What is Cryptocurrency
Stock valuations boil down to discounted estimations of a company’s future cash flows. There is no comparable valuation metric for cryptocurrencies because there is no underlying company; the value of a cryptocurrency is tied only to investor appetite.
Cryptocurrency valuations boil down to one of two factors: the likelihood of other investors buying the asset or the utility of the cryptocurrency’s blockchain. See More
How does it work?
Cryptocurrency runs on blockchain technology, but what exactly is a blockchain? The term has become so commonplace, its meaning and significance are often blurred. A blockchain is simply a digital ledger of transactions. This ledger (or database) is distributed across a network of computer systems. No single system controls the ledger. Instead, a decentralized network of computers keeps a blockchain running and authenticates its transactions.
Proponents of blockchain technology say that it can improve transparency, increase trust and bolster security of data being shared across a network. Detractors say that blockchain can be cumbersome, inefficient, expensive, and can use too much energy.
Rational crypto investors buy a digital asset if they believe in the strength and utility of its underlying blockchain. All cryptocurrencies run on blockchain, which means crypto investors are betting (whether they know it or not) on the resiliency and attractiveness of that blockchain.
Cryptocurrency transactions are recorded in perpetuity on the underlying blockchain. Groups of transactions are added to the ‘chain’ in the form of ‘blocks,’ which validate the authenticity of the transactions and keep the network up and running. All batches of transactions are recorded on the shared ledger, which is public. Anyone can go and look at the transactions being made on the major blockchains, such as Bitcoin (BTC) and Ethereum (ETH).
The answer is, they are remunerated with the underlying cryptocurrency. This incentive-driven system is called a proof-of-work (PoW) mechanism. The computers ‘working’ to ‘prove’ the authenticity of blockchain transactions are known as miners. In return for their energy, miners receive freshly minted crypto assets.
Investors in cryptocurrencies don’t hold their assets in traditional bank accounts. Instead, they have digital addresses. These addresses come with private and public keys — long strings of numbers and letters — that enable cryptocurrency users to send and receive funds. Private keys allow cryptocurrency to be unlocked and sent. Public keys are publicly available and enable the holder to receive cryptocurrency from any sender.
It is fair to say that Bitcoin has changed the paradigm — there has been nothing quite like it before, and it has unleashed an entirely new technology, a new platform for investing, and a new way of thinking about money.