Cryptocurrency is a digital currency that is currently controversial. Here’s how cryptocurrencies work, their types and investment risks.
Cryptocurrency is one of the new types of currencies in the world. Unlike currencies in general, this currency has no physical form and can only be used for digital transactions
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What is cryptocurrency?
Terminologically, cryptocurrency is a combination of the words crypto and currency. The word “crypto” comes from “cryptography” with the meaning of secret code. While the word “currency” comes from the English word meaning currency. Thus, cryptocurrencies are electronic money created based on cryptographic technology, with the ownership code kept secret to their owners only.
Since its first appearance 10 years ago, cryptocurrencies have been a digital currency that has invited many pros and cons. Especially in 2011, when the price of cryptocurrencies rose drastically from $1 to %3200 per piece in just 3 months.
Characteristics of Cryptocurrencies
After discussing what cryptocurrency is and its development in Indonesia, here are some of the characteristics that make cryptocurrency different from other exchange rates. The characteristics of cryptocurrencies are:
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Digital
First, the characteristics of cryptocurrencies are digital. This currency does not have a tangible form like banknotes or coins, so it cannot be held. Therefore, cryptocurrencies are currencies that can only be used in cyberspace. -
Peer-to-peer Transaction
Transactions using cryptocurrencies occur from one person to another virtually. The cryptocurrency transaction process is to pass from the sender to the recipient online, without any direct meeting between the parties involved in the transaction. -
Global
Furthermore, the characteristics of cryptocurrencies are globally applicable. Unlike physical currencies whose transactions are limited, cryptocurrencies can be used anywhere without any national borders and price differences due to exchange rates. -
Encrypted
The next characteristic of cryptocurrencies is encrypted. When transacting in the blockchain world, you cannot find out who the real owner of the cryptocurrency is, because the identity of the owner has been protected by a secret code. -
Decentralized
Cryptocurrency transactions occur without the involvement of an intermediary. Each user is responsible for their own transactions, without any guardian. Therefore, when there is a loss in the blockchain world, the owner of the cryptocurrency cannot sue any financial institution. -
Truthless
Lastly, the characteristic of cryptocurrencies is truthless. In this digital currency transaction, you cannot entrust your crypto balance to a party or institution such as a bank. The only way to store your crypto money is to leverage an e-wallet account from a transaction provider or create your own storage.
How Cryptocurrencies Work and Their Risk Factors
After discussing what cryptocurrencies are and their characteristics, this time we will discuss how cryptocurrencies work in the blockchain market. Just like money in general, cryptocurrencies can only work when they are traded. If you want to own crypto money, you need to make purchases using conventional currencies or do crypto mining.
In more detail, the following is the workflow of how cryptocurrencies work:
- First, the owner of the cryptocurrency sends one of the cryptocurrencies to another person as a result of a transaction.
- Transactions are diversified and stored on the blockchain, a large cloud in the form of a shared database belonging to the owner of one world crypto.
- The information on the blockchain is encrypted and converted into a secret code, which is then given to the new owner of the cryptocurrency.
- Blockchains are run by many different people and companies using high-capacity computers called nodes.
- Nodes or people who run the blockchain from a computer will be rewarded in the form of new cryptocurrency if they verify the transaction.
- The price of cryptocurrencies in the market is based on demand and supply for the currency. If the demand is high, then the price of the cryptocurrency in question will also rise, and vice versa.
Types of Cryptocurrencies
After understanding how cryptocurrencies work, we will next discuss the types of cryptocurrencies that are traded in the blockchain market. For information, what OCBC NISP explains below is not the brand, but the type. The types of cryptocurrencies are:
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Bitcoin
Bitcoin is the very first type of cryptocurrency and is popular among crypto investors. This currency was created in 2008 by an internet persona named Satoshi Nakamoto. Initially, the price of the bitcoin cryptocurrency was pegged at $1 per piece. However, currently the price has soared to $74,507 per piece in November 2024. -
Altcoin
Altcoins are a type of cryptocurrency as a term that refers to any coin except Bitcoin. The word “altcoin” means “alternative to Bitcoin”. As is well known, bitcoin has complex mathematical calculations. Well altcoins were created as a simple form of bitcoin. To date, hundreds of altcoin brands have been created, such as Peercoin, Litecoin, Dogecoin, Auroracoin, and Namecoin. -
Token
Furthermore, the type of cryptocurrency is the token. Unlike altcoins, tokens are created and awarded through Initial Coin Offerings (ICOs). The form of the offer is the same as the stock offering. Tokens can be represented such as Value tokens (Bitcoin), Security tokens (to protect your account), and Utility tokens (designated for specific uses). -
Government Currency
Finally, the type of cryptocurrency is government cryptocurrency. This type is a cryptocurrency issued or inaugurated by the government in a country. Not many countries have their own crypto governments. However, Bank Indonesia recently announced that it is planning to create BI Crypto.
That’s an explanation of what cryptocurrencies are, how they work, their characteristics, and their types. Until now, cryptocurrency investing is an activity that has many pros and cons. Therefore, before jumping into the world of digital currency investment like this, first study the risks. Good luck trying the world of blockchain!
