What is Cryptocurrency?

Sometime this year, during the investment in different securities I come to know about Crypto-currencies and their potential. Particularly the one which is around for quite some time and famous too, bitcoin. I thought to start the series of it and discuss the potential it contains for us in the future.

How currencies work?

Reference: Pixabay

Lets first understand what currency is and how it works. Currency is any legal tender, created by the authority, which promises to pay the holder, same amount, as tender, in form of goods commodities or service etc.

For example, a bank note of 50 INR promises to pay you 50 INR worth of Apples, Pizza, Salon service etc.

Reference: Pixabay

Currency is a legal and worldwide accepted way to buy what money can buy. Each country has its own currency which has certain value in its boundaries and gives you power to buy.

What is cryptocurrency?

Reference: Pixabay 

Cryptocurrency works on same principle of currency. It can be traded to gain goods, commodities or services etc. The difference is that it is a digital currency and is virtual which means that you don't have a physical tender,  which you can use to physically trade. However, it is a kind of special sequence of numbers and alphabets which are encrypted in a way that only the owner can use it and stored digitally. 

Imagine that you have to transfer funds to your friend. One way to to it is to physically give it to your friend. However, this approach has certain flaws of physical availability, slow process etc. Now, imagine there is an intermediate person who can do it for you, with some fees. This person is reliable, fast and remove the requirement of your physical availability, this entity is like bank. To transfer funds, this person gives you a box with open padlock. This padlock is unique to you. You place your fund in the box and lock it with padlock. The combination of padlock is only known to person. That is why once locked the box cannot be opened by anyone, other than this person. This is pretty much how cryptocurrency works.

Properties of cryptocurrency

1. Decentralized - One of the biggest benefit of cryptocurrency is that it is decentralized. There is no single governing body, rather whole network of people contributes to it. It is available for all the people of different parts of the world.

2. Fast - All the transactions are done instantaneously in almost real time, instantly transferring their fund from one wallet to another.

3. Pseudonym based - All the transactions are done on the basis of the public address of your wallet and it is not attached with any entity in the real world physical world.

4. Irreversible - These types of transactions are Irreversible. Box once locked cannot be opened by you.

5. Secure - Cryptocurrency is based on encryption technique, where nobody can view, what's inside the box. There are many encryption techniques SHA-256 is most popularly used. 

6. Independent - Cryptocurrencies are totally independent of all the economies in the world. All the supplies and demands are controlled independently and the exchange of the cryptocurrencies are also independent.

History
The history of cryptocurrencies can be trackback to year2009 where a person or group (not know for sure) with the name of Satoshi Nakamoto created first cryptocurrency now popularly known as Bitcoin. He uses SHA-256 encryption technique to generate these. The number of Bitcoins are limited to only 21,000,000 or 21 Million.  Due to its limited supply demand raised exponentially and Bitcoin has seen a rise from cents to more than 1000$ increment per bitcoin in just 6 years or so.

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Popular Terminology

1. Exchange - Just like normal exchange like NSE, Nasdaq etc. Exchange is an establised platform where people buy or sell cryptocurrencies on agreed amount.

2. Currency - is digital alphanumeric sequence, associated to particular individual, who owns it and contains certain value.

3. Wallet - just like physical wallet. Digital wallet is a location, where owner's digital currency is stored.

4. Hashing - process of generating random hexadecimal numbers which requires some predictable amount of CPU effort using a predefined algorithm.

5. Mining - process of hashing through which transactions are verified over the network between individuals. Once, verified the first verifying group/person will get some cryptocurrency as prize.

6. Pool Mining - Mining now a days is so complicated that personal computer or mobiles cannot compute fast enough to compete with the network. Group of individuals come together to pool their funds/resources/hardware to increase their mining/hashing capabilities and gain access to new cryptocurrencies. 

Future
Currently, not many countries/banks recognize it as a legal tender, due to its unaccountability and volatility. But, cryptocurrencies are already popular due their high return over the past years and potential it holds for the future.

This topic is so vast that it is a subject in itself. Let me know if you guys want me to cover anything more specifically.

Reference: Pixabay