Introduction to Cryptocurrency: Roles, Storage, Transactions

The primary function of a cryptocurrency is to serve as a means of exchange. Most cryptocurrencies are built on blockchain technology, which is a distributed ledger that is run by a network of computers in different places. Therefore, unlike fiat currencies, cryptocurrencies are fully unaffected by the government’s involvement or manipulation. Let’s look at the following article to learn more about how cryptocurrencies work, how to store them, and how to trade them.

What is cryptocurrency?

A cryptocurrency is a digital currency that is very similar to real-world money, but it doesn’t exist in the physical world and needs cryptography to work. Cryptocurrencies are issued and managed autonomously by a network of users rather than a central authority or bank. You can use cryptocurrency to buy common goods and services.

In 2008, Satoshi Nakamoto wrote an article called “Bitcoin: A Peer-to-Peer Electronic Cash System” that explained Bitcoin, the first cryptocurrency. In Nakamoto’s opinion, the introduction of cryptocurrencies will mark the beginning of a trusted cryptographic proof–based payment system. This cryptographic proof is in the form of verified transactions that are recorded on a blockchain.

Role of cryptocurrency

With cryptocurrencies, transaction costs are very low, which makes it easier for users to send money to each other or take money out of their accounts. Also, you can make transactions at any time of the day and make as many purchases and withdrawals as you want.

Especially, when trading cryptocurrencies, the documents and paperwork that are no longer needed are skipped. As an alternative, the data was recorded on a computer system, which offered the benefits of convenience, flexibility, independence, and sustainability (environmental friendliness).

How does cryptocurrency work?

Cryptocurrencies are decentralized digital currencies that do not rely on any central bank or government to operate. Cryptocurrencies are made through a process called “mining,” which involves solving hard mathematical puzzles with the help of computer power. Users can buy cryptocurrency from brokers and use an encrypted wallet to store and spend it.

Blockchains are typically operated by widely used consensus algorithms: Proof of Work (PoW) and Proof of Stake (PoS). Specifically:

Proof of Work (PoW)

Proof of Work is a method for verifying transactions on a blockchain. An algorithm gives computers a mathematical puzzle to solve, and the computers compete to see who can solve it first. Each participating computer, which is called a “miner,” has to solve a mathematical puzzle to verify a group of transactions, called a “block,” and then add them to the blockchain ledger. The computer that is the first to successfully complete this task will receive a token of recognition for its efforts.

For example, Bitcoin gives miners 6.25 BTC ($200,000) when they verify a new block. However, the race to solve blockchain puzzles needs a lot of electricity and computer power. Therefore, miners need to carefully figure out how much money they are earning compared to how much money they are spending on energy and computer resources.

Proof of Stake (PoS)

Some cryptocurrencies use a consensus mechanism known as Proof of Stake (PoS), which helps to cut down on the amount of necessary electrical resources to verify transactions. Besides, PoS limits the number of transactions each person can verify to the number of cryptocurrencies they are willing to “stake,” or temporarily lock up in a shared safe, in order to take part in this process.

The Proof of Stake consensus algorithm eliminates energy-intensive equation solving. As a result, it is far more efficient than the Proof of Work process, which enables faster transaction verification and confirmation times.

For example, the average transaction speed of Bitcoin is at least 10 minutes. Now compare that to Solana, which is a Proof of Stake (PoS) cryptocurrency platform that does around 3,000 transactions per second on average. So, it’s clear that Solana’s consensus algorithm speeds up processing much more than the Bitcoin blockchain. In addition, Ethereum, which is Bitcoin’s biggest competitor, is moving completely to a Proof of Stake system.

How to store cryptocurrency

Currently, users can store cryptocurrencies in one of four wallet types:

Custodial wallet

This cryptocurrency storage wallet will have third-party involvement. They are now in charge of keeping your cryptocurrency in cold storage (offline), hot storage (online), or a combination of both.

When you buy cryptocurrency from a crypto exchange, the exchange automatically puts it in a custom wallet they control. You have the option of moving it to a separate hot or cold wallet if you want to ensure its security while being in charge of it yourself.

Cold wallet

Cold wallet is an offline crypto wallet. There are two types of cold wallets, which are paper wallets and hardware wallets, with the latter being the more widely utilized. A hardware wallet is a comparatively tiny device that can connect to your computer and store cryptocurrencies.

The biggest problem with cold wallets is that they are not easy to use. Using a cold wallet to deposit and withdraw cryptocurrency is slower than using an online wallet.

Hot wallet

Hot wallet is an online crypto storage wallet. Most hot wallets can be found on the web or as mobile apps. There are some notable good points about hot wallets:

• Allows control over cryptocurrencies.
• Free
• Very easy to use, and it doesn’t take long to send or receive cryptocurrency.

However, the fact that cryptocurrency is kept in online wallets makes the risk of being hacked and losing money quite high.

Physical wallet

A physical wallet is a printout of the public and private keys, which is usually a string of characters in the form of a QR code that can be read. In order to send cryptocurrency to a wallet, it is necessary to scan both the public and private keys. This type of wallet gives you more security by keeping your cryptocurrency offline. Users are able to generate wallets that are completely free to use.

How to trade cryptocurrencies

You can buy cryptocurrencies at cryptocurrency exchanges like Coinbase, Kraken, Binance, etc. Usually, these exchanges let you trade several popular cryptocurrencies, like Bitcoin, Ethereum, and Dogecoin. However, each exchange has various limits and transaction costs, so you must compare to find the best place to buy and sell cryptocurrencies.

Advantages and disadvantages of cryptocurrencies

Advantages

High Profitability – On the market right now, there are more than 10,000 cryptocurrencies, and each one has its own special features and can suddenly go up or down in value. The main things that affect the price of a cryptocurrency are the miner supply and buyer demand. As a result, the influence of supply and demand can help you make substantial profits.

Safe – Cryptocurrencies are built on blockchain —  a decentralized data storage ledger that keeps track of every transaction made on it. Due to the fact that the blockchain is distributed on many different computers, it is impossible for a hacker to access the entire chain at once. By doing this, the data and assets of users are kept protected.

Transparent, fair financial system – Blockchain and currencies offer an alternative to the traditional methods of conducting financial transactions. As a result, people can make transactions anywhere, at any time, without the approval of any intermediate organization.

Read more: SUI Token – All information about SUI

Disadvantages

It takes a lot of time and effort – Because cryptocurrency is an entirely new category, users need to put in more effort to learn and grasp the nature of each coin they invest in. So that we can minimize the risks when investing in cryptocurrencies.

High Volatility – It is possible for the price of a cryptocurrency to reach new heights very rapidly, but it is also possible for it to drop dramatically very quickly. Because its volatility is affected by a variety of factors, like supply and demand, the development team, its backers, and the market as a whole.

Cryptocurrencies have scalability issues – Cryptocurrencies still have problems when implemented on a large scale, which can slow the speed at which transactions are processed. Even without the possible financial losses, this can be a negative experience for those involved in the trade.

Security Risks – Each user account will be provided with a private key that may be used to access their own personal wallet. And it is also all your assets. If you lose the private key, you lose all the money in the wallet.

Conclusion

The cryptocurrency business has grown rapidly in the recent decade, leading to considerable developments. Its value can be stored, transferred, and spent in a variety of ways.  At the moment, several major companies are interested in blockchain technology and are learning more about it. The future of cryptocurrencies and blockchain technology looks to be bright. We hope that this article has provided you with useful knowledge about the role, storage, and transaction of cryptocurrencies!

Disclaimer: The information in this article is not investment advice from CryptoChill. Cryptocurrency investment activities are not recognized and protected by the laws of some countries. Cryptocurrencies always carry many financial risks. Do your own research before making any investment decisions based on this website’s information.