What Are Cryptocurrencies and How They Are Different from Conventional Currencies?

There is a lot of talk about cryptocurrencies around the world today. From a precarious start to a current strong position, cryptocurrencies have gone through a lot within a very few years. Even today, some countries have banned them in any form and shape. On the other hand, there are countries that allow the use digital coins just like any other currency. However, people are still trying to understand what cryptocurrencies are. They also wonder why cryptocurrencies are called that. A rising interest in their investment begs that people know about them and how they work.

Let’s take a dive into what cryptocurrencies are and what makes them different from the currencies people have access to today.

What Are Cryptocurrencies?

Let’s focus on the word cryptocurrency first. It is a currency that is protected with the help of cryptography. Cryptography is a technique that is used for converting some information into intelligible information. Why would you want to convert information into a format that people can’t understand? The answer is security. When information travels from point A to point B, it is the start and the end points that are intended to know the information. Take the information of a letter that you are sending to a university or a company to hire you. The two persons who should know the contents of the letter are the sender and the receiver.

That’s the exact science which is applied to cryptocurrencies. These currencies are converted into a format where the sender of the money and the receiver are the only two persons who know what’s being sent and received. But how can you convert currency into that? That’s where the real concept comes in. The currency you are sending is completely digital i.e. it only exists in the digital world. There is no physical existence of this currency.

It Is Not Fiat Currency in Digital World

So, when you open an account with an online company, let’s say an online forex broker, your money appears in the account in the digital format. However, this currency is different than the digital coins. This currency was issued by the central bank of your country. You earned this money through some work and then deposited it in an online account. What you have to realize is that cryptocurrency is not produced by any bank. This currency is produced in the digital world through the work of computers and it stays there forever.

It Is Decentralized Currency

Since the central bank of your country has produced this currency, it has the record of this currency. At later times, it is the central bank of your country who will produce more of this currency. When you want to send this currency to some other country, you have to have the banks involved in the transaction. When the bank is involved in the transfer of money, it has to charge you some commission in the name of service fee. These fees can be high at times. When it comes to digital coins, you can completely avoid these fees from the banks because the banks will not be involved in the first place.

Digital coins are produced through a process called mining. Miners are people connected to the blockchain network i.e. the technology that makes the existence of cryptocurrencies possible. blockchain is a technology that keeps record of all the transactions taking place in an immutable format. After some specific minutes or seconds, a new block is created in the blockchain and this block contains the information about a specific number of transactions. Miners are people with powerful computers solving math problems to record new blocks and generate new cryptocurrencies.

This is the rule of a cryptocurrency. The creators of the cryptocurrency create these rules i.e. a specific number of crypto coins will be rewarded to the person who solve a math puzzle to record a new block on the blockchain. There hundreds and thousands and millions of such miners who are always working to solve math problems and record new blocks i.e. create new crypto coins. Every new block contains information about the transactions of that cryptocurrency that took place within a specific amount of time. This record is maintained by every computer on the blockchain.

This is why it is called a public ledger i.e. every computer on the network is maintaining a copy of the blockchain. In the case of conventional currencies, a bank makes your transactions possible and is keeping record of all your transactions that you conduct through this bank. The bank “can” meddle with your information or leak your information to some third party. In the case of blockchain, that’s not possible. First, the blockchain is protected through cryptography and secondly, modifying a block is not possible because a copy of it is stored on every computer connected to the blockchain.

Why Use Cryptocurrencies

When you use cryptocurrencies, you are saying goodbye to the banks. Companies that accept cryptocurrencies can accept the payments from you directly. There does not have to be a bank or payment processor in the middle for the merchant to accept your payment. In this way, you can avoid the bank fees that are involved in almost every payment you make online. Secondly, the money can be transferred from person to person in an instant. In the digital world, you don’t have to disclose your personal information to have a crypto wallet and store digital coins in it. As a result, you can remain anonymous while conducting your transactions on the internet.

Bottom Line

For cryptocurrencies to be successful, more and more retailers have to accept them. The more computers there are connected to the blockchain, the stronger it will be. The more companies create their own cryptocurrencies, the more the end users can avoid the involvement in third parties when making and transferring payments. If the world can have one blockchain solution as a standard for the transfer of money, you can send money to your loved on the other side of the world within seconds and without any transaction fees involved. Even if the transaction fees are involved, they will be incredibly lower than what they are today.