What is cryptocurrency? Understanding the difference – A Beginner’s Guide

What is cryptocurrency?

What is cryptocurrency? Understanding the difference – A Beginner’s Guide

image-1-1024x682 What is cryptocurrency? Understanding the difference - A Beginner's Guide

Have you ever wondered what it would be like to use a completely digital currency, that operates on a decentralized network, and is not controlled by any government or financial institution? Well, this is where the concept of Cryptocurrency comes in.

Now you must be wondering, what is cryptocurrency exactly? May have heard of this term N number of times but how do we usually define cryptocurrency and how is it different from regular currencies? On top of everything, how does it even work without the control of any government or agency?

In this article, I’m going to introduce all your queries in the simplest possible manner. What are we waiting for let’s get down!

The Origin of Cryptocurrencies: A Brief Introduction

Cryptocurrency’s origin is a fascinating story that begins with a mysterious person or group of people going by the pseudonym “Satoshi Nakamoto.”

 In 2008, Nakamoto published a research paper describing a new digital currency called Bitcoin that would allow for secure, decentralized transactions without the need for intermediaries like banks. The idea of Bitcoin quickly gained momentum among the tech-savvy community, and in January 2009, the first ever Bitcoin transaction took place between Nakamoto and a programmer named Hal Finney.

As more and more people became interested in Bitcoin, a network of users began to form, and the value of the currency began to rise. Today, Bitcoin and other cryptocurrencies are traded on exchanges around the world, with a total market capitalization of over $2 trillion.

While the true identity of Satoshi Nakamoto remains a mystery to this day, the creation of Bitcoin has sparked a technological revolution that is changing the way we think about money and financial transactions.

Let us first understand what actually cryptocurrency is and who controls it if not the banks and the government.

What is Cryptocurrency?

Cryptocurrencies are like regular currencies except they’re entirely digital. Each individual cryptocurrency coin is fundamentally just a collection of letters and numbers. This sounds complicated, but it’s not far from what we see with currencies today.

Here’s what I mean by that, almost every money bill on the planet has a unique serial number. This serial number corresponds to information like when and where the bill was printed, and similar kinds of information. In theory, a record of all money bills that have ever been printed, and where they are, is kept by the central bank, which shares this information with smaller banks and the government.

If you have a debit card or a credit card you’ll know that you have an account number as well. You also have a PIN or a password that will get you the money that you have in your account. Your bank knows your name and your account number as personal information is needed while opening an account. This information is also shared by the government as well as the central bank.

Let’s assume you have a money bill of Rs. 50 with you with a serial number ABC and your bank account number is 123. When you deposit that bill in your bank account, your bank branch, the central bank, and the govt. will check and confirm that Rs. 50 ABC has been recorded in bank account 123. Cryptocurrencies work in the same way. Every individual cryptocurrency coin is like the series number you see on a physical bill just without the physical money

What is Satoshi?

Just like a regular bill almost every cryptocurrency can be divided into smaller pieces. In the case of Bitcoin. Each BTC can be divided into 100 million pieces called Satoshi’s that are like cents to a dollar or say paisa to a rupee.

image What is cryptocurrency? Understanding the difference - A Beginner's Guide

A cryptocurrency’s wallet address is like a bank account. Except, there’s no physical card that goes along with it, it’s just an account number, and because you don’t need to provide any personal information to create a cryptocurrency wallet, your identity does not get attached to your cryptocurrency wallet, like a bank account is.

The most important thing here to understand is, any cryptocurrency held in your personal wallet is held directly by you, not under the custody of a bank. This means that nobody can shut down your crypto wallet or block your transactions, because you have total control over that account at all times.

Now the trade-off here is that if you lose your cryptocurrency wallet or forget to write down the recovery phrase you get, you’ll never be able to have access to your currency ever again.

Who collects the records of the transactions if not a bank or a government?

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Instead of the banks and the government keeping track of everyone’s bills and bank account balances, these records are stored across all the computers connected to a cryptocurrency network. These transactions and account balances are public and can be accessed by anyone using a blockchain explorer. A blockchain explorer is like a map that helps you navigate the world of cryptocurrencies. Just like a map shows you roads, buildings, and landmarks, a blockchain explorer shows you transactions, addresses, and blocks on the blockchain.

The fact that computers can earn cryptocurrency for processing transactions on a cryptocurrency network, incentivizes more computers to join the network to process transactions and earn cryptocurrency. This makes the cryptocurrency network secure because there is no chance of failure. This is called Decentralisation and it’s completely the opposite of centralized setups of banks and government.

Now in case you haven’t noticed, the digital currencies that banks are creating all around the world are certainly,  not cryptocurrencies.

Why Cryptocurrencies are Good Alternative Investments?

Cryptocurrencies are good alternative investments for several reasons. To begin with, they offer a level of diversification to our investment portfolio. Traditional investments like stocks and bonds are subject to market fluctuations and economic conditions, while cryptocurrencies operate independently of these factors. This means that adding cryptocurrencies to our portfolio can help mitigate risk and potentially increase your returns.

In addition to that, cryptocurrencies are highly liquid and offer 24/7 trading, meaning they can be bought and sold at them at any time of the day. This makes them an attractive investment option for those looking for flexibility and the ability to react quickly to changing market conditions. And, cryptocurrencies offer a high degree of security and privacy. Transactions are recorded on a decentralized blockchain network, making them difficult to hack or manipulate. Additionally, the use of encryption techniques ensures that transactions remain private and anonymous.

Finally, cryptocurrencies have the potential for high returns. While they are subject to market volatility, the rapid rise of cryptocurrencies like Bitcoin and Ethereum has made early investors wealthy. As the world becomes increasingly digital, cryptocurrencies may continue to gain in popularity and value, making them a potentially lucrative long-term investment.

Overall, cryptocurrencies offer a compelling alternative investment opportunity for those willing to take on the risk and potentially reap the rewards.