A Blockchain refers to a distributed ledger technology that allows participants to store data globally on thousands of servers. It functions like a special kind of database where different parties can add but not modify or remove data. Transactions are added to the Blockchain in the form of units known as blocks. Each of these blocks contains important metadata such as transaction information.
The “chain” in Blockchain refers to each block’s ability to include a piece of information that links it to the previous block, inside its metadata. It includes a unique digital footprint for the previous block, known as a hash. The probability of getting the same output from a hash function from two pieces of data is almost nil. This prevents anyone from altering or modifying an older block in any form.
All network participants have to download the Blockchain in full. A node performs a number of checks when it receives a block, which can be rejected if anything there is any invalid information. After a node receives a particular block, it propagates a copy of the block to all other nodes until it covers the whole network.
What is Cryptocurrency?
The term cryptocurrency refers to a particular class of digital or virtual currency secured by cryptography technology. This makes it almost infinitely impossible to double-spend or counterfeit. Cryptocurrencies are usually decentralized in nature and leverage Blockchain technology. The property of decentralization is a unique feature in this type of currency as it puts them beyond the control of any centralized authority. This makes them immune from any government interference or manipulation.
The world of cryptocurrencies has grown tremendously over the last few years, coming a long way from its inception with the launch of Bitcoin in 2009. It is still the most popular and valuable cryptocurrency in existence. The success of Bitcoin has spawned many competing cryptocurrencies in the present, collectively known as altcoins. These include cryptocurrencies such as Ethereum, Litecoin, EOS, Tron, Cardano, Monero, XRP, Tezos, and ChainLink, just to name a few.
Cryptocurrencies are distinguishable from tokens, which may appear identical at first but have fundamental differences. Both of them run on Blockchain technology and trade on exchanges. However, Cryptocurrencies can only serve as money, whether as a store of value, a medium of exchange, or both. The main aim of cryptocurrencies is to provide a way to make it easier to transfer funds directly from one party to another, without going through any third-party intermediary such as a credit card company or bank.
How and where to buy a Bitcoin
Bitcoin is the first and still the most popularly used cryptocurrencies in existence. Along with other cryptocurrencies, Bitcoin can be purchased in a variety of ways. The most popular among these methods is to get Bitcoin from a cryptocurrency exchange.
There are three major types of cryptocurrency exchanges in existence.
Centralized exchanges: These are cryptocurrency exchanges in which users deposit their own fiat money or cryptocurrency to the exchange. Trading occurs within the exchange’s internal systems. In other words, the exchange acts as a custodian for the trader’s cryptocurrency.
Decentralized Exchanges or DEX: These exchanges are non-custodial in nature. Here, the trader trades directly from their own wallet instead of depositing their funds to the wallet of the exchange. Because of this, they are a safer option to buy and trade Bitcoins.
P2P Exchanges: A P2P exchange is an exchange that simply connects buyers and sellers together, who can settle transactions on their own mutual terms.
Besides exchanges, anybody can buy Bitcoin through cryptocurrency ATMs, atomic swaps, and via some private banks.
Types of Cryptocurrency Investments
There are many ways in which an individual can invest in cryptocurrencies. They are broadly classified into three categories, namely, Active Investing, Passive Investing, and Cryptocurrency storage and monitoring.
Active Investing: Active investing involves buying and selling cryptocurrencies by traders and investors themselves. This includes buying and selling cryptocurrencies from centralized or decentralized exchanges amongst other methods.
Passive Investing: Passive investing involves several indirect methods of investing in Cryptocurrencies. This includes investing in financial vehicles that track one or even multiple cryptocurrencies. Another method of passive investing is to invest in a cryptocurrency futures contracts, which allows investors to speculate on the price of cryptocurrencies without any direct ownership.
Passive investing generally aims at long-term prospects and requires a “buy and hold” mentality, while active trading involves a more hands-on approach.
What is the future of Blockchain and Crypto?
As tech giants such as Microsoft, AWS, IBM, Oracle, and a multitude of others start to integrate Blockchain technology into their systems, it’s quite clear that the future of Blockchain looks positive. In the last three years, both Blockchain and cryptocurrencies have ascended into the spotlight of the mainstream media. There is enormous potential in Blockchain technology, especially across various industry verticals such as digital identity, supply chain management, healthcare, fund-raiser, Intellectual Property, Food safety, real estate, etc.
There are many varied opinions when it comes to the future of cryptocurrency. There are some that see cryptocurrencies and Bitcoin as just a niche market and therefore, a secondary system. There are other analysts who believe that Bitcoin will be the replacement for Gold in the digital age, disrupting the existing financial system. Many also expect Ethereum to serve as the backbone of a new internet. Overall, it is simply too early to say what fate holds for cryptocurrencies and Blockchain, with many believing that there is a huge potential for growth in the future.
Is cryptocurrency Anonymous?
Cryptocurrencies are pseudonymous rather than anonymous. While it’s true that the user’s identity is not connected directly to the cryptocurrency address, they still have an on-chain identity.
People may use certain methods to tie a user’s activity to a particular IP address. Analysis techniques such as dusting attacks can “de-anonymize” any user. Since Blockchain networks function as essentially massive databases, users concerned about their identity should make it as difficult as possible to prevent others from linking transactions to the user’s name.
There are, however, a small subset of cryptocurrencies called privacy coins. These cryptocurrencies have the ability to obfuscate the amount of funds in transactions and both the source and destination by applying methods such as Confidential Transactions. Again, even these cryptocurrencies are not totally resistant to “deanonymization”, even though they have stronger privacy by default.
Pros and Cons of Investing in Cryptocurrencies
Huge Upside Potential: Many cryptocurrencies such as Bitcoin offers enormous upside potential. Many cryptocurrencies have peaked enormously such as when Bitcoin peaked to almost $20000. Any decline in the cryptocurrency market is usually short-lived.
Transparency: Blockchain technology provides total transparency as the ledger can be verified at any time. Transactions are open to public scrutiny as well. Most cryptocurrencies also provide detailed information on who the management team is, how it works, and other useful aspects in their respective whitepapers.
Security Concerns: As we are in a completely new era where the dominance of traditional currencies is challenged by cryptocurrencies, it also brings with it a risk of being compromised by cybercriminals. Since users access cryptocurrencies via private keys of a digital wallet, they should protect it from any potential breaches.
Uncertainty and Volatility: The volatility of cryptocurrencies is almost like a “double-edged sword”. In the last few years, they have risen and fallen quite violently. Even though the upside volatility provides amazing profit opportunities; the downside often becomes a drawback.
Analysts generally see cryptocurrencies at times more erratic and volatile than stocks, gold, and other commodities. There are various uncertainties that contribute to this. As many consider cryptocurrencies as just another bubble, the heightened uncertainty can force the price to rise and fall violently and unexpectedly.