An overview of the term Cryptocurrency, with its function for the newbies, before stepping into the market of Cryptocurrency.
Cryptocurrency is an online mode of payment exchanged for goods and services. It is also called digital or virtual currency. It is a derivative of encryption techniques used to secure the network. That makes it impossible to double-spend or counterfeit. The government or central authority does not have control over it, so it is a decentralized structure. The absence of intervention of any such mediators reduces the cost, making this mode portable, divisible, inflation resistant, and transparent. On the other hand, it has a negative aspect also. The reasons being the susceptibility of its infrastructure, use for illicit activities, and unpredictability of the exchange rate.
Types of Cryptocurrency
Cryptocurrency functions like any other currency for the trading of goods, and also can be kept as currency.
- Bitcoin
- Ethereum
- Litecoin
They are the main types, but the most common is Bitcoin.
Like any other, Cryptocurrency also has some crypto terms. One should be aware of them in order to develop a better understanding, which makes it easier to speak the language.
- Blockchain: It is a digital register of recorded data that is shared. When a Cryptocurrency unit is sold or bought, it maintains the transaction history showing the change of ownership. Each transaction gets recorded as ‘blocks,’ and is successively added to the existing ‘block.’ It is a technique with a unique security feature, unlike other computer files.
- Mining: A process of checking the recent Cryptocurrency transaction followed by a new block addition to the blockchain is called Cryptocurrency mining.
- Ledger: A real-time record of every transaction which is open to the public.
- Hashes: A unique segment of code valid for each transaction.
- Tokens: It is a type of crypto asset other than the currency, used for practical reasons.
- CFD: A Contract For Difference (CFD) is a contract between a buyer and a seller. That mandates the buyer to pay the difference of purchase and sales value of the asset. A CFD does not provide the ownership of the underlying asset.
- Wallet: It is used to send, receive and monitor the balance of digital currency. It can be the hardware or software. Hardware is safer as it is used to save the private key required to sign in a new transaction. If there is no backup and the hardware is lost, the holder may lose the assets.
What is Cryptocurrency Market?
As said, Cryptocurrency is a digital asset in the form of decentralized currency. It works on blockchain technology and, each transaction generates a unique segment of codes (Hashes) that gets recorded in a decentralized ledger. This ensures the safety of Crypto transactions, making it impossible to fake Hashes.
Unlike other currencies set by the countries, Cryptocurrency is scarce and in demand, which makes it valuable. The investors are the ones who decide its value.
Bitcoin is the most heard form of Cryptocurrency. For specific use, ‘Tokens’ are in demand these days.
Buying, Selling, and Trading of Cryptocurrency
CFD trading account or buying and selling the underlying coins via an exchange are the two ways of venturing on price movement for trading in Cryptocurrency.
- In CFD trading, without taking ownership of underlying coins, you can speculate on Cryptocurrency movements. You can go long (buy) or short (sell) as per your choice. To gain exposure to the underlying market, a small deposit (margin) needs to be kept by the investor. But profit or loss is calculated considering the overall size of your position.
- In the exchange method, you need to create an exchange account with full value to open the account and store the token in your wallet. Here you sell and purchase the coin yourself.
How does Cryptocurrency market work?
The cryptocurrency market is decentralized- not governed by any central authority. It is a digital asset that runs across the computers, bought and sold via a CFD trading account or exchange, and stored in ‘Wallets.’
As it is a virtual asset, it exists only as a shared digital record of ownership. Cryptocurrency is stored in the blockchain and, when a person wants to send it to another, he sends it in his digital wallet that is verified and then added to the blockchain via mining. In this way, a new Cryptocurrency token is created. Anyone who is within the computer network of the blockchain file can read it.
This provides transparency and also difficulty in alterations by hacker, human or software errors. Also, if the cryptographic linkage between the blocks is disturbed, the fraudulent attempt is reflected easily.
Computer mining searches pending transactions from a pool before a new block is added to the blockchain. Then the sender’s balance is checked if he has enough funds to complete the transaction. This gives the history of the details stored in the blockchain. A new block is created by accumulating the valid transaction.
Thereafter, a new cryptographic link is generated to link the new block to the blockchain file, which is further updated across the network.
Certain factors affect the price of Cryptocurrency
- Supply and Demand: Bitcoin supply is limited in the blockchain by code. Its reason being, money supply transparency.
- Application of Cryptocurrency: Based on the increased use of it, the demand and value also increases.
- Regulatory Changes: The value of Cryptocurrency is highly affected by the expectation of future regulations.
- Technological Changes: They have an impact on the price of Cryptocurrency. For example, price decreases at the news of hacking.
Besides the primary function of Cryptocurrency, which is buying, selling and, exchange, it is also a means of investing for the future. Security and currency are the reasons to say, it is the next evolution. Crypto is here to stay for long and will undoubtedly become a part and parcel of our lives and financial systems. It is hard to imagine a future without Cryptocurrency.