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Financial News: Decrypting 'Cryptocurrency'

Decrypting 'Cryptocurrency'

01/18/2018 - 10:17:00 (RTTNews)

(RTTNews) - A cryptocurrency is a digital asset that works on a medium that uses cryptography, the science of hiding information from prying eyes, to secure its transactions, creation, and verification.

The key feature of cryptocurrencies such as Bitcoin, the first of its kind and the largest in terms of both value and market cap, is their decentralized nature, meaning it is neither issued nor controlled by a single authority such as a central bank, government or a company. Hence, they are not legal tender anywhere.

Cryptocurrencies operate on a peer-to-peer network that employs distributed ledger technology that validates transactions using consensus among a group of volunteers spread across the world. These transactions are recorded on a public distributed ledger.

For example, Bitcoin works of the blockchain technology, which analysts and observers predict, will outlive the cryptocurrency it supports as it has potential use in different fields such as banking, pharmaceuticals, logistics and so on.

These currencies can be bought and sold via cryptocurrency exchanges such as coinbase, Bitstamp and Bitfinex, to name a few.

Bitcoin is the first cryptocurrency of note that was launched in 2008 by an individual or group of individuals known as Satoshi Nakamoto, whose real identity remains a mystery.

Several cryptocurrencies exist today, most of which operating on the blockchain platform that Nakamoto created. And there are others such as the IOTA, which runs on an alternative distributed ledger called Tangle.

Another important feature of most cryptocurrencies is that they are created at a fixed rate using a process called "mining," and their total supply is pre-defined. For example, the total supply of Ripple, or XRP, which is among the top five cryptocurrencies in market cap, is fixed at just under 100 billion.

Mining is a competitive and decentralized process, and individuals or groups of individuals called miners use freely available special software to solve mathematical problems at regular intervals to verify and confirm each transaction in a block. Verified blocks are entered into the "blockchain" for others to accept.

In the case of Bitcoin, the first miner to solve the mathematical puzzle will receive new bitcoins as reward. As of now, a miner gets a reward of 25 bitcoins for verifying each block.

Out of the virtual space, real world has many concerns regarding cryptocurrencies.

While the leading crytpocurrency, Bitcoin, claims to be entirely separated from fiat currencies, others such as Ripple and Tether work along with legal tender.

Given their perceived anonymity, they have been popular on the darknet, and governments are worried they will be increasingly used for funding criminal activities such as drug-dealing and terrorism.

Lack of regulation is among the top concerns among authorities as these currencies become popular and their prices surge, alternating with nosedives. Hence, governments, central banks, and top bankers and investors have been issuing warnings of a bubble waiting to burst.

But cryptocurrencies, mainly Bitcoin, has found favor with venture capitalists and hedge funds.

Another issue with cryptocurrencies, mainly Bitcoin, is that their creation through the mining process requires consumes lot of electric power and is time consuming.

Commercial cryptocurrency mining farms are concentrated in countries such as China, Iceland, South Korea and those in Eastern Europe that can provide cheaper power and have cooler weather.

Others such as Ripple have done away with the mining process as it pre-exists on a network and claims to have faster transactions than Bitcoin.

Cryptocurrencies are highly vulnerable to hacker attacks that can entirely erase holdings in a server or computer hard drive.

Despite all drawbacks, cryptocurrencies have found use in crowdfunding initiatives, fundraising for charities, financing for startups, and even in distributing aid to refugees. They are also widely used in countries with troubled economies such as Venezuela and Zimbabwe.

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