In the past few years, Bitcoin and other cryptocurrencies not only witnessed a surge in prices but also garnered huge attention from potential investors. Cryptocurrencies are now being looked at as an investment opportunity. The reason that has led to so much attention on cryptocurrencies is the ease at which transactions can be made, confidentiality, cross-border transactions, and other additional aspects.
What is Cryptocurrency?
Cryptocurrency is a digital currency that operates on a decentralized network. A decentralized network here means that they are outside the control of any government or central authority. Transaction in cryptocurrencies can be processed without the involvement of a third party, directly between the payee and payer.
The most widely used and biggest cryptocurrency in terms of market cap is Bitcoin. There is no fundamental value that is associated with Bitcoin and it is also not legal tender in various countries. Therefore, at present, the value of Bitcoin is only accounted for places where people or organizations choose to accept Bitcoin as a currency.
There also is a huge misconception among people that “fiat money” is regular money and cryptocurrencies are not included in them. But, this is completely wrong, any money that is not backed with fundamental value is considered as fiat money, including cryptocurrencies. Stablecoins cannot be considered as fiat money except for those which are backed by national fiat money.
The quantity of Bitcoin is increasing slowly, but it cannot exceed 21 million which is its market cap. With a limited supply of Bitcoin, the value of Bitcoin is likely to increase, if demand continues to be on the rise. Bitcoin value can also fall to zero if it is not accepted as currency for goods and services.
Working of Cryptocurrency
In Bitcoin transactions, the payee will submit the transaction to the Bitcoin network by using his private key. The number of Bitcoins to be transferred is specified by the transaction record. The operator of Bitcoin, known as ‘nodes’, will validate and transmit the transaction throughout the Bitcoin network. The ‘miners’ will accumulate several transactions to form a ‘block’ and will then add the block, after performing costly computations, to the blockchain.
During the validation process, the miner will ensure that all the aspects of the transaction are correct and within the rules of Bitcoin. For every valid transaction on a block, a miner will be rewarded but for invalid transactions, there will be no reward.
The transaction between the payee and payer is direct and there is no involvement of any third party. Confidentiality of identity involved in a transaction is a primary feature of Bitcoin, making it popular among criminals. In a situation, where a user loses its private key, Bitcoin holdings will not be accessed without knowledge of the private key. It is also important for investors to protect their private keys from falling into the wrong hands.
Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.
Photo by – geralt on Pixabay