WHAT TO KNOW ABOUT CRYPTOCURRENCY?
The way we go about our lives handling our daily activities has changed dramatically. In today’s digital age, we rely on technology to carry out almost every function, such as communication with friends/family, education and business transaction. The use of technology has made online payment easy and convenient through payment cards and payment services like PayPal to transfer funds. However, technology has created several ways to improve how we go about our daily activities, and one of the latest inclusion in this aspect is cryptocurrency, which is becoming a popular option for transactions.
Cryptocurrency, as the name implies is a type of digital currency that uses encrypted codes to effect a transaction; other computers in the community recognize these codes. Cryptocurrency is designed to improve security and anonymity in online monetary transactions. It employs cryptographic encryption to generate currency and verify transactions. All transactions are recorded on the blockchain (a public ledger) and require the activity or process of mining carried out by specialized users called miners. Cryptography was employed to secure communication during world war 2, where information was transformed into a code which is very difficult to crack. However, cryptography has evolved in today’s digital age; this form of security on information and communication is now being used to transfer money across the web.
Cryptocurrency is the direct opposition to fiat money. Fiat money is a currency that gets its worth from government ruling or law. The dollar, euro, yen, and other currencies that are defined as a legal tender is fiat money. Cryptocurrencies use decentralized control as opposed to controlled economic money and central banking system. There are over a thousand cryptocurrencies, Bitcoin is the first cryptocurrency, and it is the standard from which other cryptocurrencies follow. Others include ethereum, ripple, litecoin, monero, ox, and Komodo.
The cryptocurrency market has undergone significant growth, and increase value in some cryptocurrencies like the bitcoin, ethereum and litecoin have made cryptocurrencies popular. Other reasons attributed to this form of currency gain more popularity may be attributed to some of its benefits which includes:
- Decentralized nature
- Minimum transaction fee
- Ease of use and convenience
- Fast transaction
How transactions are made on cryptocurrency
When a transaction is made by a user, a public cipher or public key is sent out from the user’s computer and interacts with the private cipher of the receiver. When the receiver accepts the transaction, the initiating system attaches a piece of code onto a block of several encrypted codes that is known to all users in the network. Transactions are confirmed by special users called miners; they attach extra code to the publicly shared block by solving cryptographic puzzles. Once a transaction is confirmed, it becomes unforgeable and irreversible, and a miner receives reward/ earn more cryptocurrency in the process.
Why Investing in cryptocurrency is risky?
Many people believe that cryptocurrencies are the surest available investment opportunity available. Checking the progress of bitcoin, the most recognizable cryptocurrency on the planet whose price was around $700-$900 in 2015, and as of now, the price is above $8,000. Ethereum also recorded the fastest rise in digital currency, its value increase by at least 2700%. However, before venturing into investing in cryptocurrencies, it is essential you know about the risk involved. They include:
- The price of virtual currencies is highly speculative and do not have underlying assets; this can expose investors to risk.
- Cryptocurrencies lack intrinsic value and function. The value of every cryptocurrency is dependent on demand and supply.
- It is highly volatile, and since most cryptocurrencies are traded in the open market, they are prone to market fluctuations. Also, the 24/7 trading nature of cryptocurrencies makes it difficult to monitor price change and make fast
- Transactions are irreversible and cannot be modified. Funds transferred to a wrong address may be lost permanently.
- Since cryptocurrencies are decentralized, investors have no legal resource or cannot seek legal assistance in case of fraud or accident, thus, they bear the loss alone.
- Loss of funds if a user loses his/her private key. There is no password reset as every user is in complete control of funds and responsible for securing them.
- The use of digital currencies is not immune to the threat of hacking.
Having considered the risk and nature of cryptocurrencies, researching the available cryptocurrencies is necessary to guide decisions on which cryptocurrency to invest in. To minimize risk, investors should only invest what they can afford to lose.