Cryptocurrency – Should You Invest in It?

By Joran Teijema

 

What is cryptocurrency?

The official meaning of cryptocurrency is stated as: “a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.” The big difference between cryptocurrencies and original currencies is that cryptocurrencies are decentralized and not part of an organized system like banks have.

According to different professionals and experts, a cryptocurrency is a system that meets six conditions:

 

1. The system does not require a central authority; its state is maintained through distributed consensus.

2. The system keeps an overview of cryptocurrency units and their ownership.

3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.

4. Ownership of cryptocurrency units can be proved exclusively through cryptography.

5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.

6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

 

Furthermore, the validity of a cryptocurrency coin is provided by a blockchain. A blockchain is an increasing list of records, called “blocks,” which are secured and linked together using cryptography. The way it is setup is that each block typically has a hash pointer as a connection to a previous block, a timestamp, and overall transaction data. Blockchains are designed to be inherently resistant to any modifications of the data. Usually blockchains are an open distributed ledger that can record transactions between two participants efficiently and in a verifiable and permanent way. Blockchains are secure by design and are an example of a distributed computing system. A decentralized consensus, as mentioned before as being part of cryptocurrency, is achieved with a blockchain.