What actually are Cryptocurrencies | Everything that you need to know (2022)

There is a lot of talk about crypto currencies. It seems that this is like a revolution in our payments and currency systems. Cryptocurrencies have gained large attractions among people and just like smartphones and social media it has already started to have a deep impact on our lives. Reports say that in the year 2021, $30 Bn were invested in crypto worldwide. So what actually are these crypto things? What makes them gain such a fan base and what will be its future implications?

Table of contents:

Let's Dive In

What actually are cryptocurrencies?

Let us look back in time to see how currencies evolved over time. At first humans used to barter things for things, like if I needed an axe I would present an exchange offer to someone who had it with my sword. But this was not a better thing to do as the other person may or may not be interested in the thing that I would like to offer. So to tackle this thing people began to trade things with something that they can be assured to again exchange later with similar value, like metal and gold. This was something remarkable as now people had actually developed the idea of currency. But there with time as population grew these resources became scarce and there was a need to replace them with something that was not scarce, like a paper. But why would one exchange something for a paper? This was because of the government and ruling powers. These developed the bills with a promise to pay the bearer in full the sum written on the bill. So as long as there was trust in the system this was okay as a common person would definitely trust the governments and the governments too will pay the sum. But there was flaw in this system too that sometimes large amounts of currencies were printed against the falling value of its economy so people had to keep a load of it to buy something as small as a loaf of bread, i.e. it was not convenient. Hence there developed the idea of plastic currency with the advent of banking system. That your money is physically present at one place but you can access it with a plastic chip based card and the transaction processes will be settled by the bank. But as we became digitally more advanced the money in the bank became only records or figures maintained and looked after by the banks and there computers. Also more and more transactions shifted online the transaction was no longer the physical transfer of money but only the mere addition and subtraction in figures digitally. Hence the idea for cryptocurrencies was developed which doesn't rely on banks to verify transactions. It's a peer-to-peer system that can enable anyone anywhere to send and receive payments. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

As per the definition by Investopedia:

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation. 

How does Cryptocurrency work?

When a transaction is done using a crypto it is like publicly announcing on a ledger that a particular transaction has been done using a particular id. These transactions are thus recorded on a ledger on the blockchain which can be accessed by anyone on the blockchain. The benefit of this system is that your details remain anonymous while the transaction is recorded. Looking at the things in detail, if you have an amount of particular crypto and you ant to exchange it with some goods over the internet, what you do is just complete the transaction using the crypto but what happens at the back of the transaction is some mathematical calculations and exchange of codes. To keep it simple we say that transfer of the digital ownership takes place and it is thus publicly announced that this change has taken place.

What does decentralization of cryptocurrencies mean?

What makes crypto different from these bank transfer of figures is that these transactions are open and decentralized. Decentralized means that only one single entity does not issue or maintain the currency and its values depend on a number of known factors. What mainly makes crypto currency decentralized is a blockchain system which is a large network of computers in form of a block and more of such blocks connected to each other. Thus the control of the currency is not hold by a single organization and requires the change in entire blockchain to reflect the change.

How do you earn cryptocurrencies?

There are mainly two ways by which you can earn cryptocurrencies:
a) Work for the services related to the cryptocurrencies.
b) Trade the crypto with real currency or any other digital asset like NFT's.
The main source by which you can earn crypto is a process called mining we will see what mining is in detail ahead. To keep it simple, it is like making a contribution to the development o the cryptocurrency for which you are rewarded. This can be done by letting some features of your machine to help in the maintenance of cryptocurrency, participating as a node in blockchain or even helping in building the network for the market. The other way is simple just buy the tokens and use them like you buy other currencies and use them in the particular countries.

How does the value of cryptocurrency change?

The value of cryptocurrency is dependent on the market. Like any other product its value changes as per supply and demand rule. But there are some other factors too that can affect the value of cryptocurrency. Mainly it will depend on how many coins have been mined and how popular the cryptocurrency is There are also a few methods how users increase cryptocurrency value:
Buy low, sell high – using the classic investment strategy, users can increase the value of crypto by buying and holding coins. The buying increases demand and hence crypto value increases.
Mining – the act of mining Bitcoins or altcoins can be profitable. It also impacts the supply of cryptocurrencies.
Increasing utility – as more institutions invest in crypto and accept it as a form of payment, its utility increases. As a user, you can contribute to this process. This will increase the value of cryptocurrencies over the long term.
Media coverage – crypto prices fluctuate according to media coverage. Users can impact this through their social media accounts.

Are Cryptocurrencies legal?

The issue of Cryptocurrencies being legal or illegal haunts almost all the countries there are only a few countries who have fully legalized the use of crypto and many countries have put it in a grey list as to experiment with it. The fact that crypto transactions are anonymous, there come a lot of concerns with its level of anonymity. Most importantly it paves way for a lot of illegal activities online, from trading illegal digital material to buying illegal banned items or narcotics. The fact that these transactions will only be recorded with cryptography no one will be able to know about the purchase that had been done. There will be none who can see what business the crypto was transferred to or who was the person who did the transaction. In countries like India cryptocurrency is in a grey list too. Only a few platforms are available to make crypto transactions most popular being Waxzirx, CoinDCX, Conswitch and more. The government allows them to operate under the ruling that they should provide the information of wallet users to the government authorities or police when asked. So in brief the answer to weather the crypto is legal or not depends on which country we are asking about and what regulations the country is has put on the cryptocurrencies in turn.

Are cryptocurrencies safe to invest?

Most of the people have classified cryptocurrency as highly speculative and extremely risk asset to invest. So what you need to know before investing in a cryptocurrency is having a good knowledge about the cryptocurrency before investing. Commonly it as termed as doing your homework and in that you will have to look for many things particularly things like who is leading the project and who the investors are. It is always recommended to invest only that amount of money in the crypto which will not impact you badly even if the project fails or the value of cryptocurrency falls drastically. Be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors.

The 10 largest trading cryptocurrencies by market capitalization as tracked by CoinMarketCap.

10 largest cryptocurrrencies

What is Crypto Mining and how does it work?

This term is more common with cryptocurrencies such as Bitcoin, the reason being that not all cryptocurrencies allow mining. To be more specific mining is a process of getting rewarded for supporting in the work of the cryptocurrency. The thing is that you work for the project by giving out your resources maybe your some part of your CPU or GPU or both so that it will be used to solve cryptographic algorithms to verify transactions and changes made on the public ledger i.e. blockchain. Crypto mining involves validating cryptocurrency transactions on a blockchain network and adding them to a distributed ledger. Most importantly, crypto mining prevents the double-spending of digital currency on a distributed network.

So How does mining work?

There are four primary points to achieve in mining crypto:

  1. Specialized computers perform the calculations required to verify and record every new crypto transaction and ensure that the blockchain is secure. Verifying the blockchain requires a vast amount of computing power, which is voluntarily contributed by miners.
  2. Mining is a lot like running a big data center. Companies purchase the mining hardware and pay for the electricity required to keep it running (and cool). For this to be profitable, the value of the earned coins has to be higher than the cost to mine those coins.
  3. Every computer on the network races to be the first to guess a 64-digit hexadecimal number known as a “hash.” The faster a computer can spit out guesses, the more likely the miner is to earn the reward.
  4. The winner updates the blockchain ledger with all the newly verified transactions – thereby adding a newly verified “block” containing all of those transactions to the chain – and is granted a predetermined amount of newly minted cryptocurrency.

What is the future of Cryptocurrency?

Actually answered on Quora by: Tanu Kaur

Cryptocurrency is the future! At least, that’s what many people believe. And there are a lot of good reasons to think so.
●​First of all, cryptocurrency is digital, which makes it very versatile and convenient. You can use it to buy things online, you can use it to invest in other currencies, and you can do so much more with the advent of NFT’s and Metaverse.
●​Second of all, cryptocurrency is secure. It’s based on blockchain technology, which is a very secure system. Transactions are verified by multiple computers, so it’s very difficult for anyone to hack into the system and steal your money.
●​Finally, cryptocurrency is becoming more and more popular every day. More and more businesses are starting to accept it as a mode of payment, and this means that the more cryptocurrency is on the rise.
●​ Additionally, cryptocurrency can be used to send money across borders without having to go through the hassle of dealing with banks or other financial institutions.
There is a lot of potential for cryptocurrency to become even more popular in the future, and I think it’s something worth keeping an eye on.

I hope you found this article helpful, also read : What is so special about NFT's.
Part 2 coming soon.

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