Cryptocurrencies have become a global phenomenon. While most people still don’t understand the concepts of it, many companies, major banks, financial institutions, and governments are aware of the importance of cryptocurrencies and are developing regulations and business models to manage and channel the trend.
In several-part series of articles we will go through all basic aspects of cryptocurrency and the firm’s growing cryptocurrency practice. Today we will discuss basic concepts of cryptocurrencies.
A cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptography is process of converting legible information into an almost uncrackable code, to track purchases and transfers. Therefore, cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency is that it is not issued by any central authority, such as a central bank or government. Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank. Transactions are recorded on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that periodically generate coins. After coins are mined, users can also buy the cryptocurrencies from brokers, then store and spend them using online cryptographic wallets.
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private “keys”, which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them, for security purposes. The public key (comparable to a bank account number) serves as the address which is published to the world and to which others may send cryptocurrencies. The private key (comparable to an ATM PIN) is meant to be a guarded secret, and only used to authorize cryptocurrency transmissions. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
As a new and largely unregulated financial asset, the cryptocurrency markets have been known to take off meaning a small investment can become a large sum overnight. But the same works the other way, with volatility sometimes resulting in steep losses of value.
Also because of the level of anonymity they offer, cryptocurrencies are often associated with illegal activity, such as money laundering, tax evasion and illegal activities on the dark web, however, crypocurrencies themselves are not illicit or criminal item. Those seeking to invest in or buy cryptocurrencies should be aware of the volatility of the market and the risks they take, and be careful about the implications when choosing to buy the currencies.
Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
Future posts in this series will examine the current state of crypocurrency regulation, legal trends in crypocurrency and practical aspects of engaging in cryptocurrency related business in Mongolia.
