What is Cryptocurrency?
Cryptocurrencies are digital currencies that use cryptography to secure transactions, control access, and verify ownership. Let's explore how they work, the legality, their advantages or disadvantages, and more.
They're similar to traditional currencies like dollars and euros, except that you don't need to trust the government to keep track of it. Instead, cryptocurrencies rely on a distributed network of computers called "miners." Miners validate transactions, add them to public ledgers, and provide security for the currency.
There are now over 19,000 different cryptocurrencies, including bitcoin, ethereum, dash, monero, and zcash. Some people think cryptocurrency is a fad; others see it as the future of finance. Either way, it's become big business.
Bitcoin was the first cryptocurrency created under the pseudonym Satoshi Nakamoto, who is considered a mysterious figure because his/her identity hasn't been verified or revealed.
How does cryptocurrency work?
Cryptocurrencies are still relatively new, and there isn't much regulation surrounding them. As such, investors are looking to try their hand at making some quick cash. While many see it as a way to make big bucks, others are simply curious about its technology.
The number of people who utilize cryptocurrency coins (i.e., utility) and for what purposes impact their price. The price will rise if more people use them to purchase goods and services rather than merely holding them. In addition, the price will increase if more people use them in trades. For example, the latter becomes scarce if you trade Bitcoin for Ethereum because fewer people hold it. Cryptocurrency is based on blockchain technology.
What is Blockchain?
Blockchain is essentially a public ledger where transactions take place. Each transaction is recorded chronologically and publicly. All transactions are verified by nodes running software called miners. Miners verify transactions and add them to blocks.
Blocks are added to a chain and linked together, creating a decentralized database. These blocks contain data about every transaction ever conducted within a particular currency since the beginning.
In practice, it's much like a checkbook distributed across thousands of banks worldwide. When someone deposits funds into their bank account, they write a check specifying how much money they owe another person. Then, the bank automatically credits the specified amount against the account's balance. If you later withdraw cash, your bank debits the same amount from your account. This process creates a chain of events stored in the secure public ledger database.
The ledger is shared among all the participants in the network, ensuring that no individual controls access to the data. To prevent fraud, anyone participating in the system must verify their identity before writing checks or making withdrawals.
Blockchains are often described as transparent because everyone in the network sees what's happening in real-time. But there are ways to make this technology even better. For example, the Bitcoin blockchain has been modified to allow users to set rules for how long certain types of transactions take place. So, sellers could offer instant payments rather than waiting days to receive payment for goods sold online.
Another way blockchains improve upon traditional databases is in the area of security. Because there is no central authority, the integrity of the data cannot be compromised. Once a transaction occurs on the blockchain, it becomes permanent. There is no possibility of altering the data without detection. Additionally, because the entire network participates in validating each new block, any attempt at tampering would be immediately detected and rejected by other nodes.
How are cryptocurrency transactions validated?
To understand how blockchains work, you first need to know about cryptography. Cryptography involves using mathematical algorithms to create codes that specific individuals with special knowledge can only decipher.
When we use our credit cards to get money out of an ATM, the data providing details about our account and how much money we have is sent and received. Similarly, when we type our password to access the computer or shop on the internet, the information we type is hidden and encrypted to transfer it securely. Cryptography is the foundation to secure transactions and communications, and the technology behind blockchains that was originally developed for secure communication between two parties.
Blockchain technology enables the creation of decentralized digital currencies. For example, with Bitcoin, each transaction on the Bitcoin network is recorded permanently in what is called a "block." Furthermore, these blocks are linked together chronologically in order to prevent double-spending. This means that every block contains information about the previous one, making it possible to trace the history of each coin.
The only way to ensure there will always be people willing to validate transactions is to introduce incentives to participate actively and honestly. Validating transactions requires participants to solve complex mathematical problems. In return, validators, aka miners, receive newly minted coins as compensation for performing this task.
Incentives are introduced into blockchains because without them no one would bother participating in the validation process. If you don't want to spend hours verifying and mining transactions, why would you even bother running a computer on a blockchain?
What is cryptocurrency mining?
Cryptocurrency mining is a process used to secure the blockchain, verify transactions, and add new blocks of data to the ledger. Miners use specialized hardware called ASICs (application specific integrated circuits) to run complex algorithms that solve problems related to cryptographic proof-of-work systems.
The main benefit of mining is that miners validate transactions and help prevent double-spending by ensuring that each transaction is recorded precisely once in the blockchain. This is done by creating a block containing a timestamp and linking it to every previous block in chronological order.
Mining requires a lot of computing power, and most people don't want to pay for it themselves. So instead, some companies offer cloud mining contracts where customers rent out their spare computing resources to mine cryptocurrencies.
According to the latest research published by the Cambridge University data, Russia is the world's third-biggest bitcoin mining hub, followed by China, and the United States is firmly established as the leader.
Are Cryptocurrencies Legal?
The debate over whether cryptocurrencies like Bitcoin are legal or illegal has raged since their inception. Some countries have banned cryptocurrency activities outright, while others have allowed certain types of activity. In many cases, however, cryptocurrencies are treated as commodities rather than currency. This means that there are no formal banking regulations around them. As such, the legality of cryptocurrencies depends on where you live.
In some places, cryptocurrencies are considered money substitutes, meaning that they are used as a way to pay for goods and services without the backing of a traditional currency. In other places, though, cryptocurrencies are seen as securities, subject to strict regulation.
Advantages and Disadvantages of Cryptocurrency
Cryptocurrencies were introduced with the intention to revolutionize the way money works. In theory, it sounds like a great idea because it removes the middlemen — banks — from the equation. However, some drawbacks to this system make it less appealing than traditional fiat currency systems.
The main advantage of cryptocurrency is that it eliminates the need for third parties such as banks and governments. This allows you to send funds instantly across borders without paying fees. However, there are still risks associated with cryptocurrencies. If someone hacks into your wallet, he/she could steal all your coins. Also, since transactions are public, anyone can see what you purchased and where you sent it but cybercriminals commit identity theft, using their victim's personal information.
Another major disadvantage of cryptocurrency is that the supply cannot be controlled. There is no limit on how much Bitcoin or Ethereum can ever be mined, unlike fiat currencies (government-issued currency not backed by a physical commodity such as gold or silver) that have strict limits on the amount of paper bills that can be printed. Furthermore, if the value of these digital assets increases, more people will want to buy them. As a result, the price may increase exponentially, which makes it harder for investors to get in at an early stage.
In addition to these disadvantages, there are also a few advantages to using cryptocurrency over fiat currency:
1. No government interference and self-managed
2. Instant transfers, so it's relatively easy the transfer funds
3. Low or cost-effective mode of transactions
How to buy cryptocurrency
There are generally three steps involved in buying cryptocurrency. They are:
Step 1: Choosing a Platform
The first step is choosing a platform. This could be a traditional brokerage like Coinbase or Robinhood or a dedicated cryptocurrency exchange like Binance.
Step 2: Buying Bitcoin
Once you decide on a platform, you must select what type of currency you want to purchase. Most platforms offer multiple options including BTC, ETH, LTC, XRP, etc. Once you've chosen your preferred coin, you'll transfer funds into your account.
Step 3: Selling Your Coins
Finally, once you've purchased coins, you'll need to find a way to sell those assets. Some brokers allow you to directly convert your digital currency into fiat money, while others require that you sell your coins to another crypto holder.
How is Cryptocurrency Used in Cybercrime
Cryptocurrencies play a vital role in cybercrime, and it's the payment gateway to fraudsters. Cybermonsters use cryptocurrencies to evade detection for financial crimes as many of their cyber-attacks pursue financial gain. For example, in attacks such as Ransomware, the ransom payment demands are in cryptocurrency due to anonymity and easy transfer.
Another way hackers, scammers, and Cybermonsters use cryptocurrency is when they sell their services on the dark web because they can remain unknown. After all, the public ledger only shares the wallet address, a combination of numbers and alphabets. For example, 37GHPZigo48cfjqa2GjdwV8byZYuJJnkLtktXf54 so the wallet number doesn't reveal the identity of the sender or the receiver.
Three recommendations to Protect from Crypto Cybercrime
Nothing is 100% bulletproof. However, there is so much you can do to protect your information, minimize becoming a victim of crypto cybercrime, and protect your cryptocurrencies.
Be Intentional in protecting your mobile devices. For example, when installing apps on your phone, only install applications from valid sources such as the Apple, Google Play, or Microsoft stores. Also, keep up with your software updates.
Be Aware and pay attention when receiving links from unknown and even known persons. Pause before you click or open any attachment or link because you are what you click!
Be Mindful about sharing your personal information related to your accounts or if someone offers you an incredible opportunity. Stay present when making financial decisions.
Watch my TEDx Talk https://www.youtube.com/watch?v=v46TAoZl1XI to learn how to Be Intentional, Aware, and Mindful.
Be I AM. Be I AM now!
