A cryptocurrency is a digital or virtual currency that is secured by cryptography, that sounds to be nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology. 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.

Key Concepts

A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers, it doesn’t exist as a physical coin. This concept is not a totally innovative concept, since when you make a payment via a bank, no one gives physical money to the recipient. What is really done is to increase the amount of the recipient and decrease the amount of the sender in the database where the back account is kept. The same stands for card payments and any other online transactions. Similar logic is for bitcoins and any other altcoins that exist, what is really changes is the way that crypto coins are produced, kept and the lack of authorities that control them.

The decentralized structure of coins allow them to exist outside the control of governments and central authorities. The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.

Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.

Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.

Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.

Understanding Cryptocurrencies – The idea

Cryptocurrency was born in order to exist a coin that is not controlled by an authority and that will be secure. First, it was designed a method called “Hashcash” that implements a process named “proof of work”. That means that some blocks of data that is time consuming in order to be created but it would be easy to be verified. This method ended to be fundamental for the creation of cryptocurrencies.

In addition, the money that we commonly use are based on the trust to a third party, that is a bank or governance. This secures but also produce problems, like inflation.

For example, in Greece on 1944 during the war, the drachmas value was exrtemel;y low, a part of bread cost some billions of drachmas.

On the contrary, the metals like silver or gold, have a value because of the limitation of existence and are independent on any governance or bank. However, the production of metals is very difficult (mining) and the use of them in our daily transactions is totally hard (e.g. imagine to give a part of gold in order to buy a pizza).

The proposal was the “Bit gold”. A digital “limited edition entity”, that in contrast to the gold could everyone produce (mining) and could be used as a common coin in our transactions.

As a result on the above, we have the idea (bit gold), we have the process and technical design (Hashcash) we have the tools (CPUs) and cryptos were born.

Cryptocurrencies are virtual “tokens,” which are represented by ledger entries internal to system. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Types of Cryptocurrency

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.

Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto.”. As of January 2020, there are 18.1 million bitcoins in circulation with a total market value of around $136 billion

Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as “altcoins,” include Litecoin, XRP, Stellar, Ethereum, Cardano, EOS.

Special Considerations

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.

Many experts see blockchain technology as having serious potential for uses like online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower transaction costs by streamlining payment processing. However, because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to your funds or your personal information.

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems

In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.

Disadvantages

The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others. Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.