Cryptocurrency, bitcoin, blockchain, ether and other jargons have made quite an uproar in the media and have entered in our dinnertime conversations. But despite the buzz, the meaning of these terms still elude a lot of people. Today we are going to break this concept into small comprehensible parts and try to tell you everything you would want to know about cryptocurrency.

In this article we will be talking about:

• What is cryptocurrency?

• What is blockchain?

• What is mining?

• What are the factors driving cryptocurrency?

• What are the advantages of cryptocurrency?

• What are the different types of cryptocurrency?

What is cryptocurrency?

Cryptocurrencies are electronic peer-to-peer currencies. They don’t exist physically so to speak like the traditional currency, so you can’t really pick up a bitcoin or any other type of cryptocurrency, or hold it in your hand, or pull one out of your wallet.

But just like traditional currency, they can be used to buy and sell goods or services, or be used for investment purposes like gold, diamond. Cryptocurrency leverages on blockchain technology(something we are going to be talking about in detail but in very simple terms later in this article) to gain decentralization and absolute transparency.

What is blockchain?

Imagine a small group of friends is playing a game of poker among themselves, but they don’t have poker chips or real money on the table. So, each of them brings out a notebook and starts writing down who bets how much, who has lost, and so on.

Since this is a poker game, neither of the people playing trust any one of them. So every player maintains their notebook(ledgers) separately. At the end of each hand, the players compare what they have written down in the ledger. That way if someone has made a mistake, or someone tries to cheat and take some money for themselves, that discrepancy will be caught. Now think of each page of the notebook as a “block”. As you continue playing, your notebook will be filled with pages of information about the winnings and losses of the game. A “chain” of those pages, that we earlier called a “block”. Hence, “blockchain.”

Now let’s try to understand blockchain in the context of cryptocurrency. Blockchain is a public ledger that is used to record all the transactions that are taking place. It is transformative because it is maintained by everyone involved in cryptocurrency instead of a single bank or a central authority.

It is almost akin to a software like Google Docs, where multiple parties can access the ledger at the same time, see the changes being made, and authenticate it. With blockchain, you and everyone who partakes in the system, can view the ledger. It is not controlled by either one of you, but continues to operate on consensus. And the chain is also secured with a high level of security, known as cryptography, and thus it is extremely difficult to make change to the chain.

What is mining?

Mining is a beautiful term that is quite similar to its literal meaning. Let’s take a moment to understand what real mining infers. Mining refers to the action where an individual, known as a miner, toils under the illusion that his hard work would pay off eventually and he would strike gold one day.

Similarly, mining in cryptocurrency is the process where a miner uses his computational resources to solve powerful, complex encryption problems in the hope of being rewarded with a cryptocurrency in the end. By 2020, the reward for solving a computational problem has halved and it will continue to be halved every four years.

By 2020, cryptocurrency mining has become a little more complicated and involved. With bitcoin, the reward is halved every four years.

During mining two things happen: cryptocurrency transactions are verified and new units of the cryptocurrency are created. Effective mining requires both powerful hardware and software.

When it comes to verification, an individual computer isn’t powerful enough to profitably mine cryptocurrencies because you’d run up your power bill. To address this, miners often join pools to increase collective computing power, allocating miner profits to participants.

What are the factors that drive the value of cryptocurrency?

Every item of exchange, be it traditional bank-issued currency, precious metals like gold, silver, diamond, platinum, or commodities, tends to fluctuate in its valuation. You might have seen the dollar’s value increasing and the value of the rupee declining as a consequence. Similarly the value of the cryptocurrency changes too.

Here are some of the factors that drive and affect the value of cryptocurrency:

Extreme and simultaneous volatility : The crypto market is known to reach the highest of highs and lowest of lows. One of the interesting attributes of cryptocurrency is that multiple types of cryptocurrency tend to rise and fall in a simultaneous fashion.

Media Frenzy: As any currency’s current status hits the news, it is common for an influx of new traders to be jumping in to get some part of the action. This tends to be the trigger of an increase in value. While early novice traders may engage in taking their cut and make their profit. Others panic and sell the cryptocurrency they had as an investment which leads to the drop in price.

What are the advantages of cryptocurrency?

1. No Inflation:

Inflation has caused many currencies to get their value declined with time. At the time of a cryptocurrency’s launch, the source code always specifies how much of the cryptocurrency can be generated. For example, there are only 21 million bitcoins that can be released. So, with the increase in demand, the value too will be increased which will prevent any inflation.

2. Governance by Consensus:

The transactions of cryptocurrency are maintained and stored by miners on their hardware and for this maintenance they get a reward in the form of a transaction fee. Since there’s always an incentive for the miners in the form of payment, it’s in the best interest of these miners to keep the records up-to-date, and this consequently keeps the integrity of cryptocurrency alive.

3. Can be Used Internationally:

When it comes to making transactions with cryptocurrency, there are literally no limits. You may be in one part of the world and the receiver may be on the other part, you can still transfer cryptocurrency without any hassle and make any amount of transaction. This is simply due to the fact that cryptocurrency doesn’t come under the control of any single bank or central authority. And as the coins can’t be copied, or spent twice it just guarantees the overall integrity of the crypto system.

How many cryptocurrencies are there?

According to coinmarketcap.com, a market research website there are over 6,700 different cryptocurrencies that are traded publicly. The total value of all cryptocurrencies on December 18, 2020 was more than $645.7 billions and the total value of all bitcoins, which is the most popular crypto known, was calculated to be around $421.7 billion.