Characteristics of CryptoCurrencies

A cryptocurrency is a virtual currency created by a computer program. It uses cryptography to secure the transactions and control the creation of new units of the currency. The first cryptocurrency to become publicly accepted was Bitcoin.

Bitcoin was not just a cryptocurrency, it also introduced the concept of the decentralized public ledger, known as the blockchain. Because of the revolutionary technology of the blockchain, other cryptocurrencies have been developed. These are collectively known as altcoins. This article looks at the common characteristics of these cryptocurrencies.

Volatility

Cryptocurrency prices tend to be very volatile. Cryptocurrencies are still relatively new compared to fiat currencies (Bitcoin was created in 2009), so there is still lack of sufficient knowledge about them. As a result, their prices are often affected by bad press. For example, according to a Forbes report, when a major Bitcoin exchange was hacked in 2014, Bitcoin price fell by about 23%

Speculation by Investors

Some people invest in cryptocurrencies for speculation purposes rather than for the adoption of the currencies. A recent trend in the industry that illustrates this is ICOs (initial coin offerings), where investors buy the tokens of blockchain startups and quickly sell the tokens once the price appreciates, even before the project is launched. This trend will eventually lead to a bubble in the price of the cryptocurrencies.

Security

Most cryptocurrencies use wallets, which is a computer software that stores addresses for receiving new units of the currencies and secret keys for approving transactions that transfer the currencies to other parties. For most cryptocurrencies, your funds are as safe as you keep your wallet. Wallets kept online with cryptocurrency exchanges tend to be prime targets for hackers, so this practice should be avoided as much as possible.

Decentralized

A lot of the cryptocurrencies available today are built on the blockchain technology introduced by Bitcoin. This means that they are decentralized and run on several computers worldwide. They are not owned or controlled by any organization or government. They can only go out of use if they do not offer enough value to make them publicly acceptable.

Mining

Mining is the process where the transactions in a cryptocurrency are committed to the blockchain and new units of the currency are created. Most cryptocurrencies use a “proof-of-work” system for mining. This is a system where difficult computational problem must be solved to win the right to mine new coins, but once the problem is solved, it can be easily validated.

Transactions cannot be altered

Because most altcoins use the blockchain technology, transactions created with the cryptocurrencies cannot be easily reversed. Once the transactions have been written to the public ledger and confirmed by other nodes on the network, it becomes increasingly difficult to alter the transaction as more blocks are written to the chain.

User Anonymity

The design of the blockchain that most cryptocurrencies use ensures that the identities of users are protected. The user identity is never written to the blockchain. Transactions are usually carried out on public addresses and not on names or any other detail that can uniquely identify the user. Although it is possible to see which addresses were involved in a transaction, it is not possible to see who the addresses belong to, from just viewing the information on the blockchain. This is one characteristic of cryptocurrencies that has made them very popular.

Several cryptocurrencies now exist and more are being built every day. A lot of them do not gain public acceptance because their use case is limited or the developers cannot sustain the effort required to support them, but now and then we see one that gains wide acceptance and goes on to become an established currency. Bitcoin remains the dominant cryptocurrency in the market, but other currencies that have gained acceptance include Ethereum, Monero, Ripple, Litecoin, etc.

 

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