What is cryptocurrency?

03 - 06 - 22 Knaken

Increasingly, we hear people and companies talking about cryptocurrencies. The popularity of cryptocurrencies has been increasing for years, and more and more people decided to buy crypto coins. Before you decide to buy crypto yourself, it can be wise to learn more about what you are actually going to buy.

What are cryptocurrencies, and what can you use them for?

Cryptocurrency is a digital currency that can be used for making payments and as an investment. This currency uses the blockchain technology, which makes cryptocurrencies decentralised. Thus, there is no central and authoritarian organisation that has control and management over cryptocurrencies.

There are many different types of cryptocurrencies, of which Bitcoin (BTC) and Ethereum (ETH) are the best known and most widely used. Every cryptocurrency works differently. This is because each cryptocurrency uses a different technique. This technique can also be used for other purposes, which can make a cryptocurrency more valuable.

How do cryptocurrencies work?

A cryptocurrency works through the blockchain. It is important to understand how the blockchain works, to gain a better understanding of how cryptocurrencies work.

Blockchains consist of a network of computers, called nodes. The number of nodes present in a network can differ per blockchain. In a public blockchain, anyone can add a computer to the network and become a node. These nodes all have software installed that runs the blockchain.

The moment someone makes a transaction, it is sent to the entire blockchain network. Then the nodes in the network will process all transactions. Incorrect transactions, for example because the sender does not have enough cryptocurrency, will be deleted. All approved transactions are merged with other transactions, after which this group is converted to a hash. What remains is called a 'block'. Each block contains the hash of the previous block, creating a chain of blocks. This is where the term “blockchain” comes from.

Cryptography

Cryptography is an important part of cryptocurrencies. Every user has a public key and private key. These keys consist of a few characters, and are stored in the crypto wallet. This is where cryptocurrencies are kept. So, it can be compared to a kind of bank account.

The public key is publicly known. This key may therefore also be shared with others. The private key, on the other hand, is only known to the rightful owner. It therefore shouldn't be shared with others.

When you make a transaction (send cryptocurrency) you indicate which cryptocurrency, how many coins you want to send and who the recipient is. You enter the public key of the recipient. Then you sign your transaction with the private and public key. These keys together create a unique cryptographic outcome, which is called the digital signature.

This ensures that no one but you can send your own cryptocurrencies. As long as no one else is in possession of your private key, no one can access your cryptocurrencies.

The recipient can only accept the transaction if they have the correct private key. This is linked to the public key, which can be found in the transaction. This allows only the rightful recipient to accept the cryptocurrencies.

Decentralisation

An important feature of cryptocurrencies is decentralisation. Normally, Central Banks take care of the management of currency. They determine whether new banknotes are printed, control all cash flows and take care of monetary policy. In cryptocurrencies, it is the nodes that take care of the management of the currency.

Users are no longer dependent on decisions made by authoritarian parties. Instead, they can often even co-decide within the governance of a cryptocurrency. Many cryptocurrencies are a DAO, which stands for Decentralised Autonomous Organization. A DAO is nothing less than an organisational form in which the management is in the hands of all users. Everyone has an equal say in decisions that need to be made. Because of this, cryptocurrencies are made by and for the users.

What cryptocurrencies are there?

The number of cryptocurrencies is growing almost every day. It is becoming easier to make your own cryptocurrency. Not every cryptocurrency is as well known or used as much as other cryptocurrencies. The cryptocurrencies below are the best known, and you can also buy them at Knaken.

How is the value of cryptocurrency determined?

It is generally known that cryptocurrencies can be highly volatile. This means that the value of cryptocurrencies can fall sharply, but also rise sharply. For example, it is not strange when the value of a cryptocurrency has increased or decreased by 30% within one day.

This price change, on the other hand, would rarely occur with fiat currencies or stocks. One of the reasons for this high volatility is that there is currently little to no regulation for cryptocurrencies. The market is also still young, which makes the value a lot more vulnerable.

The value of a cryptocurrency is determined by supply and demand. The moment the demand rises relative to the supply, the price of the cryptocurrency will also rise. The same thing happens vice versa. An increase in supply compared to demand will cause the price to fall.

Maximum supply of Bitcoin

Bitcoin has a maximum supply of 21 million coins. Coins are added every day, but when the 21 million is reached, there will never be new Bitcoins in circulation. Because of this, Bitcoin is often compared to gold, of which there is only a maximum supply. The scarcity surrounding Bitcoin can cause a price increase in the long term. At some point, the offer will only level off, while Bitcoin is being accepted in more and more places. So, the demand for Bitcoin is increasing.

The security of cryptocurrencies

Because crypto uses blockchain technology, this form of money is extremely safe. Occasionally, however, a hack takes place, in which many crypto coins are lost. The technology is safe, but at the same time it is still in its infancy. When developers have made a mistake while programming, sometimes things can go wrong.

You are largely in control of safety. By using strong passwords, two-factor authentication (2FA) and hardware wallets, you can reduce the risk of losing crypto.

Crypto would often be used for criminal purposes. That is certainly the case, but fiat currencies such as the euro are also used for criminal purposes. The use of crypto by criminals is relatively much lower than with fiat currencies. Regulations and regulations reduce the use by criminals even more.

How and where can you buy cryptocurrency?

You buy cryptocurrencies on a crypto exchange. This is a platform where crypto coins are offered for sale. It is also possible to sell cryptocurrencies on a crypto exchange for the current price.

When you look for a crypto exchange, you quickly find out that there is plenty of choice. Nevertheless, it is good to first research the crypto exchange before you decide to use it for carrying out a transaction. There are sometimes large differences between crypto exchanges, which means that certain exchanges are cheaper than others.

For example, there is a difference in the number of cryptocurrencies that you can buy and sell, but you also pay different transaction costs per exchange. The exchange's platform can in some cases be easier to use than that of another exchange. This is because some exchanges are focused on advanced crypto traders and therefore also offer a larger number of functionalities.

You can buy cryptocurrencies safely and quickly on the Knaken crypto platform. You do this from the web or mobile application, and you can pay directly with iDEAL, bank or credit card. After you have paid, the crypto coins are immediately in your wallet.

Conclusion

Cryptocurrency is a digital currency that uses blockchain technology. This technology consists of a large network of computers that validate users' transactions. After validation, they are merged into a block. These blocks are connected to each other, after which a chain of blocks is created. That is why this technique is called 'blockchain'.

Anyone can use cryptocurrencies. For this, you only need a crypto wallet, where the cryptocurrencies are stored. Through cryptography, only you can access your crypto coins, making crypto an extremely safe means of payment. You can buy and sell crypto coins on a crypto exchange, and send crypto coins directly from your wallet to another wallet.

New cryptocurrencies are added every day, and today there are already tens of thousands of cryptocurrencies. Some of these cryptocurrencies are the most widely used. These include Bitcoin, Ethereum, Cardano, Litecoin and Ripple.

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