What is cryptocurrency?
It is decentralized digital money based on blockchain technology and secured by cryptography.
But first things first, it is important to understand three terminologies: blockchain, decentralization, and cryptography.
What is blockchain?
Blockchain is the technology that enables cryptocurrency trade and makes it secure. So in this context, we can simply define it as a digital ledger whose access is distributed among authorized users.
The ledger records cut across a range of assets like money, houses, or even intellectual property.
One of the most important aspects of blockchain is that it is immutable. Immutable means that anything in a blockchain record cannot be changed or modified by even an administrator.
In short, access to the blockchain is shared between its users, and any information shared is transparent, immediate, and “immutable.”
What is decentralization in cryptocurrency?
Centralised money is the common money that we use, which is governed by authorities like the Central Bank of Kenya.
On the other hand, decentralization in cryptocurrency means there is no regulatory authority to supervise the rise and fall of a particular cryptocurrency.
What is cryptography?
Cryptography refers to the method that secures data from unauthorized access through the use of encryption techniques.
The majority of the blockchain’s lauded features, such as privacy and immutability, are enabled by cryptography.
Sometime in 2008, a group of people (under the pseudonym Satoshi Nakamoto) crafted the guiding principles of the first and foremost cryptocurrency on the market today, Bitcoin.
There are over 10,000 cryptocurrencies available today. Bitcoin is the world’s first widely accepted form of cryptocurrency. PHOTO/COURTESY
How does cryptocurrency work?
As earlier stated in this post, cryptocurrencies aren’t controlled by the government or state authorities.
So up until now, it is factual to say cryptocurrency operates outside the banking system using different brands of coins, with bitcoin being the leading player.
(a) Mining
It is worth noting that cryptocurrencies, which are completely digital, are generated through a process called “mining.”
The mining process entails miners being required to solve certain mathematical puzzles over specially equipped computer systems in order to be rewarded with bitcoin in exchange.
The process is tedious and can take up to 30 days.
(b) Buying, selling, and storing
The popularity of cryptocurrencies today means users can buy them from central exchanges, brokers, and individual currency owners, or sell them to them.
Bought cryptocurrencies can be stored in “hot” or “cold” digital wallets.
“Hot” means the wallet is online (connected to the internet), which makes it easy to transact but vulnerable to theft and fraud.
Cold storage is safer but makes transactions difficult.
(c) Transacting or investing
You can use your smart phone to transfer cryptocurrency, like bitcoin, from one digital wallet to another.
Owners of cryptocurrencies can use them to buy goods or services, trade in them, or even trade them for cash.
Types of Cryptocurrencies
There are over 10,000 cryptocurrencies available today. Among the most popular are bitcoin, altcoins, and crypto tokens.
Bitcoin is the world’s first widely accepted form of cryptocurrency.
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Advantages and Disadvantages
Some of the advantages of investing in crypto are that it is secure, decentralized, immutable, and transparent.
What’s more, they also provide a hedge against inflation.
On the other hand, cryptocurrencies are not widely understood and are prone to high risk.
Scalability is also another problem owing to the technology side of blockchain.
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