After dealing with fiat currencies for most of their life, many people find it challenging to understand how digital currencies, or cryptocurrencies, work. With technological advancements, it has been expected that virtual currencies will take the lead in the fiat vs crypto race.
Since no central authorities issue cryptocurrencies, they are not subject to government involvement or manipulation. What makes cryptocurrencies secure and reliable is the fact that they are decentralized and backed by blockchain technology.
Since the development of the first cryptocurrency in 2009, thousands of others have been created for various purposes.
What Is Cryptocurrency?
“Crypto” in “cryptocurrency” stands for anonymous, which means that it warrants full anonymity and secure transactions. Since crypto transactions are done online in virtual currencies, there is no fear of counterfeiting. Cryptocurrencies are sent between two parties using private and public keys with minimal fees.
Cryptocurrencies have been around for more than ten years, and they have proven to be a valid rival to fiat currencies. What makes them a well-grounded currency is their ability to retain their value and security. Besides, anyone can use cryptocurrencies, regardless of their location and whether or not they have access to a bank.
Another thing that makes cryptocurrencies valuable is their scarcity. For example, bitcoin’s creator coded the cryptocurrency so that the maximum amount of bitcoins that can be “mined” is 21 million.
That makes each coin scarce, which equals value. The same cannot be said about paper money since a government can decide to print more money if needed, which automatically diminishes the money’s value.
How Do Cryptocurrencies Work?
Inventing a cryptocurrency was an accidental byproduct of creating a peer-to-peer electronic cash system that was supposed to eliminate double-spending. Another name people use for cryptocurrencies is digital cash. To use digital cash to transfer money or pay a bill, we need a payment network with accounts, balances, and transactions. The goal here is to use math to regulate currencies rather than governments.
A decentralized peer-to-peer network called the blockchain supports each digital currency and keeps track of them. This kind of work requires an infrastructure that makes cheating the system impossible. The sender and the receiver of digital cash must sign off on payments to create a digital signature, and they do that with the help of a public and private encryption key.
Every infrastructure has a ledger where all transactions are public so that there is total visibility. Now, complex math is used to verify the transactions between two parties. After that, the transaction becomes part of a record of other transactions stored on the blockchain. The blockchain has an essential role in keeping every transaction secure.
Why Choose Crypto?
The main advantage that cryptocurrencies offer is that transactions are made between two parties without any interference from banks, credit card companies, or others.
There are minimal transaction fees and the whole process lasts up to five minutes. Also, cryptocurrency transactions are irreversible, which means you cannot undo them after the process has been completed. You can be sure you’ll receive all the goods and services you paid for — there is no room for scams.
Cryptocurrencies are stable because they are not subject to inflation. They are decentralized and therefore not subject to governments that mismanage their economies. Additionally, you can use and manage your digital cash anytime and anywhere as long as you have a computer or smartphone. Transactions are undetectable, which makes it possible to transfer even billions without anyone knowing.
Of course, there are some disadvantages to cryptocurrencies. One of them is that they cannot be recovered like a credit card if lost. They are encrypted for security purposes and cannot be redeemed. Moreover, a lot of people still consider cryptocurrencies untrustworthy and few businesses accept this payment method.