What Is a Cryptocurrency? ... CRYPTOCURRENCIES: MEANING, TYPES, ADVANTAGES, DISADVANTAGES

What Is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency that makes use of a peer-to-peer system for a transaction to take place between users. It makes use of blockchain technology and is secured by means of cryptography, making it impossible to counterfeit or double-spend. Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.

Cryptocurrencies promote secure payments online and are denominated in terms of virtual tokens, which are represented by ledger entries internal to the system. These entries are safeguarded by cryptographic techniques and encryption algorithms

Types of Cryptocurrency

The first blockchain-based cryptocurrency and most popular and valuable is Bitcoin. Bitcoin was invented by an unidentified programmer(s) under the name Satoshi Nakamoto. The program became an open software in 2009. There are many other cryptocurrencies, classified as alternate coins (alt. coins), that have various functions and specifications. Examples of some alt. coins include Ethereum, Litecoin, Peercoin, and Namecoin, Ethereum, Cardano, EOS and many more. Bitcoin currently represents more than 68% of the total value of the cryptocurrencies in existence.


Advantages and Disadvantages of Cryptocurrency

Advantages

  • It is believed that cryptocurrencies make it easier to transfer funds directly between two parties, without requiring the intervention of a  trusted third party like a bank, escrow agent or a credit card company. Public and private key usage, as well as other mining mechanisms, makes it easy for transfers to be secured. The user has a wallet or account address (which has a public key), while the private key is used by the user to sign transactions. The private key is usually secret and known by only the owner of the account.


  • Cryptocurrencies are believed to serve as a store of value in times of inflation and unrest.

  • Also, cryptocurrency transactions are completed with little processing fees, making users ditch the higher transaction fees that are charged by banks and other financial institutions for transfers.

 

Disadvantages 

  • The anonymous and semi-anonymous features of cryptocurrency transactions pose several risks. This makes them to be used for a host of illegal activities, such as money laundering, sponsoring of terrorist activities and tax evasion


Sending Cryptocurrencies Along the blockchain.

Outlined below is the sequence of how a cryptocurrency (example Bitcoin) can be sent along the blockchain.

1. Then the sender creates and opens his blockchain address.

2. The sender proceeds to scan the receivers address.

3. The sender fills the number of bitcoins to be transferred, as well as the transaction fee he can afford.

4. The wallet signs the sender's transaction with the private key before sending it along the blockchain.

5. The transaction is sent to the closest node for verification, where it sits in the memory pool, waiting to be picked up by a miner.

6. Miners pick up the transaction, however those with a higher transaction fee first and groups them into block by solving some difficult mathematical puzzles.

7. The miner who gets the puzzle first and correctly propagates it onto the network.

8. The nodes verify the results as it propagates the block.

9. The receiver gets a notification of a successful transaction.


Criticisms of Cryptocurrency 

  • Volatility: market prices of cryptocurrencies are based on the laws of demand and supply, however any shift in the market can will the cryptocurrency fluctuate at a very wide range. This fluctuation makes them very volatile.


  • Also, the wallet or user account can be hacked which can lead to loss of funds.







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