cryptocurrency:

1. Inflation Protection

Many view cryptocurrency as a hedge against inflation, as the value of many traditional currencies depreciates over time. The finite supply of cryptocurrencies, such as Bitcoin, can act as an inflation safeguard. As demand increases, the value of these cryptocurrencies tends to rise, providing inflation protection in the long term. 

2. Transactional Speed

Cryptocurrency transactions are completed in a matter of minutes, making them appealing to many. Compared to the several days it usually takes for transactions to be settled within U.S. financial institutions and the 24-hour wait time for wire transfers, cryptocurrency is significantly faster. 

3. Cost-Effective Transactions

Cryptocurrency makes transferring funds globally more affordable. Transactional costs are very minimal or even non-existent with cryptocurrency because intermediaries like Visa, Mastercard, etc are cut off.

4. Decentralization

Cryptocurrencies represent a new model of decentralized money. They challenge the monopoly of traditional currency and free money from governmental control. Cryptocurrency enthusiasts argue that this makes cryptocurrencies safer and more secure. 

5. Diversity

Investments in cryptocurrency can be profitable. The market has significantly expanded over the past decade. The price movement of cryptocurrencies appears unrelated to other markets, such as stocks or bonds, thus providing a potential source of portfolio diversification. 

6. Accessibility

Investors only need a computer or a smartphone with internet access to use cryptocurrency. No identification verification, credit check, or background is needed to open a cryptocurrency wallet. 

7. Safe and Secure

The only way to access your funds is by using your crypto wallet’s private key. The blockchain system and network of computers that verify transactions secure your funds. 

8. Transparent

Thanks to the decentralized nature of blockchains, anyone can view money transfer transactions by using a blockchain explorer to track live transfers. 

9. Private

Due to the absence of third-party intervention, your account has a level of privacy. Transactions are pseudonymous, and nothing personal about you is disclosed. 

10. Effortless Currency Exchanges

Anyone can buy cryptocurrency using traditional currencies like the British Pounds Sterling U.S. Dollar, Indian Rupee, or European Euro, and more.

What Are the Downsides of Cryptocurrency?

Is cryptocurrency a secure investment? Cryptocurrency is often viewed as a volatile investment owing to significant investor losses caused by scams, hacks, and technical errors. Although the cryptographic security underpinning crypto is generally robust, the complexity associated with utilizing and storing crypto assets can pose a considerable hurdle for newcomers.

If you are new to cryptocurrency, it is crucial you should be aware of the risks associated with speculative assets, in addition to market risks, such as:

1. User risk:

Finally, there's the huge risk of loss. One major reason why some people ditch traditional banking system for cryptocurrency is the freedom offered by the latter. Some cryptocurrencies will give you total control of your money, but know this; there won't be any bank to report to if you mistakenly send your crypto to the wrong address and you want it reversed. How about you lose your private key? There's no way around it.

2. Regulatory risks:

Regulatory risk is also a key factor. Initially, the crypto industry wasn't taken serious by various governments and regulatory bodies worldwide. In fact, the regulatory status of some cryptocurrencies remain undefined. However, as they continues to grow in popularity, more attention is been drawn to them with various forms of scrutiny. A sudden regulatory clampdown could complicate selling cryptocurrencies or trigger a market-wide price slump. The take home is here is that any form of regulation (positive or negative) will impact the value, and even the legality of certain cryptocurrencies.

3. Crypto Value: 

Firstly, the value of cryptocurrencies can be extremely volatile. Imagine waking up one morning to find that your digital wallet's value has halved overnight. Scary, right? Volatility can provide opportunities for huge gains, but it also carries significant risk of loss.

4. Counterparty risks:

A substantial number of investors and merchants entrust exchanges or other custodians with their cryptocurrency storage. Though the Blockchain technology is very secure, the platform where you buy and sell your crypto might be vulnerable to hacking. If one of these third parties suffers theft or loss, it could result in the total loss of one's investment.

5. Management risks: 

The absence of consistent regulations provides limited safeguards against fraudulent or unethical management practices. Numerous investors have suffered major losses due to management teams failing to deliver a product.

6. Programming risks:

Several investment and lending platforms employ automated smart contracts to manage user deposits. Investors using these platforms face the risk of losing their investment due to bugs or exploits in these programs.

7. Market Manipulation:

Unethical conduct by influential individuals, organizations, and exchanges remains a significant issue in the cryptocurrency market.

Despite these risks, cryptocurrencies have experienced significant price increases, with the total market capitalization exceeding $1 trillion.

Even with the speculative nature of the asset, some individuals have amassed significant wealth by taking on the risk of investing in early-stage cryptocurrencies.

Are there any Cryptocurrency scam or fraud?

Regrettably, the rise of cryptocurrency has given birth to an unfortunate companion: cryptocurrency fraud. Scams involving cryptocurrencies have become increasingly prevalent, and it's crucial to be aware of these malicious practices.

1. Deceptive digital domains:

Fraudsters may set up websites adorned with convincing testimonials and heavy crypto-lingo. These sites promise astronomical returns on your investments, as long as you continue to contribute more. However, these supposed returns are nothing more than empty promises.

2. Crypto-based pyramid schemes: 

In these situations, the fraudsters create fictitious investment opportunities in cryptocurrencies. They concoct an illusion of remarkable returns by using the funds from new investors to pay the old ones. A notorious example is the BitClub Network, which successfully collected over $700 million before its operators were legally charged in December 2019.

3. Counterfeit celebrity confirmations:

Some con artists impersonate billionaires or other notable figures online, pledging to increase your crypto investments manifold. In reality, they only intend to take what you send them. They may also employ messaging apps or chat rooms to spread rumors that a high-profile entrepreneur is supporting a specific cryptocurrency. Once they have convinced investors to purchase and increased the price, the scammers sell their shares, causing the currency to plummet in value.

4. Romance Scam:

A particularly cruel strategy, the FBI has highlighted a surge in online dating scams involving cryptocurrencies. Fraudsters romance unsuspecting individuals they meet on dating platforms or social media, persuading them to trade or invest in digital currencies. From January to July 2021 alone, the FBI's Internet Crime Complaint Center received over 1,800 reports of such romance scams, culminating in losses exceeding $133 million.

Apart from these, scammers may present themselves as genuine crypto traders or establish sham exchanges to con people into giving them money. There's also the alarming trend of fraudulent sales pitches for individual retirement accounts (IRAs) in cryptocurrencies. And let's not forget the good old hacking of digital wallets, where the perpetrators break into these secure spaces to snatch away your virtual currency.

Being aware of these scams is the first step towards securing your investments. The next step is to stay vigilant, conduct thorough research, and make well-informed decisions in your cryptocurrency journey. Always put safety first when diving into the crypto world because as exciting as the crypto sphere can be, it also holds the potential for considerable risk.

 Frequently Asked Questions:

Q. Will Crypto be the future?

A. Crypto is widely seen as the future. The decentralization, security, and global access that it provides shows it will play a vital role in shaping the financial landscape in shaping the future.  But then, it all depends on the adoption progress, technology and the regulatory framework.

Q. Are Crypto Transfers taxable?

A. Yes, crypto transfers are taxable in many countries. Just because cryptocurrencies operate in a decentralised manner doesn't exempt them from taxation. Though the rule vary according to country, most tax authorities view cryptocurrencies as property, and thus, capital gains tax applies when you trade, sell, or use your crypto to make purchases.

Q. When did Cryptocurrency Start?

A. Cryptocurrency can be traced back to 2008, with the creation of Bitcoin by Satoshi Nakamoto, an unknown individual or group of persons. Ever since then, we've seen thousands of cryptocurrencies (called altcoins), with each offering their own unique value propositions.

Q. What Crypto has the lowest fees?

A.  Cryptos such as Steller (XLM), Ripple (XRP), and NEO has some of the lowest transaction fees in the market. However, there is no exact crypto that has the lowest fees, since crypto currency transactions can vary, depending on the network congestion, transfer speed, and the cryptocurrency itself.