Cryptocurrency, also known as crypto, refers to digital or virtual currencies that utilize cryptography for secure transactions.
Unlike traditional currencies, cryptocurrencies lack a centralized authority overseeing their issuance and regulation. They rely on decentralized systems to record transactions and create new units.
Cryptocurrency functions as a digital payment system that operates without the need for banks to verify transactions. It enables seamless peer-to-peer transactions, allowing anyone anywhere to send and receive payments.
Instead of physical currency, cryptocurrency payments exclusively exist as digital records within an internet-based database, documenting particular transactions.
The name “cryptocurrency” stems from using encryption to verify transactions. The process entails advanced coding methods to securely store and transmit cryptocurrency information between wallets and public ledgers. The primary goal of encryption is to ensure the security and integrity of transactions.
Bitcoin, founded in 2009, was the first cryptocurrency and remains the most well-known today. Much of the interest in cryptocurrencies revolves around trading for profit, with speculators often driving prices to soaring heights.
Cryptocurrency and Blockchain
When the holders transfer cryptocurrency funds, the transactions are recorded in a publicly accessible ledger called Blockchain. This ledger distributes and operates cryptocurrencies by timestamping the transactions into “blocks.”
The end result is a tamper-resistant digital ledger of cryptocurrency transactions. According to crypto media platform Bitrates, the decentralized nature and cryptographic algorithm of Blockchain make it “immune to attacks” and almost impossible to get hacked.
Cryptocurrency units are generated through a procedure called mining. It involves computers solving intricate mathematical problems to produce coins. Users can also obtain currencies from brokers and manage or utilize them using cryptographic wallets.
Cybersecurity service Kaspersky noted that owning cryptocurrency does not mean owning anything tangible. Rather, it means possessing a key that allows the transfer of a record or unit of measure from one individual to another without the need for a trusted third party.
While Bitcoin may have existed for a while now, cryptocurrencies and blockchain applications are still evolving within the financial domain.
Kaspersky added that there are more potential uses expected in the future. In the future, it could be utilized for a wider range of purposes, including facilitating transactions related to bonds, stocks and various other financial assets.
Types of cryptocurrency
According to Forbes, there are around 22,904 types of cryptocurrencies as of March 2023. Some of the most prominent ones include Bitcoin, Ethereum, Litecoin and Ripple.
Bitcoin was developed by an individual or group of people operating under the pseudonym Satoshi Nakamoto. To distinguish cryptocurrencies other than Bitcoin from the original digital currency, they are commonly called “altcoins” as a collective term.
Ethereum, established in 2015, is a blockchain platform that features its own cryptocurrency called Ether (ETH) or Ethereum. It has secured its position as the second most prominent cryptocurrency globally, following closely behind Bitcoin.
Litecoin, similar to Bitcoin, has been at the forefront of developing new innovations. It includes faster payments and enhanced transaction capabilities.
Then there is Ripple. Founded in 2012, it is a distributed ledger system that extends beyond cryptocurrencies, allowing the tracking of various types of transactions. The company behind Ripple has collaborated with multiple banks and financial institutions.
Buying, selling and storing
Forbes underscored the rapid adoption of cryptocurrencies has opened up various avenues for purchasing them. Users now have multiple options, including central exchanges, brokers and individual sellers.
Among these, exchanges like Coinbase and other platforms have emerged as the easiest and most popular methods for buying and selling cryptocurrencies.
Crypto-native exchanges provide a wide range of digital assets for users to buy and sell. Platforms like PayPal facilitate purchasing and selling certain digital assets in the mainstream realm. Crypto ATMs are also available in some parts of the world.
Regarding payment methods for purchasing assets, platforms typically offer bank transfers, crypto transfers or credit card payments. It is also possible to buy cryptocurrencies with cash in person through peer-to-peer transactions. However, the availability of buying and selling options may vary depending on the region.
Once purchased, crypto holders can store their cryptocurrencies in digital wallets, categorized as either “hot” or “cold.” Hot wallets are connected to the internet. It allows for easy transactions but makes them vulnerable to theft and fraud.
On the other hand, cold storage wallets offer higher security but are less convenient for frequent transactions.
Initially, Satoshi Nakamoto envisioned Bitcoin as a medium for everyday transactions. It allows the holders to purchase anything from a cup of coffee to a computer or even real estate. This concept, however, has yet to materialize fully, according to Kaspersky.
While there is a growing trend of institutions accepting cryptocurrencies, significant transactions involving digital currencies remain uncommon. However, buying a wide range of products from e-commerce websites using cryptocurrencies is still possible.
Security and safety
Blockchain technology, as explained by Bitrates, is highly secure. It is a collection of different technologies that can be combined to create diverse applications and outcomes.
These transactions are verified using suitable methods based on the specific blockchain application. The most common approaches include utilizing a “proof of work” or “proof of stake” process.
Ensuring the security of cryptocurrency transactions often involves a two-factor authentication process. Users may be required to provide a username, password and undergo identity verification by entering an authentication code sent via text to their phone.
While security measures are in place, cryptocurrencies are not immune to hacking attempts. Some notable instances include the Coincheck hack, which resulted in a loss of $534 million.
There was also the BitGrail hack, which amounted to $195 million. According to Investopedia, these incidents rank among the largest cryptocurrency hacks of 2018.
Unlike traditional government-backed currencies, the value of virtual currencies is solely determined by supply and demand dynamics. This can lead to significant price fluctuations, offering substantial gains for investors and potential for substantial losses.
Kaspersky highlighted that cryptocurrency investments are subject to lesser regulatory safeguards in comparison to conventional financial products like stocks, bonds and mutual funds.
Regulations in the crypto industry
Over the years, the U.S. has strengthened its regulatory oversight of the crypto industry. For instance, the Securities and Exchange Commission (SEC) has taken action against major platforms like Binance and Coinbase.
Forbes reported that these recent lawsuits filed by the SEC have prompted industry experts to call for the establishment of “clear, comprehensive and forward-thinking regulations.” The regulations aim to safeguard stakeholders, encourage fair competition and foster sustainable growth within the crypto industry.
Steve Rosenblum, the founder of Libertify.com, an AI-driven risk management solution for crypto fund managers, emphasized the need for regulatory frameworks to protect and support the evolving crypto landscape.
However, given the young and evolving nature of the crypto industry, it remains challenging to provide comprehensive legal clarity across all aspects of this space.
