What is cryptocurrency ? Key points to understand before investing - Definiton from Digimagg

Understanding Cryptocurrency

Cryptocurrency is a form of digital currency traded on decentralized blockchain networks. Unlike physical money, it's only accessible through electronic devices. Decentralized currencies are not governed by governments or financial institutions. Instead, cryptocurrencies operate on decentralized networks worldwide, allowing anyone with tech expertise to create them. This lack of central authority enhances security, making cryptocurrencies less susceptible to hacking, as there's no single point of failure. David Donovan, executive vice president at Publicis Sapient, highlights this feature, stating that cryptocurrencies are "hack-proof" due to their decentralized nature.

How Cryptocurrencies Operate

Although numerous cryptocurrencies exist, each possessing distinct characteristics, they generally function similarly. While discussing cryptocurrencies may involve some technical terminology, the underlying concepts are often straightforward to grasp.

"Ether, the native cryptocurrency of the Ethereum blockchain, is also tradable on various exchanges such as Coinbase, Binance.US, and Robinhood."

Blockchain Technology

Blockchain technology is the digital ledger containing all transactions related to a cryptocurrency. Maintained by computers globally, it resembles traditional double-entry bookkeeping systems. Each transaction results in debits and credits, akin to entries in ledgers. According to Donovan, "It works like a general ledger — it's that simple." Transactions are grouped into blocks and appended to the existing ledger, forming an immutable chain. Once added, blocks cannot be reversed or modified, hence the term "immutable" for blockchains. While some cryptocurrencies have their dedicated blockchains like Bitcoin and Ethereum, others are built on existing blockchains rather than starting anew.

Public Transactions Under Pseudonymity

Cryptocurrencies possess another distinctive trait: their blockchains serve as public ledgers, allowing anyone to view and examine transactions. Yet, they also offer a level of anonymity. According to Donovan, "You have a private key, which is how you initiate transactions, and a public key, which is how someone identifies you in the market."

Transactions on a blockchain are linked to the public key of a crypto wallet, but the owner of that wallet may remain unknown. This characteristic leads to cryptocurrencies being referred to as pseudonymous, as the public key acts as an individual's pseudonym.

Cryptocurrencies typically employ one of two methods to establish trust and determine the validity of transactions for inclusion in their blockchain:

• Proof of work involves miners worldwide competing to solve complex cryptographic puzzles and add the next block to the blockchain. The winners are rewarded after other network members confirm the sufficient computational effort expended to find the solution. According to Donna Parisi, global head of financial services and FinTech at Shearman & Sterling, "The validation of transactions in proof-of-work systems relies on the hard work, effort, and financial investment made by participants." However, proof-of-work systems are associated with high energy consumption.
• Proof of stake is a newer and less energy-intensive approach. Parisi explains, "Participants validate transactions on the blockchain by staking some of the currency they own, ensuring they only validate legitimate transactions."

Varieties of Cryptocurrencies

As per CoinMarketCap's data, there were over 25,149 distinct cryptocurrencies worldwide, collectively valued at approximately $1.16 trillion as of May 30, 2023. Among the widely recognized cryptocurrencies are:

Bitcoin, introduced in 2009, marked the inception of cryptocurrencies, offering an alternative form of decentralized and digital currency. Since then, various cryptocurrencies have emerged, each tailored to specific functions or transaction types.

According to Parisi, "Cryptocurrencies serve diverse purposes." Some are utilized in gaming environments for earning rewards, while others facilitate payments. Certain cryptocurrencies cater to cross-border remittances, and some are geared towards micro payments.

For instance, stablecoins aim to maintain a fixed exchange rate with another asset, like the US dollar. Governance tokens represent another specialized form of cryptocurrency, granting token holders voting rights in the corresponding crypto project.

Investing in Cryptocurrency

Investing in cryptocurrencies can be initiated through established crypto exchanges and investment platforms. Leading cryptocurrency exchanges like Kraken and Coinbase provide various features such as staking rewards, goal-setting tools, competitive fees, and more. Similarly, prominent investment apps like Robinhood Investing offer access to a diverse range of investments, minimal fees, market accessibility, and additional features.

Cryptocurrency Security: An Overview

While the blockchain technology underlying cryptocurrencies offers security through its immutable ledger system, there are still concerns regarding overall security in the crypto world. Despite the inherent value of blockchain technology, scams are prevalent in the cryptocurrency space, similar to traditional financial systems. Warning signs of scams, such as requests for payment via gift cards or wire transfers, should be taken seriously, but cryptocurrency scams may pose additional risks due to various factors.

Creating Your Own Cryptocurrency

Creating your own cryptocurrency is feasible for individuals with coding skills and advanced technical knowledge, but it's a complex process not advisable for novices. There are three main methods to develop a cryptocurrency.

• Developing a new blockchain is the most sophisticated approach to crafting a cryptocurrency, providing extensive flexibility in terms of nodes, architecture, tokenomics, and more.
• For those unable to create a new blockchain, modifying the open-source code of an existing blockchain is an option, albeit requiring substantial technical expertise.
• Another method involves building upon an existing blockchain, which is simpler and involves creating new coins or tokens, but its success is contingent upon the original blockchain's performance. Blockchains such as Binance and Ethereum support this process.

What is digital currency? 

Digital currency refers to a currency accessible solely in electronic form, typically through devices like computers or smartphones. Unlike physical money such as banknotes or coins, digital currencies lack a tangible counterpart. Nevertheless, akin to traditional currency, they can be utilized for purchasing goods and services, albeit predominantly restricted to online platforms like investment platforms, gaming sites, and gambling portals. Among the most popular variants are cryptocurrencies, central bank digital currencies (CBDCs), and stablecoins.

Nisa Amoils, a managing partner at A100xx Ventures, notes the ongoing push towards decentralization, highlighting digital currencies like cryptocurrencies as appealing investment options for many investors.

Digital currencies exist in two primary forms:

Investors, particularly those skeptical of government-issued currencies, are drawn to digital currencies like cryptocurrencies as alternative options. Nisa Amoils highlights that individuals previously marginalized from traditional financial systems or affected by currency devaluation are keen on participating in markets. This retail-driven trend reflects a broader desire for wealth creation and stems from a crisis of trust in traditional financial institutions, prompting a surge in speculative trading activities.

Should you invest in crypto ?

While the debate over cryptocurrency investment continues, it's valuable to comprehend the landscape to make informed choices. Whether you choose to fully commit or cautiously explore, engaging in activities like setting up wallets and trading can enhance your understanding. However, proceed thoughtfully, considering the evolving regulatory environment. Donovan advises starting with a reputable and regulated platform like Coinbase and taking gradual steps to navigate the system wisely.

Is investing in cryptocurrencies advisable?

Investing in cryptocurrencies could be a viable opportunity, with various methods available. One option is purchasing and holding coins in anticipation of their appreciation. Alternatively, participating in decentralized finance (DeFi) platforms for staking or lending could generate interest. Traditional avenues like cryptocurrency-linked exchange-traded funds (ETFs) are also viable. Furthermore, investing in related projects or industries is another avenue. Parisi suggests caution, advising investors not to allocate funds they can't afford to lose, emphasizing that cryptocurrency investments should comprise only a small portion of one's portfolio.

Before committing to any investment, it's essential to weigh its potential advantages and disadvantages.