You might have heard of the term cryptocurrency many times and might be a little bit familiar with it. In this article, we will explore in deep the meaning of cryptocurrency.
What Is a Cryptocurrency?
To understand the concept of cryptocurrency you need to think of what is digital. A cryptocurrency is a digital currency that is not physical but virtual and is meant to be used as a medium of exchange. It is secured by cryptography, which aims at securing it against any counterfeit and helping it work the way it does. Furthermore, there is a limit for how many units of cryptocurrencies can exist, for example, for Bitcoin, the limit is 21 million. Once there are 21 million Bitcoins, no more will be produced. Another important feature of cryptocurrency is that the process of transfer of funds can be easily verified. This is due to algorithms that it uses and that helps determine whether a transaction is valid or not. Also, cryptocurrencies operate independently from banks and other central authorities as they operate in a decentralized manner. Finally, new units are allowed to be added when certain conditions are met only. In the case of Bitcoin, block needs to be added to the blockchain so the miner can be rewarded with bitcoins and be able to generate new Bitcoins.
What makes Cryptocurrencies special?
1. It requires very little or no transactions costs unlike bank transfers
2. It allows the user a 24/7 access to their money
3. It has no limits on withdraws and purchases
4. It allows anyone to use it
5. Setting up an account requires little or no documentation and paperwork
6. International transfers require minutes or seconds rather than hours (like in the case of wire transfers)
What does crypto in cryptocurrencies mean?
Crypto refers to the word cryptography, which is a method that secures communication through the internet when third parties are present, using encryption and decryption. Usually, third parties are considered to have ill intents such as wanting to steal your data or to eavesdrop on your communication. Cryptography relies on computational algorithms, a private key (a digital signature of the user that stays hidden) and a public key (behaves like the digital identity of the user that he/she can share with everyone).
How does a cryptocurrency transaction happen?
1. The transaction details: these details include the identity of the person who will receive the transaction and the number of cryptocurrencies that will be sent to him/her.
2. The transaction passes through an algorithm
3. The output obtained by the algorithm is passed through a signature algorithm using the users’ private key, to be able to identify the user
4. The output is distributed across the network to be verified using the sender’s public key. The people who do the verification process are known as miners
5. Then the transaction is added to the blockchain where it cannot be changed again
There are more than 1600 cryptocurrencies in the market and you can choose the one that suits you the best.