The popularity of Dogecoin has increased the interest in cryptocurrencies for many. A cryptocurrency that was once worth less than a penny at the beginning of the year has gone on to make millionaires out of early investors. With Dogecoin’s sudden popularity in mind, you might be wondering what cryptocurrency is and how it works.
What is a cryptocurrency?
A cryptocurrency, or “crypto”, is a system of digital money that can be exchanged for a variety of items. Some of these uses include currencies, clothing, games and even other “cryptos”. There are several companies and websites that have created their own currencies which can be exchanged for a specific item that they sell.
Imagine it like purchasing a foreign currency: you exchange your money for a certain number of coins in that currency, but you can’t spend those coins in every store like you can with US dollars. Just like a foreign currency, its value can increase or decrease to the dollar. P, and prices can range from as low as less than a cent per coin to over $40,000 per coin like in the case of Bitcoin.
Cryptocurrencies do not exist in a physical form as most other forms of currency do; it’s a set of data secured by cryptography — or encoding and decoding information. This encoding and decoding process diminishes the possibility of counterfeiting. This is part of the appeal of using cryptocurrency., It’s anonymity also allows users’ transactions to not be tracked and provides a safe and secure process. It works similarly to a virtual private network, hiding your information and IP address from any unwanted observers.
Two of the major drawbacks are the environmental impact that its mining (the process that keeps the crypto up and running) has as well as cybersecurity issues which could put you at risk.
The mining of cryptocurrencies takes a significant amount of energy. Bitcoin mining rigs consume a staggering 121 terawatt-hours of electricity each year. To put that into perspective, that is more energy than Argentina uses over the course of a year.
While it may be more secure than a “normal transaction”, cryptocurrencies have been vulnerable to attacks by hackers. As a result
, of a few cybersecurity breaches and the lack of upkeep of security infrastructure, some investors have already lost millions of dollars .
- It can be used as a savings account: several coins known as stable coins maintain a fixed value and allow the lender to gain annual interest. (Interest rates vary between each coin.)
- Many cryptos have begun to be used for buying luxury items such as cars, real estate and other goods.
- Several crowdfunding companies such as Kickstarter and IndieGoGo have begun accepting cryptocurrencies as a form of payment.
Examples of currencies
- Bitcoin (BTC) The first cryptocurrency, and also the most popular, can be used for transactions between peers.
- Ethereum (ETH) Second most popular cryptocurrency, can be used to store computer code to allow for the distribution of financial contracts and applications.
- Monero (XMR) Allows for better privacy protection than many other cryptocurrencies.
- Dogecoin (DOGE) Created as a joke, but has gained popularity in meme culture and seen its price surge as a result.