CRYPTOCURRENCY

 



What is cryptocurrency? 

Cryptocurrency is essentially digital money. However, unlike regular fiat currency (such as Dollars, Pounds, Yen, etc.), it decentralized, meaning it isn’t backed or regulated by a central authority, such as a bank, government, or country.

There are other differences between crypto assets and other kinds of money. For a start, cryptocurrencies don’t exist in a physical format – there are no coins or bills that you can use; they are all digital. Similarly, they’re not based on another asset such as gold, and it’s not stored in a bank or financial institution. 

So, cryptocurrencies are digital, decentralized currencies that are based on blockchain technology. Although cryptocurrencies such as Bitcoin and Ethereum are some of the most well-known, there are actually more than 4,000 in existence. 

How do cryptocurrencies work? 

We already know how blockchain technology works. Blocks of data in the chain are created with unique identifiers, referencing the block before them. These blocks of data are shared and verified across a distributed network of users. Cryptocurrencies use this principle, using and recording transactional data in the blocks. 

Let’s look at a simplified example of how a cryptocurrency transaction might take place: 

  1. A user has 100 coins in a particular cryptocurrency. These funds are stored in a digital wallet which has a public and private key. Only they know the private key, and this ties their cryptocurrency to that particular key. The public key is linked to the private one, allowing them to send and receive funds. 
  2. The user wants to purchase a product from a vendor for 10 coins of the cryptocurrency. The user agrees to transfer this amount from their wallet to the vendor’s wallet using the public key to identify them. 
  3. The transaction is digitally signed using the user’s private key. This transaction is then recorded and sent to the wider cryptocurrency network. Here, it is verified, ensuring that it is legitimate and that the user has enough funds to make the transaction. 
  4. This transaction, along with many others, is added to the next block of the blockchain, confirming the transaction. 



What is cryptocurrency mining? 

There is another piece of the blockchain and cryptocurrency puzzle that we’ve not covered yet, and that relates to cryptocurrency mining. To add a new block to the blockchain (and by doing so, verify the transactions within that block), a small percentage of users in the network race to solve a very complex math puzzle. 

The solving of this problem takes a lot of computing power (and electricity), but the winner gets the right to add the new block to the blockchain. This then becomes the official record on the public ledger and the person who solved it is rewarded with an amount of cryptocurrency. 

Although this seems like a surefire way of making some money, there are a few issues. Crypto mining often requires specialized (and expensive) computing hardware. What’s more, the more people mining, the harder it is to solve the puzzles, often making it impossible for casual users to mine even one block. 

That being said, there are opportunities for users to pool their computing resources with other miners, which can mean they get a small share of the profits. However, the electricity-intensive process can mean that the cost of mining isn’t worth the rewards. 



The pros and cons of cryptocurrency

If you’ve followed cryptocurrencies in the media, you’ll have no doubt noticed both good and bad stories about them. From record-breaking all-time highs to stories of lost fortunes, this new technology is clearly fascinating. But what are the actual positives and negatives of cryptocurrency? Some of the pros and cons are outline below: 

Pros

Emerging technologies often bring a host of new opportunities and uses. Here are just some of the positives of cryptocurrency:

 

  • They’re self-managed. Cryptocurrencies are decentralized, meaning no one authority can influence the price. Instead, members of a peer-to-peer network are responsible for the integrity of the currency. 
  • They’re secure and private. The decentralized blockchain ledger is a secure basis for the currency. What’s more, it offers a large degree of anonymity for transactions. 
  • They’re fast and cost-effective. For those looking to transfer and move funds, cryptocurrencies are near-instant. Without the need for a third-party financial institution to handle transactions, it’s possible to transfer funds without having to pay excessive fees. 

Cons

Of course, there are also plenty of downsides that come with cryptocurrencies in their current format. Here are just a few: 

  • They’re volatile. Although no one central authority can alter the price of cryptocurrencies, it’s possible for small groups of users to influence the unregulated market. This means that prices can rapidly rise and fall, making them an unsecure investment. 
  • They’re susceptible to hacks. If you lose your cryptocurrency wallet private key, you lose access to all the funds that are in there. What’s more, the exchanges that often store this wallet data aren’t always that secure. Millions of dollars in cryptocurrencies have been lost through hacking. 
  • They use a lot of energy. The process of mining for cryptocurrency is incredibly energy-intensive. As such, it can have negative impacts on the environment. 


What is Bitcoin? 

We’ve come this far without really mentioning the biggest name in the cryptocurrency market – Bitcoin. So what is Bitcoin? And why is it so popular? Bitcoin is a cryptocurrency based on blockchain technology. It works in the same way that we’ve mentioned above, with all of the positives and negatives that come with it. 
The digital currency emerged in 2008 after the financial crisis. Essentially, it was a way for people to make purchases and trade funds without having to go through banks and financial institutions. However, many elements of linking digital money to cryptography had been around since the 1990s.
Despite being worth less than $0.01 in May 2010, it was then that the first transaction in Bitcoin was made. Two pizzas were purchased for 10,000 BTC. At the time of writing, that amount of BTC is worth over £350 million.   
In the years since, the price of Bitcoin has fluctuated wildly. At the start of 2017, each Bitcoin was worth around $1,000. By December of that year, it had peaked at $20,089. However, after that point, prices gradually declined, before another peak towards the end of 2020. 

4 Key Cryptocurrency Security Measures:


A cryptocurrency system requires secure creation of cryptographic keys and seeds. In examining your organization's security measures in this area, pay close attention to confidentiality and unguessable numbers. Confidentiality ensures that newly created keys or seeds are not obtained by an unintended party. Using unguessable numbers protects against unintended actors impersonating the intended key/seed holder.

  • Generating unique addresses for every transaction
  • Requiring a minimum of 2 signatures in order to spend funds from the wallet
  • Using keys/seeds only in trusted environments
  • Checking identification, references, and background of all key/seed-holders
  • Assigning redundant keys to each wallet for recovery purposes
  • Storing keys that have signing authority in different locations.





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