The terminologies “blockchain” and “cryptocurrency” aren’t mere industry buzzwords anymore but have become almost mainstream today. Even the recent crypto crashes didn’t prevent people from trading the internet-based currency. However, many are puzzled about how blockchain works and what makes it crucial for the existence of digital money. “How does cryptocurrency work, and what makes this virtual money reliable for investment?” These questions about unfamiliarity with blockchain have prevented a lot of people from investing in cryptocurrency. And we appreciate these people since you should never invest in something you don’t understand. So, we’ll try to make these concepts more familiar to you.
What do we mean by cryptocurrency?
What makes the existence of cryptocurrency possible? This virtual money exists because of the idea called cryptography that remains decentralized, i.e., no central authority controls this currency. How does it differ from traditional formats of cryptocurrency? It doesn’t exist physically, doesn’t have any intrinsic value, and exists because of a technology called the blockchain.
Today, there are 4,000+ types of this digital money, the first being Bitcoin. The most interesting thing about it is cryptocurrency mining. You can “mine” this virtual money, adding new blocks by solving complex math problems. After solving these problems (it requires lots of electricity), you can add more blocks. However, mining isn’t the only way to make money via cryptocurrency.
Nowadays, Australians aren’t unfamiliar with cryptocurrency, and many investors have entered this market. Unsurprisingly, crypto-investing has become popular among Gen Z, Gen X, and Millennials. Experts estimate that Bitcoin, Ethereum, and Dogecoin are some of the most well-known options among Australians. If you’re interested, look online for “ETH to AUD” and trade Ethereum to Dollar easily.
Remember that AUD is popular among Forex marketers, and converting your virtual money into this format ensures a long-term investment. Cryptocurrency investment keeps attracting Reddit-based and Twitter-inspired people who wish to trust a decentralized institution. Recently, Elon Musk publicly gave his blessings to the notorious Dogecoin (“DOGE to the moon!”) and encouraged his supporters to have faith in the supremacy of the meme-coin. Why do people believe in the concept of cryptocurrency?
Let’s review some of the merits of working with virtual bucks.
What are the benefits of cryptocurrency?
The popularity of cryptocurrency seems apparent since over 17% of Australians currently own certain forms of virtual money. What makes these digital investment options lucrative enough for modern investors? Is it the backing it receives from renowned tycoons? Elon Musk again made headlines – when the world’s richest person allowed customers to purchase Tesla’s electric vehicles via Dogecoin. Moreover, the internet-proclaimed meme-lord was sued in July by an investor who claimed that DOGE was just a pyramid scheme.
Truthfully, you shouldn’t neglect the drawbacks of trusting cryptocurrency. This currency is volatile and, unlike fiat money, keeps yo-yo-ing up and down your charts as the market flutters. Furthermore, it isn’t regulated, so investors often find it difficult to retrieve their wealth if some hackers manage to steal their virtual money. For instance, Terra Luna’s unfortunate cryptocurrency crashed 98% and became almost worthless in the blink of an eye this May. So, how can we make a case in crypto’s favor?
Despite these drawbacks, crypto’s certain merits overshadow the risk involved in this business. After all, there’s no investment without a certain amount of risk to be afraid of now and then.
Hence, we can describe the benefits of cryptocurrency investment here in these bullet points:
- These currencies are accessible to everyone with a computer connected to the internet.
- As we’ve explained below, cryptocurrency’s foolproof security allows investors to invest in these options without worrying about hackers.
- There are several privacy-focused crypto options. And mostly, all transaction platforms allow you some pseudonymity, ensuring privacy online.
- Since these transactions take place on an electronically-distributed ledger called blockchain, an investor can have complete transparency, making fraudulent transactions almost impossible.
- Cryptocurrency transactions usually take a few minutes to complete and are quick enough for a tech-reliant world. Also, these transactions cost you less than typical wire transfer costs.
Explaining blockchain, the future of our finance
Surveys indicate that 96% of financial experts consider blockchain to have become mainstream. So, let’s understand the concept behind blockchain and how this technology works. You may describe blockchain as a shared ledger where you can store information electronically. Since these blocks are shared across a peer-to-peer network, the information is stored in different computers. Don’t mistake blockchain for a traditional database since the former keeps the information in the form of closely-linked blocks chained with each other. Blocks are added to this database after participants’ approval and have some timestamps denoting when these blocks are introduced. So, what makes blockchains secure?
There’s no central authority, and participants can confirm transactions easily because of “decentralized” blockchains. Furthermore, IBM states that a blockchain is “permanent and unalterable” since you can always add new blocks to the database but can’t alter them once they’ve become a part of the gang. So, nobody can change, delete, or destroy previously-added blocks now.
After being introduced in the 1990s, this novel technology serves as exactly the necessary foundation for cryptocurrencies to exist. Imagine someone accessing the information stored in one computer and trying to alter it. But that person won’t be able to change it because the information is spread across several nodes – why we trust blockchain.
What are some reasons to rely on the blockchain?
What makes a blockchain more reliable than your traditional ledgers? A blockchain is a decentralized electronic database with multiple computers managing it for security purposes. Experts have defined it as DLT or distributed ledger technology that ensures that the information you have entered remains unadulterated. The “spreading out” of your information is why Bitcoins exist and why people trust them. Remember that every block contains the following elements:
- The data you’ve stored
- An encrypted hash of that block
- The encrypted hash of the past block
This “hash” serves as an identifier that prevents hackers from tampering with a block’s data. Since we’ve made it a P2P network, every participant contains a copy of the information. Moreover, experts added a layer of security called proof-of-work that requires a lot of time/energy to tamper with the data. That’s why blockchains are trustworthy and can safely give proper footings to the concept of cryptocurrency. A variety of benefits arise from all the security strategies we have mentioned above, some of which are:
- Security: The data is encrypted to ensure it’s secure
- Unanimity: All participants must confirm that the data is valid
- Anonymity: The identity of participants stays hidden, i.e., anonymous
- Immutability: Once validated, all records become irreversible and can’t be changed
- Programmability: All blocks are programmable and allow us to create smart contracts
But is there any way for hackers to steal all our cryptocurrency? Well, hackers have to control 51% of the nodes containing the information. But controlling this massive number of nodes requires hackers to give this endeavor a lot of time, money, and patience. Without changing 51% of the copies of the data, folks can’t make their distorted copies the majority ones. As cryptocurrencies are growing exponentially, this endeavor will likely be detected early on, and the hacker’s attempt will be fruitless.
“Cryptocurrency” has ceased to be a concept alien to people since people are increasingly using and buying digital money today. We have established that cryptocurrencies cannot exist without blockchain technology. Experts describe blockchain as a shared ledger used for recording transactions digitally. You store the information across different computers across the planet and leverage its decentralized aspect to create a cryptocurrency or digital money. This money is made and stored digitally in the blockchain as encryption techniques ensure its immutability from hacker attacks. That’s how these concepts have now become popular electronically alongside blockchain influencing traditional banks.