Crypto currency is a virtual currency that has grown increasingly popular in recent years because it uses cryptography that provides security of transactions and protection from counterfeiting.
This modern-day medium of exchange for digital information is completely decentralized and hence no government has control over it. Apart from its use as a currency, it can also serve as a great investment platform for potential entrepreneurs.
Crypto currency transactions are usually conducted online, but some vendors also accept them in person via digital wallets or mobile payments.
There are many crypto currencies around these days, but Bitcoin is the obvious leader of the pack since it is the oldest and most popular. Other crypto currencies like Dash, Namecoin, Limecoin and Ethereum are often called altcoins (alternatives to Bitcoin).
How do they work?
Bitcoin and most of the altcoins have a technical system that aims to reduce production as time passes: a built-in market cap. Bitcoin has a limit of 21 million coins in circulation. On the other hand, a conventional currency can always be added to, resulting in inflation.
Most crypto currency specifications are based on the proof-of-stake or proof-of-work guidelines. Crypto currency miners are responsible for maintaining crypto currencies; these miners are ordinary people who perform transactions using ASIC machines or ordinary computers.
How to acquire crypto currency
Many people prefer buying Bitcoins and altcoins from platforms like GoCoin which offer crypto exchange services; this option is cheaper, less time consuming and less tedious. However, you can also do the mining yourself if you have a very powerful computer.
Mining involves securing the peer-to-peer infrastructure of crypto currencies by calculating complicated problems using your computer. As a miner, you have to validate every transaction while averting counterfeits and double-spending. In return, you get bitcoin pieces.
Performance and risk involved
Since their inception in 2009, crypto currencies have been enjoying fast growth and now have a market cap of more than $6 billion. They have evolved from black market currencies for sites like Silk Road to become popular alternatives to conventional currencies and investments.
Bitcoin started at 10 cents to the dollar in 2009; by December 2013, it had risen to more than $1,200. This explosive increase in value caught the media’s attention and made marketing the currency much easier.
In February 2014, however, the weakness of Bitcoin was exposed when Mt. Gox, a leading exchange, made a loss of about $500 million (equivalent to 850,000 Bitcoins). This was particularly serious since Mt.Gox was once responsible for more than 70% of Bitcoin transactions.
This turn of events slowed down the emergence of crypto currencies as reliable mainstream currencies. Bitcoin’s overnight crash scared off many potential investors, and some countries (like China) even went as far banning its use as a currency.
Crypto currency security is based on the complex process the miner has to go through to locate the hash set intersections.
It is also based on the 51% attack, wherein if a miner has a mining power that exceeds 51% of the network, he or she can come up with a different blockchain by manipulating the global blockchain ledger.
Even at this stage, the attacker’s options will still be rather limited, but he or she will be able to stop another transaction or reverse one of his or her own.
Crypto currencies are also anonymous and therefore they cannot easily be seized by law enforcers.
Below we look into some of the commonest and most popular crypto currencies.
Various kinds of crypto currencies
In 2009, the pseudonymous Satoshi Nakamoto started the virtual currency revolution by creating the first crypto currency: Bitcoin. Bitcoin uses the proof-of-work protocol to perform its functions.
Bitcoin is based on a cryptographic hash algorithm called SHA-256. The SHA-256 was developed by the U.S National Security Agency. However, Bitcoin is completely independent and is not associated with any nation (unlike, e.g., the Chinese Yen or the US Dollar).
Sellers and buyers who are involved in Bitcoin transactions are identified using their Bitcoin wallet addresses in order to protect their true identities. Every wallet address is made of a unique code, and no one can link it to the user unless he or she chooses to allow this.
This means that you can purchase or sell items electronically without worrying about who is watching. However, Bitcoin wallet addresses, together with other transactions, are recorded in the block chain; this is the platform’s public log.
Remember, Bitcoins can be traced back to you if you buy them from a trading exchange or platform that retains your identity details.
You must have a Bitcoin wallet in order to create a Bitcoin address; you will also need it for the process of sending and receiving Bitcoins. A Bitcoin wallet is software that is equivalent to your conventional bank account; it can hold as many Bitcoin addresses and Bitcoins as you wish.
Many people like the Bitcoin crypto currency because it cannot be hacked and has very low (and sometimes free) transaction fees.
Namecoin was the first altcoin, following in the footsteps of bitcoin in April 2011; it has a decentralized Domain Name System (DNS) that blocks internet censorship.
This crypto currency uses the proof-of-work protocol and, like Bitcoin, can only have 21 million coins. However, it is different from Bitcoin in that its blockchain transaction database can be used to store data.
Namecoin also has the potential of being used for personal namespaces, domain name registration, messaging, and issuance of stocks, among others.
Litecoin came into the crypto currency limelight in October 2011. This crypto currency replaces the usage of SHA-256 as a hash function with Scrypt. Unlike Bitcoins, which must be mined using specific computers like ASIC machines, Litecoins can be mined with normal machines.
Late 2013 saw Litecoin hit a market cap of $1 billion after enjoying good media attention.
In 2011, a payment platform by the name Ripplecoin was introduced to the market. It was built on the foundation of the Bitcoin codes but was meant to support crypto currency, conventional currency and so on.
This crypto currency was first introduced on January 18, 2014, under the name XCoin. The name was soon changed to Darkcoin on February 28 of the same year. The manufacturers settled on the name Dash on March 25, 2015. It is one of the most popular crypto currencies today.
Dash stands out because it has the PrivateSend ability, which is used to conduct private transactions; it also has InstantSend, a feature that is used for immediate transactions. This crypto currency can be categorized as an open source peer-to-peer currency.
It uses X11, a chained hashing algorithm. This crypto currency also uses the proof-of-work protocol and works under a decentralized budgeting and governance structure.
Vitalik Buterin came up with the idea of Ethereum in late 2013 and grabbed a World Technology Award for the invention in the following year. This programmer co-created this platform according to Bitcoin guidelines .
This platform is based on blockchain and uses a functionality called smart contract. Another feature that stands out is the Ethereum Virtual Machine (EVM), a decentralized virtual machine that uses a crypto currency called ether in the transaction of peer-to-peer contracts.
Currently (as of July 2016) there exist two Ethereum blockchains: Ethereum Classic and Ethereum. Crypto currency exchanges use ether from both of them for trading.
The majority of the world’s nations have no issue with the usage of crypto currencies. Vietnam and Iceland, however, have frozen foreign exchange therein.
Crypto currency is legal in Russia, but you cannot use it to buy goods unless you change it into Russian rubles. In China, financial institutions are not allowed to transact using Bitcoins.
In the United States, the law states that Bitcoins are not immune to capital gains tax. According to some rules released by the Financial Crimes Enforcement Network, Bitcoin miners may be answerable for selling bitcoins in exchange for money. However, this issue is still being debated.
Most people are still not aware of how to work with crypto currencies, and hence it comes as no surprise that they do not know how to use them as an investment opportunity.
Crypto currencies have proven to be good alternatives to the traditional ways of handling money. They have to evolve some more before they can beat conventional currencies, but given that they are both a virtual currency and an investment, there are unquestionably brighter days ahead.
Attributes like security, anonymity and decentralization will be key in deciding which crypto currency eventually becomes the must-have electronic currency. In the meantime, remember to take calculated risks, since the value of some of these crypto currencies (like Bitcoin) has been known to fluctuate rapidly.