What is Cryptocurrency: A Beginner's Guide to Decentralized Digital Currencies

Humanities have developed their technology beyond the realm of reality. Nowadays, we exist in the real world as well as in the virtual realm via our devices. The uprising of digital society has pushed humanity to develop some form of digital currencies backed by advanced programming and encryptions. Known as cryptocurrencies, we use this so-called “digital money” for our digital transactions. But what is cryptocurrency exactly?

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What Is Cryptocurrency?

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Cryptocurrency is a form of digital currency created as an alternative to conventional currencies for digital transactions. Cryptocurrencies only exist in digital realm, but are exchangeable to tangible, real world currencies like US Dollars or Indonesian Rupiah.

The name ‘cryptocurrency’ was coined because it uses a form of encryption to verify transactions. This encryption involves high computing and advance coding to provide security and safety when storing and transmitting data to public ledgers as well as between wallets. Encryption makes cryptocurrencies work not only as a currency in a more traditional way, but also as a virtual accounting system.

The nature of cryptocurrency is that it is decentralized, meaning its not governed by a central authority—be it governments, central banks, or any other financial institutions. Cryptos are regulated on a peer-to-peer network, in which any and all transactions are recorded and integrated on a public ledger using blockchain technology (more on that later).

Aside from transactions, you can also trade cryptocurrencies. But, how is cryptocurrency traded? First, you will need a wallet–either cloud based or installed in your device. Then, link your crypto wallet to any crypto trading platform. Crypto trading itself is similar to stock exchange. You’ll need a thorough understanding of the crypto market volatility by using either fundamental analysis or technical analysis. For further explanation regarding crypto trading, you can go to this article.

How They Work

The backbone of cryptocurrencies is blockchain, a decentralized digital ledger with distributed access among authorized users. This ledger is used to store and verify transaction data related to a range of assets, including but not limited to liquid money, properties, or even intellectual property.

Blockchain technology itself is a combination of three different technologies:

• Cryptographic keys. There are two components: Private key and Public key. Each user possesses these keys, and they are used as both authenticator and transaction controller or, in a simpler term, a ‘digital signature’.
• Shared ledger in a peer-to-peer network. After the user’s identity is authenticated by the cryptographic keys, their digital signature then enters this network. The ledger itself is an assembly of users that use their own digital signatures to authorize a transaction, among other things.
• Compute units (like personal computers or mobile devices) to record and store transaction information. Also called as ‘nodes’, this computing device is what the users use to hold their digital signature and other cryptocurrency-related things.

Transactions and other things related to cryptocurrencies, including mining and trading currencies, work using this basic principle. When a transaction happens, the ledger will use a mathematical verification to both authorize and certify the deal. The information regarding the transaction itself then enters the blockchain, effectively ‘immortalize’ it.

Examples of Cryptocurrencies

Approximately, there are around 22,000 types of cryptocurrencies in circulation today. While some of these digital currencies are better known and/or better valued, most of them are barely recognizable to non-enthusiasts.

Today, the most recognizable as well as the most valuable cryptocurrency is Bitcoin—it’s also the first cryptocurrency ever created and traded. Its influence over other coins is so massive that other cryptos are valued according to their price against Bitcoin. Ethereum is another cryptocurrency with a big influence over other cryptos as well as cryptocurrency ecosystems in general. 

Benefits, Challenges, and Risks

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The decentralized nature of cryptocurrency means that they hold some benefits over their conventional and centralized counterparts, such as:

• The controlling power over the currency is shared with everyone in the ledger; no one is above each other.
• Only members of the network hold the encryption keys needed to access the information stored in the ledger.
• All members of the network have to “agree” before information is added to or changed in the blockchain.

However, cryptocurrencies also pose their own challenges and risks. One of the major concerns is that cryptocurrency and blockchain in general are terrible for the environment due to the immense computing power they need to manage the ledger. Another concern is cyber-criminals using the allure of crypto to scam people.

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However, one of the main concerns of many governments is that there is no real regulator managing or to even supervise cryptocurrencies. After all, what is cryptocurrency but lines of computer codes in the massive virtual realm?