Cryptocurrency basics

This article discusses Cryptocurrency, Bitcoin, Blockchain, and Cryptography, their meaning and how the whole thing works from a beginner's point of view.

There are two friends Liam and Noah. Liam got some work done from Noah. Now Liam has to pay Noah. The work is worth $ 10. Instead of $10, Liam thought of giving Noah a Chocolate worth $10. The world is going digital, so Liam thought he would give Noah a digital chocolate. Chocolate can be made digitally but there is a problem. Anyone can copy this digital chocolate and create many copies of it. What would be the solution to stop this? They maintain a ledger and create entries in it to show how many digital chocolates Liam has and how many digital chocolates Noah has. Whom they transferred them and from whom they received them, who has how many of them etc. All transitions related to the exchange of digital chocolates will be maintained in a ledger. Now this ledger is getting maintained in one place. It is possible that the person who enters the ledger can manipulate the entries. This creates the necessity to create a system of multiple systems worldwide connected to each other and showing the same data. These computers will maintain the information about how many digital chocolates are there. How many Liam has, and how many Noah has. Who transferred these digital chocolates to whom? What is the balance with each one? If this information is maintained in all the systems that are interconnected and anyone tries to manipulate the data others show data mismatch. The manipulator will be caught.

Now, with this concept let's understand Cryptocurrency.

The Digital chocolates that were exchanged between Liam and Noah are a kind of Cryptocurrency. Crypto means Secret. Currency is a medium of exchange. So, it’s a secret currency or a private currency.

We have heard the names of a number of Cryptocurrencies, like Bitcoin, Ripple, Ethereum and Dogecoin. Now this ledger we spoke about is getting maintained by a number of computers. A number of people are also involved in maintaining this. This is a peer-to-peer network. Person-to-person network. How these computers are maintaining this? This gives existence to the revolutionary term ‘Blockchain”

Blockchain

Imagine a chain of blocks. A train has many bogies(Boxes), one is filled the other is attached and filled again and this continues until the required material quantity is filled completely. Similarly, one block is filled with transitions, another is attached and if that is filled one more is attached. Every block that is filled with transactions is linked with the next block and then the next. It continues like a chain.

All this information will be available on all the computers. In this case, if someone wants to cheat or scam it will be tracked easily.

Now imagine if in the story above Liam had 2 bitcoins and he gave 1 to Noah. All the transactions will be verified by the computers to check if Liam had 2 bitcoins? If he had considered all the transactions he made in the past and he gave 1 to Noah, how many Liam left with and how many Noah has. In this case one each with both Liam and Noah. All these transactions will happen with accuracy in seconds.

Miner and mining

The one who maintains the ledger is a Miner and the process of maintaining it is called Mining. All of this is automated. But this requires special computers and special software. In this whole process, a lot of time is spent and a lot of money is involved. The persons who do it get their reward in Cryptocurrency.

Privacy

So many systems maintaining the ledger raise questions about the privacy of people. This gave rise to “Cryptography”. Cryptography means everything is coded. This means there is no Liam neither there is Noah everything is coded. Liam might be Alpha or Noah might be Beta.

Existence of Cryptography

Every challenge people face gives rise to a new innovation. People had a challenge as to when money is ours why the govt needs to take control over it? It is our hard-earned money and why should there be an authority to control it? Why Banks? Why authorities? Why agencies? Raising inflation, raising interest rates, and ups and downs of the value of currency give rise to Cryptography.

Why can't there be a currency which is decentralized? No one person or authority has control over it? When the currency is of all why not control will be of all?

Why should bankers know how much money people have?

Price determination

But now how is the price determined? How do we know the value of Bitcoin is fluctuating?

In every Cryptography, it is decided at the beginning itself how many currencies will be existing. When something is fixed the cost of it depends on the demand it has. Imagine a house. Fixed in size. The demand for the house will decide the price of it. More buyers ready to buy it more price will it fetch. This happens the same way in Cryptocurrency. More demand more will be its price. With less demand lesser will be its price.

Supply of Bitcoin is limited to 21 Million so its price will be decided by its demand in the market. 2010 Bitcoin had a price of a quarter of a dollar. It went till a hundred thousand in between and on 28.05.2023 the price of it is 22,51,652. If someone had invested $1 in 2010 it would have grown to 1,80,722 in 2021

Prices of Crypto depend also on what is the news, what companies are planning and what investors are thinking about it. In March 2021 Elon Musk said Tesla will accept Bitcoin as payments for cars. The price of Bitcoin raised humongous. In May same year Musk said Tesla will not accept Bitcoin and the price dropped drastically. The incident was then referred to as “Musk Dip”

Advantages

Decentralized – No person or agency has the controlling authority.

No Govt Control – Inflation won’t affect

Safety – Blockchain is the most secure platform and might be seen in its implementation in different areas.

Disadvantages

No Govt and authority – If one faces any difficulty there is no one to take care of it. The owner himself is responsible for both profits and losses

Unethical uses – As this is private currency, there are possibilities of it getting used unethically

Not eco-friendly – As it consumes a lot of electricity, but in future this can be taken care of

Conclusion

This article discusses Cryptocurrency, its functioning, pros and cons and finally the technology involved behind the scenes. Some say it’s a digital revolution and others say it’s just an air balloon and will burst one day. Everyone has their own opinion. One can only wait and watch what’s in the box.

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Thanks for reading!

Cryptocurrency basics for beginners – Bitcoin, Blockchain, Cryptography- meanings and application