# What is Cryptocurrency?

**Published by:** [mereHoopoe0](https://paragraph.com/@merehoopoe0/)
**Published on:** 2022-05-03
**URL:** https://paragraph.com/@merehoopoe0/what-is-cryptocurrency

## Content

Cryptocurrency has taken the world by storm in 2021, with many people becoming multi-millionaires, and in some cases even billionaires, overnight. Financial experts around the world and the wealthy, such as Elon Musk and Warren Buffett, have also shared their contrasting opinions on cryptocurrency. But at the end of the day — What exactly is cryptocurrency and how does it work? As of now, the most pervasive and commonly discussed type of cryptocurrency is Bitcoin, although there are several other types of currency as well, such as Etheruem, Dogecoin and Litecoin. Because these currencies are not presently as popular as Bitcoin, people often refer to them as Altcoins (i.e. Alternative coins). So, what defines Cryptocurrency? Cryptocurrency is a form of virtual currency. It is different from traditional fiat money because you can’t see it and unlike fiat money, which is based on faith in governments and banks. cryptocurrency is not. This is because cryptocurrencies are decentralized networks based on blockchain technology. To answer this question, we need to understand the concept of a decentralized network. Cryptocurrency transactions run on a decentralized network that is maintained and controlled by a wide network of computers worldwide. Here, there is no bank to act as the middleman. Instead, transactions have to be updated and verified by all computers connected to the cryptocurrency network for them to go through. This contrasts with a centralized network that consists of a medium controlled by a central authority, like governments or banks. In a traditional financial transaction, banks on either side of the transaction record the money flowing out of one account and into another. You might wonder, whose computers are connected to this network and why would they use their computer’s power to maintain this global ledger? In the bitcoin network, these individuals are known as Bitcoin miners. Bitcoin miners are people who compete to be the first to verify Bitcoin transactions by using their computers to solve the complex encryption code. In return, they earn Bitcoin. The concept of blockchain technology may sound complicated but it can be understood better by, quite simply, imaging a chain of blocks . In this chain, each block contains 2 lines of code, also known as a hash. The first line of code is that block’s unique code. The second line of code is the code of the previous block. Take block number 5 in the chain for example. Block 5 contains its own “Block 5” code and the unique code of “Block 4”. Similarly block 6 contains its own unique code and the unique code of “Block 5”. As the name suggests, all blocks in the blockchain are quite literally chained together. If someone tries to change the code of one block, the whole chain is disrupted. Hence, hackers are detected easily and information in the blockchain is incredibly secure. What do people use cryptocurrency? One of the biggest reasons cryptocurrency is so commonly used is that the fees associated with it are very low. The transaction of funds is straightforward and convenient because, unlike traditional payment methods, cryptocurrency transactions require no broker, paperwork, interest rates or exchange rates. Furthermore, cryptocurrency transactions are very cost-efficient as fees are kept to a minimum. Another reason is that this currency is not associated with any world government. This can be credited to the decentralized network cryptocurrency runs on that keeps the currency monopoly-free and unrestrained so that nobody is able to determine its flow. In addition, using cryptocurrency to pay for things online actually provides consumers with more security than traditional payment methods. This is because the blockchain ledger, a decentralized processing and recording system, run based on difficult mathematical problems and encryption that make it hard to decode. This way, information is kept secure and private. Of course, the profit potential is another huge reason that people get into cryptocurrency since it is very volatile. For example, if you choose to buy Bitcoin at a lower price, you could potentially profit when that price rises. This was the case for several investors, who wound out making huge profits because the market has not cooled in recent years. This idea will be explained in greater depth in the next section, ‘The reasons behind cryptocurrency’s hype and volatility. The reasons behind cryptocurrency’s hype and volatility Unlike our banking system where fees are charged to verify transactions, the intention behind cryptocurrency was to cut banks out of the process to make transferring funds more cost-efficient, effective and convenient. This idea was especially popular since it was published about a month after the 2008 financial crisis, a period of time where people lost much faith in the financial system. In addition, cryptocurrency is seen as the future of money. This is because the adoption of technological innovations like blockchain makes trading easier, simpler and a more transparent process. Cryptocurrency’s volatility makes the potential for profit very high, attracting many people to invest in them. To give a more specific example, $1 invested in Shiba Inu coin in 2020 would be worth $30 million today. The unpredictability of trading cryptocurrencies, as compared to other currencies is due to it still being very new. This means that no one actually knows what 1 bitcoin, for instance, is truly worth. Therefore, the main driver of the price of crypto is consumer speculation, also known as the excitement to buy, and marketplace confidence. Confidence in the cryptocurrency system is unstable because it is a new concept that many are still trying to grasp. Thus, when an article compliments cryptocurrency, faith in the system rises and people buy more, causing prices to rise. But should someone like, let’s say, Elon Musk tweets to criticize cryptocurrency, people lose faith in the system and prices drop. Another driver would be that lower liquidity in the cryptocurrency markets compared to foreign exchange. This means that on the forex, you might get trillions of dollars traded every day compared to the billions in the Bitcoin market. Fewer trades cause the market to spike more frequently. In other words, the higher liquidity is, the more stable prices become. In addition, the list of companies that accept cryptocurrency changes every day. Although one day a company might accept crypto as a valid payment form, the next day they might not. This applies to major companies such as Tesla and Paypal which have a vacillating relationship with cryptocurrency, constantly changing policies regarding them. This very lack of consistency causes unpredictable trends in cryptocurrency since its legitimacy as a form of payment constantly fluctuates. The disadvantages of using cryptocurrency One disadvantage would be that cryptocurrency is not accepted as a valid form of payment in most places, so many would argue that it is presently more of an investment option rather than an actual currency. Another disadvantage of using cryptocurrency is that it could potentially be harmful to the environment, as advanced technology and computers are needed for its operation and maintenance. As mentioned earlier, cryptocurrency transactions are kept secure because ledgers are updated several times on all computers. This requires a lot of computing power and therefore, electricity. A single transaction, for example, could take up to 1700 kWh worth of electricity: twice the amount of monthly usage in a US home. Furthermore, illegal cryptocurrency transactions can be easily made due to the lack of government regulation as such transactions can be limited, but not banned. Cryptocurrency’s volatility can also be seen as a downside to it, since it is hard to predict when and whether the value of the currency is high or low, making investing difficult. Is cryptocurrency the currency of the future? Listen to our podcast to find out! The Monkey Business Podcast: https://open.spotify.com/show/3mlOTh7PEEDhrw6liETo7K Glossary References: https://www.javatpoint.com/role-of-bitcoin-miners https://www.bankrate.com/investing/what-is-bitcoin-mining/ https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency https://www.nerdwallet.com/article/investing/cryptocurrency-7-things-to-know https://worldfinancialreview.com/seven-reasons-why-cryptocurrency-is-so-popular/

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