A Description of Cryptocurrency
The stock market exploded in 2017, as a new business model rose to prominence: cryptocurrency. Bitcoin was the main talk of the stock market, but other cryptocurrency companies were not far behind. The rise of cryptocurrency has added massive wealth for some, but financial burden for others. Despite the success of Bitcoin and its ilk, many cryptocurrency companies on the market are little more than Ponzi schemes. Some investors wonder whether the entire cryptocurrency craze is a bubble, waiting to burst. Navigating and understanding what cryptocurrency is, and how to be safe with it, is a difficult task. Due to the potential that cryptocurrency wields, it demands to be understood.
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Cryptocurrency works by using virtual tokens (2) as a form of currency. One unique feature of cryptocurrency is that there is not a specific federal body that it is maintained by. The U.S. Dollar might have a Federal reserve to fall back on, but not so for a Bitcoin (1). Another difference is that cryptocurrencies are directly exchanged from person to person (1). Unlike money moved through banks or PayPal, there is no middleman. Bitcoin and its ilk also don’t have serial numbers to transactions for tracing back to the buyer or seller (1).
Despite the lack of conventional supervising bodies, cryptocurrency has a revolutionary system that ensures security. It uses blockchains, which are an encrypted database network. Better put, blockchains consist of countless blocks, that each store bits of data. In the case of cryptocurrency, blocks store transactional data. These blocks are arranged in a decentralized way, where blocks are given timestamps and added to a chain of blocks (3); the aforementioned “blockchain”. While every block stores its own data, it also acts as a node in the chain, and references information from other nodes to ensure its own accuracy (3). In cases where a node disagrees with the wider blockchain, it corrects itself (3). Thus, corruption of a cryptocurrency system would require corrupting most of a network’s decentralized nodes.
In addition to blockchains, cryptocurrencies have other provisions for secure transactions. Namely, they restrict and regulate user activity through public keys, private keys, proof of work, and proof of stake (2). A private key is a unique identification code, known only to a user, which allows a user to make transactions (2). A public key is used to verify private keys, during transactions (2). Proof of work is when computers run through an intense mathematical algorithm to verify a block’s legitimacy. Verifiers are rewarded with cryptocurrency. In proof of stake systems, verifiers stake part of their own cryptocurrency for a chance to verify blocks and earn more cryptocurrency (4). If a verifier verifies invalid transactions, verifiers lose out on more cryptocurrency, as well as a portion of their stake (4).
There are risks inherent to cryptocurrencies. Their reliance on technology means that there is no collateral in the event of system shutdowns or fraud (5). On the issue of fraud, there are many cyberthreats who create exchanges that are fake (5). The value of cryptocurrencies are turbulent, jumping from extreme highs to extreme lows (5). Finally, since cryptocurrencies are new, it is difficult to gauge what role they have. Many markets do not recognize cryptocurrencies, and many investors believe cryptocurrencies are vastly overvalued.
Cryptocurrency is complicated and involved. It also poses several issues. That said, it possesses many advantages, and will likely continue to gain ground as a legitimate form of currency. In the future, it might be just as ubiquitous as any form of federal currency.
By: Christian Mueth
Sources:
1. What Is Bitcoin? (gizmodo.com)
2. Cryptocurrency Definition (investopedia.com)
3. Blockchain: Everything You Need to Know (investopedia.com)
4. What Is Cryptocurrency? – Forbes Advisor
5. Council Post: The Top 10 Risks Of Bitcoin Investing (And How To Avoid Them) (forbes.com)m
