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Cryptocurrency: The Digital Currency And How It Works

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What is Cryptocurrency?

It is decentralized digital money based on blockchain technology and secured by cryptography.

But first things first, It is important to first 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 cuts across a range of assets like money, house or even intellectual property.

One of the most important aspect of blockchain is that it is immutable. Immutable means anything that a blockchain records cannot be changed or modified by even an administrator.

In short, the access to blockchain is shared between its users and any information shared is transparent, immediate and “immutable”.

What is Decentralisation 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 regulation 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 by the use of encryption techniques.

Most of the hailed aspects of blockchain, like privacy and immutability, are activated through cryptography.

Sometime in 2008, a group of people (under the pseudonym Satoshi Nakamoto) crafted the guiding principles of the first and foremost cryptocurrency in the market today, Bitcoin.

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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 till now, it is factual to say cryptocurrency operates outside the banking system using different brands of coins – 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 special equipped computer systems in order to be rewarded with bitcoin in exchange.

The process is tedious and it can take up to 30 days.

(b) Buying, selling, and storing

The popularity of cryptocurrency today means users can buy from central exchanges, brokers and individual currency owners or sell it to them.

Bought cryptocurrencies can be store in “hot” or “cold” digital wallets.

Hot means the wallet is online (connected to internet), which makes it easy to transact but vulnerable to theft and frauds.

Cold storage is safer but makes transaction hard.

(c) Transacting or investing

You can use your smart phone to transfer a cryptocurrency, like say 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 include bitcoin, altcoin and crypto tokens.

Bitcoin is the world’s first widely accepted form of cryptocurrency.

READ ALSO: What is Non Fungible Token? How to Buy NFT

Advantages and Disadvantages

Some of the advantages of investing in crypto is that they are 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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