Take a quick look at what cryptocurrency is

Cryptocurrencies are fast becoming a legitimate financial asset that is increasingly difficult to ignore. Public figures like Warren Buffet and Elon Musk have strong views on the subject. Central banks, leading software companies and governments around the world are all delving into the technology, and some are even considering launching their own tokens. But beyond that, the vast majority of people still have a limited understanding of cryptocurrencies. Many do not understand the basic concepts behind crypto. So let's remove the complexity and explain all about cryptocurrencies with Big Eyes Asahi.

Cryptocurrency is digital cash. It does not have a physical existence like bills and coins, but exists purely as a digital entry in an online database. The database is simply a collection of numbers and letters protected by a password, hence the name cryptocurrency.

Cryptography is a method of encoding and decoding information that can only be read and processed if the members involved in the transaction have the correct public and private keys.

In this case, cryptography enhances the security of cryptocurrencies by eliminating the possibility of forgery and double payments. However, this does not mean that cryptocurrencies are immune to all hacking. In fact, a number of cryptocurrency startups and exchanges have fallen victim to some of the worst cyberattacks in the past few years.

Unlike traditional currencies, cryptocurrencies are decentralized, meaning they are created, stored, and processed outside the scope of a central bank or government. As a result, cryptocurrencies avoid any interference from government agencies or financial institutions. Traditional financial models usually control individuals' access to their own money. The lack of centralized authority allows for anonymous processing of crypto transactions, which is the main benefit of cryptocurrencies touted by many.

Few people realize that Bitcoin, the first and most valuable cryptocurrency, is a byproduct of another invention. The unknown inventor of Bitcoin, who goes by the pseudonym Satoshi Nakamoto, never intended to create a digital currency. Instead, Satoshi Nakamoto wanted to develop a new electronic cash system, which he proposed in a late 2008 paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System.

"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution."

Satoshi Nakamoto proposed a payment system based on cryptographic proof rather than trust. This cryptographic proof comes in the form of cryptocurrency transactions recorded on a distributed ledger called a blockchain.

Blockchain is a distributed ledger technology that keeps a permanent record of all transactions. Transactions are stored as blocks in a database and linked together to form a chain, hence the name blockchain. Think of it as a book where you write down all the transactions you make every day. Each page in the book is a block, and the entire book makes up the blockchain. Every time a cryptocurrency is bought or sold, all users on the blockchain network add and verify the transaction. They use one of two methods to verify each transaction: proof of equity and proof of work.

The digital verification process and the nature of the blockchain make it nearly impossible to modify or delete records on the ledger. Any change to the data on one block changes the data on all other blocks on the blockchain.

There was a time when it was easy for anyone to keep track of all the virtual currencies in use. But that is not the case today. Since the 2010s, the cryptocurrency market has skyrocketed. Bitcoin, Ether, Dogcoin, and Litecoin are some of the popular coins that everyone knows about, but there are tons of digital currencies that have not made it into the mainstream discourse. As of July 2021, there are nearly 6,000 virtual currencies listed with market research firm Coin Market Cap.

As of July 2021, the crypto market was worth more than $1.35 trillion, according to the same firm. However, nearly 60% of that comes from bitcoin and ethereum alone.

There are multiple ways to define and separate digital currencies. The simplest of these is to categorize cryptocurrencies into the following three categories:

Bitcoin : A self-explanatory category, Bitcoin is the first and most popular cryptocurrency, and has had a significant impact on the nature of the crypto market.

Torrent coins : These are alternative currencies that were introduced after the success of Bitcoin. Some of the cottage coins work in exactly the same way as Bitcoin. However, others address the obvious shortcomings of Bitcoin and plan themselves as better alternatives. Using different algorithms, they present themselves as more environmentally friendly coins and claim a competitive advantage over Bitcoin.

Tokens : These are cryptocurrencies that do not have their own blockchain. Tokens are built on existing blockchains, such as the Ether platform or the Chiliz blockchain.

As cryptocurrencies have grown in popularity, questions about the value of digital currencies have entered the public debate. Even though the cryptocurrency market is now worth over a trillion dollars, many still question the intrinsic value of cryptocurrencies. However, these questions stem from a misunderstanding of the definition of currency. Simply put, currency is anything that is accepted as a medium of exchange between buyers and sellers. It earns its value through the price people are willing to pay to acquire the currency.

Think of cryptocurrency as digital gold. Gold has value because most people agree on it. The same principle governs the value of cryptocurrencies. The same types of factors drive the price of cryptocurrencies:

Utility of the token : The use case or utility of the currency determines its price. What problems does it solve? How much energy or effort is required for the currency to be used for mining or updating its protocol?

Supply and Demand : Much like fiat (government-issued) currencies, the value of cryptocurrencies is heavily influenced by supply and demand. If enough traders invest in cryptocurrencies, prices will rise as more people see them as an attractive form of currency. This also means that the market must limit the amount of cryptocurrency available to maintain its value.

External Drivers : External factors such as government regulations and tweets from famous people can also affect the value of cryptocurrency. For example, when Elon Musk tweeted about working with the developers of Dogcoin in May 2021, he drove up the price of Dogcoin by 30%. Similarly, his tweets about Bitcoin heavily influenced the price of the cryptocurrency.

A distributed ledger stores proof of how much cryptocurrency you own. It is updated every few minutes when someone mines new coins or moves their digital currency. To access your cryptocurrency, you need a private key (a 256-bit passphrase) to create a unique signature and enable you to use your cryptocurrency.

A private key is associated with a public key and an address (string), similar to a bank account address. You can store such private keys in a digital wallet online, on your computer, or on an external storage device.

You can also print out your keys and store them in a safe place. However, if there is a problem with your password and key, you may not be able to access your funds.

Cryptocurrency and the distributed ledger technology at its heart are still in the early stages of development. Like any new technology, it won't suddenly go from rare to ubiquitous.

Despite the obstacles, cryptocurrencies are becoming a legitimate financial asset. As Blythe Masters, a former JPMorgan Chase executive, said, "You should take this technology as seriously as you took the development of the Internet in the early 1990s." And, while currencies like Bitcoin have a significant impact on the environment, more efficient alternatives are becoming available.