How to understand Bitcoin and cryptocurrencies in five easy steps

It’s true that cryptocurrency is the next major step in the evolution of the internet, but it’s also true that it’s a frighteningly complex technology that makes it difficult for potential investors to assess the recent news flow.

It’s natural for investors, who have not already in the Bitcoin market to wonder if it’s too late to get in now or if they’ve missed the boat. It is natural for business owners to wonder whether they should establish a way to accept cryptocurrency payments in order to stay ahead of potential changes to the payment landscape in the future.

Despite that, cryptocurrencies are affecting industries outside of the financial sector. It is difficult to predict the future, but a grounding in cryptocurrency fundamentals is a good starting point. Following are some guidelines that can serve as a starting point:

1. Which ones are they?

A cryptocurrency is a digital currency that exists only online and is operated by peer-to-peer networks. In contrast to fiat currencies – those issued and guaranteed by a country – they do not have a paper version and their supply is not controlled by a central bank.

The currency can be used in the same way as any other: as a payment or as an investment. Various exchanges or platforms allow you to purchase them directly online, and they can be purchased in small fractions, so you can theoretically use them for both small and large purchases. Bitcoin, for instance, has a limit of 21 million coins per year, which appeals to investors since it puts a limit on inflation.

Any changes made to a block require changes in previous blocks, making the chain nearly impossible to hack.

Cryptocurrencies might be seen as potential alternative investments or payment systems by investors, but Perlin argues that blockchain’s potential could be more transformative.

2. Where do they come from?

As opposed to fiat currencies, cryptocurrencies do not have a central bank issuing them. Rather, they are mined, which is a term referring to the amount of work required to produce them. Blockchains verify cryptocurrency transactions by mining and adding them to the blockchain with the help of miners. Their efforts are rewarded with new coins. A special piece of hardware is required and a lot of power is consumed, so the process is costly.

A new technology like the Lightning Network could eventually solve mining issues, according to a San Francisco-based RBC Capital Markets analyst. Using this technology, you can layer a payment protocol on top of a cryptocurrency blockchain to reduce transaction times and energy use.

3. Why is it beneficial?

Decentralized blockchain technology allows cryptocurrency transactions to be carried out without requiring an intermediary, making them cheaper and preventing transactions from being canceled or interfered with by any authority.

When sending money to family or buying a product overseas, an intermediary would normally be required to convert the currency, with fees associated with the conversion and the transaction. Funds could also be delayed depending on how they are transferred.

When using a cryptocurrency such as Bitcoin, the Bitcoin transaction takes at most a few minutes, and there is only one transaction fee. Internet connections make it possible for it to be initiated from anywhere in the world. There is potential for businesses to conduct cheap, nearly instantaneous, cross-border transactions, which could revolutionize global payments and remittances.

4. How risky is it?

Despite the possibilities of cryptocurrencies, they also come with a lot of risks, both as an investment and a currency for transactions.

Firstly, cryptocurrencies’ decentralized nature comes with a downside because no government backs them, so they are not protected by the government. It could mean that the government is not motivated to track down thieves in the event of thefts, according to Steves.

While blockchains have not been hacked, cryptocurrency exchanges that buy and sell cryptocurrencies have been targeted for theft. The Coincheck exchange in Japan was hacked in January and around 530 million dollars’ worth of cryptocurrency was stolen.

5. In what ways will the future be different?

Despite the newness of the cryptocurrency space right now, many merchants already accept Bitcoin worldwide using a Bitcoin wallet and blockchain could have an impact across many industries in the future.

In addition to global remittances, blockchain’s decentralized nature opens up the opportunity to revolutionize the identity industry, as customer specifics can be stored in an authenticated distributed database that consumers can manage and share with businesses and authorities.

This will require continued advancements in the cryptocurrencies themselves, in order to be able to add applications and transact faster and more cheaply.

As for whether cryptocurrencies will become the world’s dominant currency, Steves says, “It’s unclear,” adding that there will be some coins worth trillions of dollars.

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