What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography,

which makes it nearly impossible to counterfeit or double-spend. Many
cryptocurrencies are decentralized networks based on blockchain technology a
distributed ledger enforced by a disparate network of computers.
A defining feature of cryptocurrencies is that they are generally not issued by any
central authority, rendering them theoretically immune to government interference or
manipulation.

KEY TAKEAWAYS
A cryptocurrency is a form of digital asset based on a network that is distributed
across a large number of computers. This decentralized structure allows them to exist
outside the control of governments and central authorities.
Some experts believe that blockchain and related technology will disrupt many
industries, including finance and law.
The advantages of cryptocurrencies include cheaper and faster money transfers and
decentralized systems that do not collapse at a single point of failure.
The disadvantages of cryptocurrencies include their price volatility, high energy
consumption for mining activities, and use in criminal activities.

Understanding Cryptocurrencies
Cryptocurrencies are digital or virtual currencies underpinned by cryptographic
systems. They enable secure online payments without the use of third-party
intermediaries. "Crypto" refers to the various encryption algorithms and
cryptographic techniques that safeguard these entries, such as elliptical curve
encryption, public-private key pairs, and hashing functions.
Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all
e-commerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies,
even popular ones like Bitcoin, are hardly used for retail transactions. However, the
skyrocketing value of cryptocurrencies has made them popular as trading
instruments. To a limited extent, they are also used for cross-border transfers.

Blockchain
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is
blockchain technology. As its name indicates, blockchain is essentially a set of
connected blocks or an online ledger. Each block contains a set of transactions that
have been independently verified by each member of the network.
Every new block generated must be verified by each node before being confirmed,
making it almost impossible to forge transaction histories.
The contents of the online ledger must be agreed upon by the entire network of an
individual node, or computer maintaining a copy of the ledger.
Experts say that blockchain technology can serve multiple industries, such as supply
chains, and processes such as online voting and crowdfunding. Financial institutions
such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to
lower transaction costs by streamlining payment processing.

Cryptocurrency Definition
Types of Cryptocurrency
Bitcoin is the most popular and valuable cryptocurrency. An anonymous person
called Satoshi Nakamoto invented it and introduced it to the world via a white paper
in 2008. There are thousands of cryptocurrencies present in the market today.
Each cryptocurrency claims to have a different function and specification. For
example, Ethereum's ether markets itself as gas for the underlying smart contract
platform. Ripple's XRP is used by banks to facilitate transfers between different
geographies.
Bitcoin, which was made available to the public in 2009, remains the most widely
traded and covered cryptocurrency. As of May 2022, there were over 19 million
bitcoins in circulation with a total market cap of around $576 billion. Only 21 million
bitcoins will ever exist.
In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins,"
have been launched. Some of these are clones or forks of Bitcoin, while others are
new currencies that were built from scratch. They include Solana, Litecoin,
Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the
cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented
approximately 41% of that total value.

Are Cryptocurrencies Legal?

Fiat currencies derive their authority from the government or monetary authorities.
For example, each dollar bill is backstopped by the Federal Reserve.
But cryptocurrencies are not backed by any public or private entities. Therefore, it
has been difficult to make a case for their legal status in different financial
jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have
largely functioned outside most existing financial infrastructure. The legal status of
cryptocurrencies has implications for their use in daily transactions and trading. In
June 2019, the Financial Action Task Force (FATF) recommended that wire transfers
of cryptocurrencies should be subject to the requirements of its Travel Rule, which
requires AML compliance.
As of December 2021, El Salvador was the only country in the world to allow Bitcoin
as legal tender for monetary transactions. In the rest of the world, cryptocurrency
regulation varies by jurisdiction.
Japan's Payment Services Act defines Bitcoin as legal property.
Cryptocurrency exchanges operating in the country are subject to collect information
about the customer and details relating to the wire transfer. China has banned
cryptocurrency exchanges and mining within its borders. India was reported to be
formulating a framework for cryptocurrencies in December.
Cryptocurrencies are legal in the European Union. Derivatives and other products
that use cryptocurrencies will need to qualify as "financial instruments." In June
2021, the European Commission released the Markets in Crypto-Assets (MiCA)
regulation that sets safeguards for regulation and establishes rules for companies or
vendors providing financial services using cryptocurrencies.
Within the United States, the biggest and most sophisticated financial market in the
world, crypto derivatives such as Bitcoin futures are available on the Chicago
Mercantile Exchange. In the past, the Securities and Exchange Commission (SEC)
took the stance that Bitcoin and Ethereum were not securities; however, in September
2022, SEC Chair Gary Gensler stated he believes cryptocurrencies are securities. This
stance implies that cryptocurrency's legal status may become subject to regulation.
Although cryptocurrencies are considered a form of money, the Internal Revenue
Service (IRS) treats them as a financial asset or property. And, as with most other
investments, if you reap capital gains in selling or trading cryptocurrencies, the
government wants a piece of the profits. On May 20, 2021, the U.S. Department of
the Treasury announced a proposal that would require taxpayers to report any
cryptocurrency transaction of and above $10,000 to the IRS.
How exactly the IRS would tax proceeds—as capital gains or ordinary income—
depends on how long the taxpayer held the cryptocurrency.

Are Cryptocurrencies Safe Investments?

Cryptocurrencies have attracted a reputation as unstable investments, due to high
investor losses as a result of scams, hacks, and bugs. Although the underlying
cryptography is generally secure, the technical complexity of using and storing crypto
assets can be a major hazard to new users.
In addition to the market risks associated with speculative assets, cryptocurrency
investors should be aware of the following risks:

User risk: Unlike traditional finance, there is no way to reverse or cancel a

cryptocurrency transaction after it has already been sent. By some estimates, about a
fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending
addresses.
Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, with
many governments seeking to regulate them as securities, currencies, or both. A
sudden regulatory crackdown could make it difficult to sell cryptocurrencies, or cause
a market-wide price drop.
Counterparty risks: Many investors and merchants rely on exchanges or other
custodians to store their cryptocurrency. Theft or loss by one of these third parties
could result in the loss of one's entire investment.
Management risks: Due to the lack of coherent regulations, there are few protections
against deceptive or unethical management practices. Many investors have lost large
sums to management teams that failed to deliver a product.
Programming risks: Many investment and lending platforms use automated smart
contracts to control the movement of user deposits. An investor using one of these
platforms assumes the risk that a bug or exploit in these programs could cause them
to lose their investment.
Market Manipulation: Market manipulation remains a substantial problem in the
cryptocurrency space, and some exchanges have been accused of manipulating prices
or trading against their customers.
Despite these risks, cryptocurrencies have seen a major leap in prices, with the total
market capitalization rising to over $1 trillion.
Despite the speculative nature of the asset, some have been able to create substantial
fortunes by taking on the risk of investing in early-stage cryptocurrencies.

Advantages and Disadvantages of Cryptocurrency

Cryptocurrencies were introduced with the intent to revolutionize financial
infrastructure. As with every revolution, however, there are trade-offs involved. At
the current stage of development for cryptocurrencies, there are many differences
between the theoretical ideal of a decentralized system with cryptocurrencies and its
practical implementation.
Some advantages and disadvantages of cryptocurrencies are as follows.

Advantages
Cryptocurrencies represent a new, decentralized paradigm for money. In this system,
centralized intermediaries, such as banks and monetary institutions, are not necessary
to enforce trust and police transactions between two parties. Thus, a system with
cryptocurrencies eliminates the possibility of a single point of failure, such as a large
bank, setting off a cascade of crises around the world, such as the one that was
triggered in 2008 by the failure of institutions in the United States.
Cryptocurrencies promise to make it easier to transfer funds directly between two
parties, without the need for a trusted third party like a bank or a credit card
company. Such decentralized transfers are secured by the use of public keys and
private keys and different forms of incentive systems, such as proof of work or proof
of stake.
Because they do not use third-party intermediaries, cryptocurrency transfers between
two transacting parties are faster as compared to standard money transfers. Flash
loans in decentralized finance are a good example of such decentralized transfers.
These loans, which are processed without backing collateral, can be executed within
seconds and are used in trading.
Cryptocurrency investments can generate profits. Cryptocurrency markets have
skyrocketed in value over the past decade, at one point reaching almost $2 trillion. As
of May 2022, Bitcoin was valued at more than $550 billion in crypto markets.
The remittance economy is testing one of cryptocurrency's most prominent use cases.
Currently, cryptocurrencies such as Bitcoin serve as intermediate currencies to
streamline money transfers across borders. Thus, a fiat currency is converted to
Bitcoin (or another cryptocurrency), transferred across borders, and, subsequently,
converted to the destination fiat currency. This method streamlines the money
transfer process and makes it cheaper.

Disadvantages
Though they claim to be an anonymous form of transaction, cryptocurrencies are
actually pseudonymous. They leave a digital trail that agencies such as the Federal
Bureau of Investigation (FBI) can decipher. This opens up possibilities of
governments or federal authorities tracking the financial transactions of ordinary
citizens.
Cryptocurrencies have become a popular tool with criminals for nefarious activities
such as money laundering and illicit purchases. The case of Dread Pirate Roberts,
who ran a marketplace to sell drugs on the dark web, is already well known.
Cryptocurrencies have also become a favourite of hackers who use them for
ransomware activities.
In theory, cryptocurrencies are meant to be decentralized, their wealth distributed
between many parties on a blockchain. In reality, ownership is highly concentrated.
For example, an MIT study found that just 11,000 investors held roughly 45% of
Bitcoin's surging value.
One of the conceits of cryptocurrencies is that anyone can mine them using a
computer with an Internet connection. However, mining popular cryptocurrencies
requires considerable energy, sometimes as much energy as entire countries consume.
The expensive energy costs coupled with the unpredictability of mining have
concentrated mining among large firms whose revenues running into the billions of
dollars. According to an MIT study, 10% of miners account for 90% of its mining
capacity.
Though cryptocurrency blockchains are highly secure, other crypto repositories, such
as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and
wallets have been hacked over the years, sometimes resulting in millions of dollars
worth of "coins" stolen.
Cryptocurrencies traded in public markets suffer from price volatility. Bitcoin has
experienced rapid surges and crashes in its value, climbing to as high as $17,738 in
December 2017 before dropping to $7,575 in the following months.
Some economists thus consider cryptocurrencies to be a short-lived fad or
speculative bubble.
$576 billion
Total market cap of Bitcoin, as of May 2022.

How Do You Buy Cryptocurrencies?

Any investor can purchase cryptocurrency from popular crypto exchanges such as
Coinbase, apps such as Cash App, or through brokers. Another popular way to invest
in cryptocurrencies is through financial derivatives, such as CME's Bitcoin futures, or
through other instruments, such as Bitcoin trusts and Bitcoin ETFs.

What Is the Point of Cryptocurrency?

Cryptocurrencies are a new paradigm for money. Their promise is to streamline
existing financial architecture to make it faster and cheaper. Their technology and
architecture decentralize existing monetary systems and make it possible for
transacting parties to exchange value and money independently of intermediary
institutions such as banks.

Can You Generate Cryptocurrency?

Cryptocurrencies are generated by mining. For example, Bitcoin is generated using
Bitcoin mining. The process involves downloading software that contains a partial or
full history of transactions that have occurred in its network. Though anyone with a
computer and an Internet connection can mine cryptocurrency, the energy- and
resource-intensive nature of mining means that large firms dominate the industry.

What Are the Most Popular Cryptocurrencies?

Bitcoin is by far the most popular cryptocurrency followed by other cryptocurrencies
such as Ethereum, Binance Coin, Solana, and Cardano.

Are Cryptocurrencies Securities?

In the past, the SEC has said that Bitcoin and Ethereum, the top two cryptocurrencies
by market cap, were not securities. In September 2022, SEC Chair Gary Gensler
stated he believes cryptocurrencies are securities and has asked SEC staff to begin
working with crypto developers to register their crypto. However, he also clarified
that he did not speak on behalf of the SEC; he was only speaking for himself. He
encouraged those starting in the crypto space to register their crypto in the spirit of
getting ahead because "It's far less costly to do so from the outset."

The Bottom Line

Cryptocurrencies are digital assets that are secured by cryptography. As a relatively
new technology, they are highly speculative, and it is important to understand the
risks involved before making an investment.
Investing in cryptocurrencies and other initial coin offerings (“ICOs”) is highly risky
and speculative, and this article is not a recommendation by Freecrypto-money.com
or the writer to invest in cryptocurrencies or other ICOs. Because each individual's
situation is unique, a qualified professional should always be consulted before
making any financial decisions.
Freecrypto-money.com makes no representations or warranties as to the accuracy or
timeliness of the information contained herein.