What is Cryptocurrency?

  • Kanan Arora
  • May 09, 2021
  • Financial Analytics
What is Cryptocurrency? title banner

Introduction to Blockchain And Cryptocurrency

 

A cryptocurrency is a digital currency secured by cryptography and based on blockchain technology. Blockchain as a concept might seem sophisticated, and indeed it is. But, in simple terms, a blockchain is a type of database and is essentially a collection of information in an electronic medium.

 

A blockchain is a digital ledger that organizes data into groups called blocks, each containing a collection of data. Blocks have specific storage capacities which once filled, are chained onto the previous block, creating a data chain known as a "blockchain." All new information introduced after a newly inserted block is compiled into a new block and added to the chain. 

 

Blockchain networks used by most cryptocurrencies are spread across many servers, making cryptocurrency decentralized. This decentralization of cryptocurrencies is the distinguishing factor that separates cryptocurrency from other asset classes.

 

This structure enables cryptocurrency to exist outside government control and other central authorities who have considerable control over certain asset classes. 

 

Cryptocurrency enthusiasts are fascinated by this concept. And a lot of the experienced market participants and government agents are skeptical since they believe that some amount of control is necessary and also perhaps because they do not completely understand the fundamentals behind cryptocurrency and its uses or perhaps because they just don’t trust the asset class with their money.

 

Cryptocurrency has gained significant interest in the near past and a lot of contrasting views are seen on the same. In this blog, we’ll understand the pros and cons of cryptocurrency, go through a few of the significant cryptocurrencies, cryptocurrency exchanges and try to form an unbiased view on cryptocurrencies.

 

 

Pros and Cons of Cryptocurrencies

 

Below are the pros of cryptocurrencies;

 

  1. Transparency: One of the main reasons cryptocurrency is considered to have immense potential for societal change is its transparency. Due to blockchain technology, anyone can look at the transaction data at any time. This is a massive plus for those who want a more transparent financial system.

 

  1. Accessibility: Bitcoin is accessible all over the world all around the clock. This makes it much more accessible than other asset classes. Most of the time, investors can access cryptocurrencies with mobile phones in a hassle-free manner.

 

  1. Privacy and Security: The blockchain database is made up of a series of difficult-to-solve cryptographic puzzles. As a result, cryptocurrency transfers are more reliable than regular electronic transactions. Cryptocurrency is private, ideal for those who respect their online anonymity and are hesitant to share personal information.

 

  1. Inflation Resistance: Inflation poses a silent threat in almost all asset classes, particularly the currencies issued by governments. Since cryptocurrencies have a finite supply, a government can't devalue them by increasing the supply, as can be done with fiat currency, and therefore, cryptocurrencies are inflation-protected in most of the cases.

 

Following are the cons of cryptocurrencies 

 

  1. Use for illegal activities: Since cryptocurrencies are much more private and secure, it’s hard to regulate the transactions done in illicit activities using cryptocurrencies, making cryptocurrencies attractive to people who partake in them.

 

  1. Volatility: Cryptocurrencies are highly volatile, and therefore, most of the participation in cryptocurrency is for investing and trading purposes. There is actually a little transaction in cryptocurrency for buying and selling of goods.

 

Since cryptocurrencies are much more volatile than other asset classes, they possess with them a much more significant risk component as well, which needs to be understood by the investor/ trader

 

  1. Impact on the environment: Cryptocurrency mining is the process of creating new cryptocurrencies by solving a computational puzzle. Mining requires a lot of computing power and electricity, making it a very energy-intensive process.

 

Most of this energy requirement is fulfilled by using coal which increases the carbon footprint of countries involved in mining cryptocurrencies.

 

  1. Data losses and hacks: Since the source code of cryptocurrencies is virtually untraceable, losing the key to one’s crypto wallet could result in substantial financial losses. Even though cryptocurrencies are highly secure, cryptocurrency exchanges are susceptible to hacks.

 

(Must check: What is Digital Money?)

 

 

Top Cryptocurrencies


 

Top cryptocurrencies with price, market capitalization and tokens in circulation as of 28th April 2021, Image Source

Top cryptocurrencies as of 28th April 2021, Image Source



More than 9,400 different cryptocurrencies are traded publicly globally, and more than 370 exchanges facilitate their transactions. Just like Initial Public Offerings (IPO), cryptocurrencies raise money through Initial Coin Offerings (ICO). During the ICO, tokens are given out, just like stocks are given out during an IPO.

 

With the increase in the interest in cryptocurrencies, there has been a rapid rise in the number of new cryptocurrencies entering the crypto-space in the past few years and according to a lot of crypto-researchers, this rise is expected to continue.

 

(Note: All the below data is captured from the website CoinMarketCap) 

 

  1. Bitcoin (BTC): 

 

Bitcoin is a cryptocurrency that Satoshi Nakamoto, an alias, created in 2009. It is the most well-known currency and is the largest cryptocurrency in terms of market capitalization, with a market capitalization of more than $1 trillion, as mentioned by CoinMarketCap. Currently, there are more than 18.5 million Bitcoin tokens that are in circulation all over the world. 

 

The maximum number of tokens is capped at 21 million, leaving about 2.5 million Bitcoin tokens yet to be mined. Approximately 900 new bitcoins are mined daily. 

 

  1. Litecoin (LTC): 

 

Litecoin was created in 2011 as a Bitcoin substitute. Charlie Lee created Litecoin in 2011 to improve Bitcoin technology to achieve faster transactions, lower fees, and more concentrated miners. Accroding to the data provided by CoinMarketCap, It has a market capitalization of more than $17 million.

 

  1. Ethereum (ETH): 

 

Ethereum was created in 2015 with the primary focus on decentralized applications. For this purpose, it runs the programming code of any decentralized application, enabling application developers to use it to pay for transaction fees and utilities on the Ethereum network.

 

The name of the token used in Ethereum is Ether. Accroding to the data provided by CoinMarketCap, It has a market capitalization of more than $300 million, making it the second-largest cryptocurrency in terms of market capitalization. Currently, there are 115 million Ethereum tokens in circulation.

 

  1. Bitcoin Cash (BCH): 

 

Bitcoin Cash was introduced in 2017 to improve the features of bitcoin. Today, it is one of the most popular cryptocurrencies. It has a block size of 8MB as compared to a block size of 1MB in Bitcoin and, therefore, is a faster alternative to Bitcoin. It has a market capitalization of about $16 million, as reported by CoinMarketCap.

 

Bitcoin, Litecoin, Ethereum, and Bitcoin Cash are all open source in nature and are all based on blockchain technology. There exist other non-Blockchain-based cryptocurrencies like Ripple as well. A few of the other famous cryptocurrencies include Binance Coin, Dogecoin, XRP, etc.

 

In order to learn about for such cryptocurrencies and their current market capitalization, check the Coinmarketcap.

 

 

Cryptocurrency Exchanges

 

Exchanges that facilitate the trading of cryptocurrencies are cryptocurrency exchanges that form a subset of digital currency exchanges. They mediate transactions between cryptocurrencies and other digital currencies or other assets like government-based/ fiat currency. 

 

Cryptocurrency exchanges could either be centralized or decentralized in nature:

 

  1. Centralized cryptocurrency exchanges: Centralized cryptocurrency exchanges serve as middlemen between buyers and sellers. The concept is similar to the idea of stock exchanges. Since they are run and owned by a corporation, they are more reliable and almost all of the crypto trades take place in centralized exchanges. Examples: Coinbase, GDAX, Kraken, and Gemini.

 

  1. Decentralized cryptocurrency exchanges: Decentralized cryptocurrency exchanges do not have any middlemen and allow bilateral transactions. They are more secure than centralized cryptocurrency exchanges which are prone to hacks but are riskier due to the absence of any intermediary. Examples: AirSwap, io, Barterdex, and Blocknet.

 

Conclusion

 

Blockchain and cryptocurrencies are new and revolutionary concepts that are undergoing immense and rapid research. No doubt, cryptocurrency has brought about ingenuity in the financial industry and has gained massive interest, especially from retail investors. 

 

However, it is imperative to understand the concept of cryptocurrency before even thinking about investing in it. There are certain aspects of cryptocurrency that are yet to be explored. Still, the expectations regarding the future of cryptocurrency have already multi-folded the market capitalization of cryptocurrencies in the past few years. Most cryptocurrency owners have made a fortune.

 

This, however, leaves a bias in the price of and attitude towards cryptocurrencies. An investor/ trader should take any investment/trading-related positions with appropriate risk management techniques in place. This is more than applicable in the crypto-space.

 

Cryptocurrency enthusiasts believe in the possibility of cryptocurrency being widely used in the near future. On the other hand, a lot of the big investors are skeptical of cryptocurrencies and therefore, do not interact with them.

 

Nonetheless, there is huge scope for further innovation in the crypto-space, from reducing the economic cost of cryptocurrency mining to stabilizing cryptocurrencies and looking for better uses of cryptocurrencies. Blockchain network is anticipated to revolutionize the future of the whole financial industry, the role played by cryptocurrencies is yet to be observed.

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