What is cryptocurrency? How does it works? What are its advantages and disadvantages?

 

written by M. Arshad Sohail

Table of content

1-      What is Cryptocurrency

2-      How does cryptocurrency created?

3-      Features of cryptocurrency

4-      Cryptocurrency how does work?

5-      Storage of cryptocurrency

6-      Key steps

7-      How do exchange works?

8-      What are different types of cryptocurrencies?

9-      Cryptocurrency Scams

10-    History of cryptocurrency

11-   Difference between cryptocurrency and conventional currency.

12-    Future of cryptocurrency

13-    Advantages and disadvantages

14-    Best cryptocurrency to invest

15-    FAQs

1-What is cryptocurrency?

Cryptocurrencies are digital currencies secured by cryptography. It can act as a medium of exchange to sell, buy or trade goods and services without the need for an intermediary such as a bank.

A cryptocurrency is an encoded string of data representing a unit of currency. Peer-to-peer networks called blockchains monitor and organize cryptocurrency transactions such as buying, selling, and transferring, and also serve as secure transaction ledgers. By utilizing encryption technology, cryptocurrencies can serve as both a currency and an accounting system.

A cryptocurrency is a digital or virtual currency that is meant to be a medium of exchange. It is quite similar to real-world currency, except that it has no physical embodiment and uses cryptography to work.

For example, with Bitcoin, a miner will only be rewarded with Bitcoins after a block is added to the blockchain, and only then can new Bitcoins be generated. The limit for bitcoins is 21 million; after that no more bitcoins will be produced. Because cryptocurrencies are digital assets, they cannot be held physically – they only exist online.

2- How is cryptocurrency created?

What is mining Mining is the process by which new coins are put into circulation. It is done using computers to solve computational math problems and is done to secure the network.

Mining relies on distributed ledger technology (often referred to as "blockchain"). Blockchain is an independent public peer-to-peer network that is currently unregulated. Blockchain securely stores a series of time-stamped records (cryptocurrency transactions) within a decentralized network.

 

3- Features of cryptocurrency

a) Non-refundable

It is very difficult for anyone but the person who owns the cryptocurrency to move it. Since the owner owns the private key, he has a unique code to access it. Once transactions are recorded, they cannot be changed.

b) Limited offer

 Most cryptocurrencies have a limited and predetermined supply. There are different kinds of cryptocurrencies that trade differently.

c) Cryptocurrencies with N26

N26 has a number of resources to help you understand the latest developments in the world of finance. From cryptocurrencies for beginners to the details of What is a crypto wallet?, N26 is by your side every step of the way, allowing you to make informed financial decisions backed by reliable information.

4-How does cryptocurrency work?

Cryptocurrencies are designed to work in different ways.

Some cryptocurrencies are meant to act like money; function as a means of payment. Others have more in common with traditional investments such as stocks, bonds or funds.

Cryptocurrencies are largely unregulated, which means there can be a high level of risk involved in investing in them.

5-Crypto currency storage?

A cryptocurrency wallet gives you access to cryptocurrencies and allows you to buy, store and hold them. Some wallets only support one type of coin, while others support more.

Each wallet has a private and public key. You can think of the public key as your wallet address because, like a bank account number, people use it to send cryptocurrency to your wallet. The private key works like a PIN or password; you enter it to send and receive cryptocurrency. Your wallet can be on an external device, software, PC, smartphone or online account linked to the exchange.

6 -Key Steps to Buying Cryptocurrency?

• Step 1: Choose the best cryptocurrency exchange.

• Step 2: Open a business account and confirm your email. Connect your phone now.

• Step 3: Verify your identification in the third step. Next, fund your account.

• Step 4: Buying and Investing in Cryptocurrency.

• Step 5: Save your cryptocurrency.

• Step 6: Choose a strategy in the last step.

 

7-How do exchange wallets work?

Wallets stored on exchanges are called hosted web wallets, which means your keys are stored online by a trusted third party.

This gives you the ability to recover your password if you forget it, but you don't have ultimate control over your funds because they are stored by someone else (and therefore at risk of hacking).

Most exchanges allow you to keep cryptocurrency in your online account. Cryptocurrency exchanges are completely digital and, like any virtual system, are vulnerable to hackers, malware and malfunctions.

Although exchanges take steps to keep their platforms secure, wallets provided by exchanges can be hacked. A serious hack could bankrupt a cryptocurrency exchange.

8 – What are the different types of cryptocurrencies?

Bitcoin (BTC), Ethereum (ETH), Tether (USDT), USD Coin (USDC) and Binance Coin (BNB) are some of the popular ones.

Cryptography in Bitcoin Transactions

In a normal bitcoin transaction, first there are the details of the transaction: who you want to send bitcoins to and how many bitcoins you want to send. Then the information is passed using a hashing algorithm. Bitcoin uses the SHA-256 algorithm. The output is then passed through a signature algorithm with the user's private key used to uniquely identify the user. The digitally signed output is then distributed over the network for other users to verify. This is done using the sender's public key.

Users who check a transaction to see if it is valid or not are known as miners. Then the transaction and several others are added to the blockchain where the details cannot be changed. The SHA-256 algorithm looks something like the image below.

Bitcoin vs. Ethereum

Now you know that Bitcoin is a digital currency that is decentralized and works on blockchain technology and that it uses a peer-to-peer network to conduct transactions. Ether is another popular digital currency and is accepted on the Ethereum network. The Ethereum network uses blockchain technology to create an open-source platform for building and deploying decentralized applications.

Similarities

Bitcoin and Ether are currently the largest and most valuable cryptocurrencies. Both use blockchain technology, in which transactions are added to a container called a block, creating a chain of blocks in which the data cannot be changed. For both, the currency is mined using a method called proof of work, which involves a mathematical puzzle that must be solved before a block can be added to the blockchain. Finally, both Bitcoin and Ether are widely used around the world.

Differences

Bitcoin is used to send money to someone. The way it works is very similar to how currency works in real life. Ether is used as a currency on the Ethereum network, although it can also be used for real-life transactions. Bitcoin transactions are done manually, which means you have to do these transactions in person when you want to do them. With Ether, you have the option to make transactions manually or automatically – they are programmable, meaning that transactions take place when certain conditions are met. In terms of timing, it takes about 10 minutes to complete a Bitcoin transaction – that's how long it takes to add a block to the blockchain. With ether, it takes about 20 seconds to complete a transaction. As of May 2020, 1 Bitcoin equals $8741.81 and 1 Ether equals $190.00.

Cryptocurrencies have unique properties and perform different tasks and functions. In the UK, they fall into the following categories, most of which (except CBDC) can be bought on various exchanges.

                                    #basicsofcryptocurrency

9-Cryptocurrency Scams?

There are scams in the cryptocurrency world. To avoid becoming a victim of fraud, it is good to be aware of scams.

i) Fake applications or websites

 There are fraudulent apps or websites that look very similar to well-known apps and websites. Always use a website with a small lock icon next to the website address and an https link. If you're using an app, make sure it's verified.

ii) Fraudulent Emails

they may look like emails you received from a legitimate business. Always check the address the email came from to confirm it is from a real company.

iii) Unrealistic claims

 some scammers guarantee that you will make an exorbitant profit, release money or receive large payouts with guaranteed returns. Fraudsters cannot back up these claims with details or truthful explanations.

10-A Brief History of Cryptocurrency

In the caveman era, people used a barter system in which goods and services are exchanged between two or more people. For example, someone might exchange seven apples for seven oranges. The barter system fell out of popular use because it had some glaring flaws:

• People's needs must match - if you have something to trade, someone else must want it, and you must want what the other person has to offer.

• There is no common measure of value - you have to decide how much of your items you are willing to trade for other items, and not all items can be split. For example, you cannot divide a living animal into smaller units.

• Goods cannot be easily transported, unlike our modern currency that fits in a wallet or is stored in a mobile phone.

After people realized that the barter system wasn't working very well, the currency went through several iterations: In 110 BC, an official currency was minted; in 1250 gold-plated florins were introduced and used in Europe; and from the 1600s to the 1900s, paper currency gained widespread popularity and eventually came into use around the world. This is how the modern currency as we know it was born.

                                #howcaninvestincryptocurrency

Modern currency includes paper currency, coins, credit cards and digital wallets – such as Apple Pay, Amazon Pay, Paytm, PayPal and so on. Everything is controlled by banks and governments, which means that there is a centralized regulatory body that restricts the functioning of paper currencies and credit cards.

11- Difference between traditional currencies and cryptocurrencies?

Imagine a scenario where you want to repay a friend who bought you lunch by sending money online to their account. There are several ways this can go wrong, including:

• A financial institution may have a technical problem, such as its systems not working or machines not working properly.

• Your account or your friend's account may have been hacked - such as a denial-of-service attack or identity theft.

• The transfer limits for your account or your friend's account may have been exceeded.

There is a central point of failure: the bank.

This is why the future of currency lies in cryptocurrency. Now imagine a similar transaction between two people using a Bitcoin app. A notification will appear asking if the person is sure they are ready to transfer bitcoins. If yes, the processing will take place: The system will verify the identity of the user, check if the user has the required balance to complete the transaction, etc. Then the payment will be transferred and the money will come to the recipient's account. All this happens in a matter of minutes.

Cryptocurrency thus removes all the problems of modern banking: There are no limits to the funds you can transfer, your accounts cannot be hacked, and there is no central point of failure. As mentioned above, there are more than 1,600 cryptocurrencies available as of 2018; some popular ones are Bitcoin, Litecoin, Ethereum and Zcash. And every day a new cryptocurrency appears. With how much growth they're experiencing right now, there's a good chance there will be plenty more to come!

12-The future of cryptocurrency

The world is clearly divided when it comes to cryptocurrencies. On one side are advocates like Bill Gates, Al Gore and Richard Branson who say cryptocurrencies are better than regular currencies. On the other side are people like Warren Buffet, Paul Krugman and Robert Shiller who are against it. Krugman and Shiller, who are both Nobel laureates in economics, call it a Ponzi scheme and a vehicle for criminal activity.

In the future, there will be a conflict between regulation and anonymity. Since several cryptocurrencies have been linked to terrorist attacks, governments would like to regulate how cryptocurrencies work. On the other hand, the main emphasis of cryptocurrencies is to ensure that users remain anonymous.

Futurists believe that by 2030, cryptocurrencies will occupy 25 percent of national currencies, which means that a significant part of the world will begin to believe in cryptocurrencies as a method of transaction. It will be increasingly accepted by traders and customers and will continue to have a volatile nature meaning that prices will continue to fluctuate as they have for the past few years.

This concludes our cryptocurrency course. If you want to learn more about blockchain (the underlying technology behind cryptocurrencies like Bitcoin), check out Simplilearn's Blockchain Basics. To learn even more and get a blockchain certification to boost your resume, take the Blockchain Certification Course.

If you have any questions in the article “what is cryptocurrency”, please ask in the comment section below. Our experts will get back to you as soon as possible.

                            #cryptocurrency the future

13- ADVANTAGES AND DISADVANTAGES OF CRYPTOCURRENCY

5- Advantages of cryptocurrency

While cryptocurrencies are a relatively recent invention (Bitcoin, for example, started in 2009), they are definitely here to stay, with all their benefits. From the prospect of big returns to 24/7 trading on an ultra-secure, transparent infrastructure, the cryptocurrency world has a lot to offer – if you know how to tap into it.

1. High risk – and the potential for high rewards

There are more than 10,000 cryptocurrencies on the market today, and each of them has its own peculiarities. However, all cryptocurrencies have a few things in common – such as their tendency to experience sudden jumps (and drops) in value. Prices are primarily driven by the supply of coins from miners and the demand for them from buyers. And this supply and demand dynamic can lead to high returns. For example, the price of Ethereum roughly doubled from July 2021 to December 2021 – quite a payoff for investors who got in at the right time.

2. The blockchain technology that underpins cryptocurrency is inherently secure

Some of the main advantages of cryptocurrencies are not associated with the currencies themselves, but with the infrastructure that supports them. That's the blockchain – a decentralized ledger for data storage that tracks every transaction made on it. Once you make a record on the blockchain, it can never be erased. And with the blockchain stored decentralized on multiple computers, no hacker can access the entire chain at once; all information stored in it is safe forever good.

3. Goodbye to traditional banks - hello to a fairer and more transparent financial system

Overall, our financial system revolves around third-party intermediaries that process transactions. That means if you make a transaction, you're putting your trust in one or more of these intermediaries—and the recession of the early 2000s made many people wonder if that was a good idea. Blockchain and cryptocurrencies offer an alternative. They can be viewed by anyone, anywhere, so you can participate in financial markets and make transactions without any intermediaries.

4. Crypto trades around the clock

Another advantage that cryptocurrencies have over banks is that crypto markets are always open. With coin mining and 24/7 transaction recording, you don't have to wait for the NYSE, NASDAQ or any other exchange to start trading on a given day if you want to buy, sell or trade cryptocurrencies. This has had such an impact that mainstream exchanges are considering trading shares outside normal banking hours - although that may still be a long way off. So for investors who are on the go 24/7, cryptocurrencies could be the best way to generate income outside of regular business hours.

5. Cryptocurrencies could help investors beat inflation

Cryptocurrencies are not tied to a single currency or economy, so their price reflects global demand rather than, say, national inflation. But what about the inflation of cryptocurrencies themselves? As an investor, you can rest easy for the most part. The number of coins is limited so the amount available cannot get out of control and thus no inflation. Some coins (like Bitcoin) have an overall cap, others (like Ethereum) have an annual cap, but either way this approach keeps inflation at bay.

5-disadvantage of cryptocurrency

That's a lot of glitter, but is the outlook for cryptocurrencies really that golden? Let's look at some of the disadvantages. Some are easy to solve, others less so - but it's always worth keeping them in mind.

1. Understanding cryptocurrency takes time and effort

Cryptocurrencies can take a while to get the hang of. Unless you're a digital native, the concept of cryptocurrency (let alone blockchain) can feel anything but second nature. And trying to invest in something you don't really understand is a risk in itself. There are plenty of online resources to help you (including the N26 blog series on cryptocurrencies), but you'll still need to spend some time to really understand the pros and cons of investing in cryptocurrencies.

2. Cryptocurrencies can be an extremely volatile investment

While the price of a cryptocurrency can shoot to dizzying heights (with attendant benefits for investors!), it can just as quickly sink to terrifying lows. So if you're looking for steady returns, this might not be the best bet. The cryptocurrency market inherently favors speculation, and its relatively small size makes it more vulnerable to price fluctuations. This in turn can cause confusion with the value of the coins - one of the main disadvantages of cryptocurrency.

3. Cryptocurrencies have not yet proven themselves as a long-term investment

While cryptocurrencies have become widely known and continue to gain popularity, it's worth remembering that they've only been around for a little over a decade. The concept only really emerged with the publication of the Bitcoin white paper in 2008. Stock markets, on the other hand, can look back on a century of history. The London Stock Exchange, for example, was founded in 1801. Gold has been a proven store of value for millennia. But cryptocurrencies? No one really knows what will happen to cryptocurrencies in the future – and you have to be brave to step into these uncharted waters as an investor.

4. Crypto has serious scalability issues

You could be forgiven for thinking that digital currencies work at lightning speed – and they do, to an extent. But at some level, they encounter major problems that make it difficult to expand them on a large scale. Cryptocurrency providers themselves admit that this is a problem, with the people behind Ethereum saying that the blockchain has reached "certain capacity constraints" that slow down the speed of transaction processing. This can be a frustrating experience for those involved in the transaction, not to mention the potential financial losses it can cause.

5. Cryptocurrency beginners are vulnerable to security risks

Cryptocurrencies may not have the risks associated with using central intermediaries, but that does not mean they are completely without security issues. As a cryptocurrency owner, you can lose the private key that gives you access to your coins – and with it, all your holdings. And then there's hacking, phishing, and all the other attempts to gain control through malicious means. This is something that seasoned investors are wary of, but newer investors are more susceptible to these kinds of traps.

14- The best cryptocurrency to invest.

There is no cryptocurrency that is significantly better than all the others. It comes down to personal preference, but there are things you might want to watch out for. Think about your individual risk tolerance; can you lose a substantial part of your investment if the value of your chosen coin plummets? Are you only using the coin to generate revenue or are you hoping to pay with it as well? Is it just the money, or do you want to invest in a coin with a broader social or environmental impact? One easy approach is to simply pick the market leader, Bitcoin. It is the original cryptocurrency and at the same time the one that has built the largest information base.

What are the advantages and disadvantages of Bitcoin?

Bitcoin, which trades under the abbreviation BTC, comes with a number of benefits. It has a cap of 21 million coins, is guaranteed to be inflation-proof, and its high prices certainly offer investors room to reap the rewards. And Bitcoin is the most widely used cryptocurrency for payments. Of course, this has its drawbacks. Bitcoin's blockchain infrastructure starts to slow down once it exceeds seven transactions per second (a real problem when you consider that Visa processes around 1,700 transactions per second!). And because it's the most well-known cryptocurrency of all, it's a prime target for hackers and fraudsters of all stripes. For more information about Bitcoin, see our, what is Bitcoin? Article.

What else should I know before trading cryptocurrencies?

Cryptocurrencies can be a minefield for new investors. From unfamiliar terminology to complex technology, it's a topic that takes some getting used to. As with everything, there are benefits and risks involved in trading cryptocurrencies, but N26 is here to help. Whether you want to pay for your daily necessities with Bitcoin or use another coin to boost your investment portfolio, we can show you all the pros and cons of cryptocurrency.

                               # images and types of cryptocurrency

15 -free questions (FAQ)

1. What are the most popular cryptocurrencies?

Consider buying Ravencoin, Ethereum and Bitcoin today and keep forever. Due to their volatility, cryptocurrencies are best suited for those who can tolerate risk. For these investors, investing in leading cryptocurrencies now, while the market is unreliable, can pay off in the long run. One of the largest cryptocurrency exchanges in the world, Binance, has its own coin called BNB. Although Binance Coin was first designed as a token to pay for discounted transactions, it is now used to make payments and purchase various goods and services.

2. Are cryptocurrencies securities?

Crypto derivatives such as Bitcoin futures are offered on the Chicago Mercantile Exchange, the largest and most comprehensive financial market in the world. According to the Securities and Exchange Commission (SEC), Ethereum and Bitcoin are not securities.

3. How do cryptocurrencies work?

Digital currency or cryptocurrency is an alternative payment method developed using encryption methods. By utilizing encryption technology, cryptocurrencies can function as both a medium of exchange and a virtual accounting system. In order to use cryptocurrencies, you need a cryptocurrency wallet. Blockchain networks power cryptocurrencies. Blockchain is simply a growing collection of digital blocks that serve as a ledger. Blockchain's distributed ledger allows data to be stored on multiple computers in a network. Nodes are individual computers that verify and store data.

4. How to invest in cryptocurrency?

Opt for the bitcoin exchange of your choice. Then create an account with a bitcoin exchange. Spend fiat money to fill your account. Choose the cryptocurrency you want to buy. Place a buy order for the cryptocurrency of your choice.

5. What is the minimum amount you can invest in cryptocurrencies?

You can buy or sell digital money for as little as $2.00 ($2 or €2) denominated in your home currency.

6. How many cryptocurrencies are there?

There are already more than 12,000 cryptocurrencies and the rate of growth is simply astounding. The number of cryptocurrencies more than doubled between 2021 and 2022. By the end of 2021, the market had added approximately 1,000 new cryptocurrencies per month.

            bitcoin and cryptocurrency shapes

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