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What are Cryptocurrencies

4 September، 2024

8 minutes read

What are Cryptocurrencies? Cryptocurrencies, or digital assets, are decentralized, digital forms of money that operate on blockchain technology. Unlike traditional currencies, they are not controlled by a central authority, such as a government or bank. Instead, their value and transactions are maintained by a distributed network of users.

Cryptocurrencies can be used to purchase goods and services, but many people also invest in them as they would other assets like stocks or precious metals. While they offer a new and exciting asset class, investing in cryptocurrencies can be risky, as it requires extensive research to understand how each currency works and the underlying technology.

Contents Hide

1 what are cryptocurrencies and The Birth of it?

1.1 What is Blockchain?

1.2 Mining Cryptocurrencies

1.3 How to Use Cryptocurrencies

1.3.1 Investing in Cryptocurrencies

1.3.2 The Most Traded and Popular Cryptocurrencies:

1.3.3 The Advantages of Cryptocurrencies

1.3.4 The Pitfalls of Cryptocurrency Investing

1.3.5 Central Banks and Cryptocurrencies: A Shifting Landscape

1.3.6 The Future of Cryptocurrencies

what are cryptocurrencies and The Birth of it?

Bitcoin, the first cryptocurrency, was introduced in 2008 by Satoshi Nakamoto in a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described Bitcoin as an “electronic payment system that works without relying on trust.” This system relies on cryptographic proof in the form of transactions verified and recorded on the blockchain.

What is Blockchain?

A blockchain is a decentralized, open ledger that records transactions in code. It’s similar to a checkbook distributed across countless computers worldwide. Transactions are recorded in blocks, which are then linked together to form a chain of previous cryptocurrency transactions.

Butch Okoro, CEO and co-founder of Quidax, an African cryptocurrency exchange, explains blockchain using a simple analogy: “Imagine a ledger where you record every financial transaction you make daily. Each page in this ledger represents a block, and the collection of pages forms a blockchain. This shared ledger ensures transparency and security for all transactions.”

This distributed ledger ensures that everyone using a cryptocurrency has their own copy, creating a unified transaction record. Each new transaction is recorded as it occurs, and all copies of the blockchain are simultaneously updated with the new information. This ensures all records are consistent and accurate, preventing fraud.

Mining Cryptocurrencies

The process of producing new bitcoin units is called mining. While theoretically, anyone can mine cryptocurrencies, as the Bitcoin network has grown, mining has become more complex and requires significant computing power.

Many individuals who mine cryptocurrencies currently need to invest in specialized hardware and software to compete. Additionally, some cryptocurrencies require vast amounts of energy to mine. For example, Bitcoin mining currently consumes an estimated 127 terawatt-hours (TWh) of electricity annually.

How to Use Cryptocurrencies

Cryptocurrencies, particularly Bitcoin and Ethereum, can be used to purchase a variety of goods and services. They can also be considered as an alternative investment option to stocks and bonds, although they carry significant risks. Also, it should comply with Islamic Jurisprudence in Investment.

As David Zeller, a cryptocurrency expert at financial news website Money Morning, states, “Bitcoin, the most famous cryptocurrency, is a secure, decentralized currency and has become a store of value, much like gold. Some people even refer to it as ‘digital gold.'”

Investing in Cryptocurrencies

Understanding how to buy and store cryptocurrencies is crucial. Many brokerage platforms, such as Robinhood, Webull, and eToro, allow you to invest in cryptocurrencies.

Setting up an account is quick and easy, similar to traditional investment platforms. However, it’s advisable to conduct thorough research on each cryptocurrency before investing. For beginners, here are five steps to get started:

Decide the cryptocurrency you wish to purchase.
Select a reputable cryptocurrency exchange.
Explore storage options and digital wallets.
Determine the amount you want to invest.
Keep yourself educated and make smart investment decisions.

Note: It should be noted that the Islamic rulings regarding trading and investing in cryptocurrencies should be consulted. For more information, please refer to the ruling on dealing in cryptocurrencies

The Most Traded and Popular Cryptocurrencies:

Bitcoin (BTC): Often considered the gold standard of cryptocurrencies, Bitcoin, the brainchild of the pseudonymous Satoshi Nakamoto, was first introduced in 2009. Since its inception, Bitcoin has experienced significant price volatility. However, public awareness and investor interest surged in 2017, leading to a surge in its value. In a landmark move in 2024, the Securities and Exchange Commission approved the launch of exchange-traded funds (ETFs) that invest directly in Bitcoin, offering investors a more straightforward way to gain exposure to this digital asset.
Ethereum (ETH): Ethereum, often referred to as “Ether,” is the closest cryptocurrency to Bitcoin in terms of market capitalization and technological significance. The Ethereum network aims to replace traditional financial institutions like banks and brokerages by utilizing decentralized applications (dApps) for financial services.
Tether (USDT): Tether is a stablecoin pegged to the US dollar at a 1:1 ratio. This means that one USDT is always worth approximately one US dollar. Stablecoins like Tether are designed to offer price stability, unlike cryptocurrencies that are highly volatile. Tether is frequently used as a medium of exchange when traders move between different cryptocurrencies, serving as a more stable intermediary than directly converting to fiat currency.
USD Coin (USDC): As the second-largest stablecoin, USDC, like Tether, is centralized and backed by US dollars and Treasury bills. It provides a reliable and regulated option for those seeking to maintain the value of their digital assets.
Binance Coin (BNB): Native to the Binance exchange, one of the world’s largest cryptocurrency exchanges, BNB was initially created as a utility token to reduce trading fees. Over time, BNB has evolved into a multi-functional token with various use cases within the Binance ecosystem.
Solana (SOL): Launched in 2020, Solana is a standalone blockchain network with its native cryptocurrency, SOL. Known for its high speed and scalability, Solana is frequently used for smart contracts and non-fungible tokens (NFTs).
Ripple (XRP): Created in 2012, Ripple (XRP) offers a network for fast, low-cost international payments. It enables the transfer of various fiat currencies and cryptocurrencies, providing a more efficient alternative to traditional cross-border payments.
Dogecoin (DOGE): Originally created as a joke and inspired by the Shiba Inu meme, Dogecoin has defied expectations to become a significant player in the cryptocurrency market. Unlike many cryptocurrencies with a limited supply, Dogecoin has an unlimited supply. While it started as a meme coin, it has gained a dedicated community and is now used for various purposes, including tipping and online transactions.
Cardano (ADA): The blockchain platform Cardano is open-source and decentralized. Although it was launched in 2017, its development began in 2015 with the involvement of one of Ethereum’s co-founders. Cardano aims to provide a more sustainable and scalable platform for decentralized applications.

The Advantages of Cryptocurrencies

Cryptocurrencies have gained significant traction among global investors, particularly following advancements in technology and manufacturing. Bitcoin, in particular, has secured a prominent position compared to other digital assets.

Cryptocurrencies streamline the transfer of funds without the involvement of banks or other financial institutions. Key benefits include:

Accessibility: Investors need only a computer or smartphone connected to the internet to buy, sell, or trade cryptocurrencies. The verification process is swift and straightforward, eliminating the need for credit checks to open a cryptocurrency wallet. This makes it significantly faster and easier compared to traditional financial institutions. Cryptocurrencies also allow individuals to conduct online transactions or send money effortlessly.
Security: Cryptocurrencies are highly secure, as no one can access your funds unless they have your private wallet key. However, losing or forgetting this key means you will be unable to recover your funds. Transactions are secured by blockchain technology and a vast network of computers that verify them. Therefore, it’s safer for investors to store their crypto assets in personal wallets.

Inflation Hedge: The value of many fiat currencies has declined due to inflation. Many people believe that cryptocurrencies offer protection against inflation. Bitcoin has a hard cap on the total number of coins that will ever be mined, with only 21 million bitcoins to be produced. By 2140, all bitcoins will have been mined..

Speed of Transactions: Transferring funds within the United States can be done through various methods, but cryptocurrency transactions are typically completed within minutes. This speed is appealing to many investors. Notably, within U.S. financial institutions, most transactions are settled within three to five days, while bank transfers can take at least 24 hours.
Cost-Effective Transactions: Cryptocurrencies facilitate global money transfers at minimal or no cost. They eliminate the need for third-party intermediaries like Visa to verify transactions.
Decentralization: Cryptocurrencies represent a new model of decentralized finance. They help combat currency monopolies and liberate money from control. No government organization can dictate the value or flow of a cryptocurrency, which cryptocurrency enthusiasts believe makes them secure and reliable.
Ease of Exchange: Investors can purchase cryptocurrencies using fiat currencies like the US dollar or Euro, among many others. Cryptocurrency exchanges enable investors to trade digital assets and convert currencies with minimal fees across various wallets.

The Pitfalls of Cryptocurrency Investing

While cryptocurrency investments can seem enticing and potentially lucrative, investors must also consider the inherent risks and challenges associated with these digital assets.

Extreme Price Volatility: Cryptocurrency prices can fluctuate wildly, experiencing significant drops within short timeframes. Although this volatility is similar to what’s seen in the stock market, it tends to be more pronounced among digital assets.
Subjective Valuations: Unlike traditional stocks, which are valued based on tangible factors like earnings, revenue, and assets, cryptocurrencies often lack a solid financial foundation for valuation. As a result, their market prices can be highly speculative and subject to irrational exuberance.
Regulatory Uncertainty: Governments worldwide are still grappling with how to regulate cryptocurrencies. While some countries, such as El Salvador and the Central African Republic, have embraced Bitcoin as legal tender, others, like India and China, have outright banned them. The regulatory landscape for cryptocurrencies remains unclear, making it difficult for investors to navigate.
Decentralization Challenges: While decentralization is often touted as a key advantage of blockchain technology, it can also create challenges. The consensus-driven nature of decentralized networks can make it difficult to implement changes or upgrades. Furthermore, the absence of a centralized authority may make things hard to settle conflicts or recover lost money.
Risk of Losing Keys: Cryptocurrencies are stored in digital wallets, which require secure passwords or keys for access. If these keys are lost, stolen, or forgotten, the associated funds may be irretrievably lost.

Central Banks and Cryptocurrencies: A Shifting Landscape

When cryptocurrencies first emerged, many governments responded with outright bans due to the perceived risks and uncertainties associated with these digital assets. Some jurisdictions even enacted laws criminalizing the use or mining of cryptocurrencies.

However, in the face of rapid technological advancements and the rise of decentralized finance, governments have begun to shift their stance, introducing regulations to oversee the cryptocurrency market.

A significant development in this space has been the emergence of central bank digital currencies (CBDCs). A survey conducted by the Bank for International Settlements (BIS) found that a staggering 94% of the 86 central banks surveyed were considering issuing their own digital currencies.

The BIS has expressed concerns that these CBDCs could disrupt monetary policy in the coming years.

The Future of Cryptocurrencies

The future of cryptocurrency is uncertain, but it has the potential to have an impact on the financial world. As technology continues to advance and regulatory frameworks evolve, cryptocurrencies may become more widely adopted and integrated into mainstream financial systems.

FAQ

What’s the difference between digital and cryptocurrency? Not all digital currencies are cryptocurrencies, even though they are all digital currencies. The underlying technology makes all the difference. Cryptocurrencies leverage blockchain technology to secure transactions and data, offering enhanced security.
How are cryptocurrencies used? C Cryptocurrencies have a wide range of uses, which include:
– Purchasing goods and services: Many online merchants now accept cryptocurrencies as payment.
– Investing: Cryptocurrencies are treated as assets, similar to stocks and bonds, and can be bought and sold on exchanges.
– Remittances: Sending money internationally using cryptocurrencies can be faster and cheaper than traditional methods.
What are the risks associated with cryptocurrencies? Investing in cryptocurrency has a high risk:
– Volatility: Cryptocurrency prices can fluctuate dramatically over short periods, leading to potential losses.
– Decentralization: The decentralized nature of cryptocurrencies means there’s no central authority to regulate them, which can increase market volatility.
– Lack of regulation: Many countries have yet to establish comprehensive regulations for cryptocurrencies, making them a riskier investment compared to traditional assets like stocks and bonds.Note: Investing in cryptocurrency has a significant degree of risk and uncertainty. It’s essential to conduct thorough research and understand the risks involved before making any investment decisions.

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