What is Cryptocurrency? [Explained]

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What is Cryptocurrency?

Overview

Most people have heard of cryptocurrency, but not many out there have much of a clue about what it is and whether the currency is real or not. Cryptocurrency has become a global phenomenon, and banks and governments are very aware of its presence and importance. It’s a digital currency that uses cryptography for security; this makes it difficult to counterfeit, and most of the cryptocurrencies out there are decentralized systems that are based on blockchain technology.

Initially, cryptocurrency was more of a ‘side’ product of another invention – Bitcoin. Satoshi Nakamoto, Bitcoin’s creator, never intended to create a currency in the first place. Nakamoto stated that he had developed a “peer-to-peer electronic cash system,” rather than a currency. Nakamoto had instead seen that many before him had tried to create a digital currency and had failed, and he aimed to build a decentralized digital cash system. There had been a lot of attempts previously in the Nineties, but these all failed before they got off the ground. Enter Nakamoto and Bitcoin.

Cryptocurrency Defined

The one thing to know about cryptocurrency is that it’s not a tangible currency that you can carry around in your wallet. It’s a digital asset, and this can be exchanged in virtual markets. The reason it’s called ‘crypto‘ currency is that cryptography is used for security and verification purposes. Without the reliance on a bank to facilitate a transaction, there are no fees that would normally have to be paid when using financial institutions.

The allure of cryptocurrency comes from the fact that it’s organic; there is no central authority issuing it, and therefore it’s pretty much immune to manipulation and government interference.

How Are Cryptocurrencies Processed?

Usually, cryptocurrencies are completed through a blockchain network. These are designed so that they are decentralized, with every computer to the network being required to confirm the transaction before it can be processed. The idea behind this was to create safer transactions for all those that are participating in the transaction.

All transactions are put into a block, and these then are subject to a complex mathematical problem by the computers in the network. The computer solves the block, with the solution shown to others in the network. The network has to agree that the solution is right and then the block is added to the chain for the transaction to be marked as complete. There is a finite amount of cryptocurrencies that can exist because they have to be mined.

Cryptocurrency vs Banks

People want a more natural way to transfer funds directly between two parties in a transaction, without a bank or credit card company to facilitate the transaction. Instead, the transaction is facilitated with the use of public or private keys, and that’s for security purposes. Users have a “wallet” or an address for their account, which has the public key and the private key is used to sign transactions.

There are minimal processing fees involved with fund transfers, which allows users to avoid the high fees charged by the banks for wire transfers.

Banks are interested in what blockchain can do for them; any financial institution would be. However, Bitcoin was developed to avoid using banks, and fans enjoy the idea of a decentralized system that doesn’t require the need of an outside institution. Cryptocurrency owners avoid banks – they want independence!

Miners – What Do They Do?

Everyone can be a miner because there is no authority to delegate the task. Where there is no central space for rules, there needs to have a mechanism to prevent one party from abusing the system – the forged transactions potentially being spread through the network would mean an unsustainable system.

Bitcoin has a network of miners, each with a record of transactions and their history, and also the balance of every account. Transactions are files that show who has given Bitcoin to whom, which isn’t anything too special, as it’s basic public key cryptography. Once it’s been signed with a private key, transactions are then broadcasted in the network, which is then sent to each peer.

Here’s how it works:

  • A transaction is requested.
  • This is then broadcast to the P2P network, which consists of nodes (computers).
  • This network of nodes then validates the transaction along with the user’s status using known algorithms.
  • Verified transactions can involve records, contracts and cryptocurrency.
  • Once verified, the transaction will then be combined with other transactions, which created a new block of data for the ledger.
  • The new block is added to the existing blockchain which is permanent, and then the transaction is complete.

Cryptocurrency is the medium of exchange, which is stored electronically in the blockchain with encryption techniques used to control and vary the transfer of funds. Cryptocurrency has no intrinsic value, so it cannot be redeemed for any other commodity. It also has no physical form, existing solely within its network. The transaction is immediately picked up by the whole network, but it does take some time to confirm it. Confirmation is a critical part of the process because unconfirmed transactions are set as pending and they can be forged. Any transactions that are confirmed cannot be forged and also cannot be reversed – and only miners can confirm these transactions. This is their whole purpose in the network, taking the transactions, stamping them as legitimate and spreading them throughout the network.

Satoshi Nakamoto set a rule that miners have to invest some of their work to be miners – they have to find a hash (a product of cryptographic function) to connect the new block with its predecessor. Miners can build a block and add it to the blockchain, and the incentive is that the miner has the right to add a coinbase transaction that gives them a specific number Bitcoins – which is the only way to create valid Bitcoin!

How To Buy Cryptocurrency

Mining uses a lot of resources, costing a lot of money, which is why people look for other ways to purchase it. Thankfully, there is more than one way to buy cryptocurrency! Here’s how you do it:

Cryptocurrency Exchange

It’s the most popular way to buy cryptocurrency; buyers will use this platform to trade or purchase a cryptocurrency. Some exchanges use USD to buy, but some exchanges require you to own Bitcoin to exchange. There are some cryptocurrency platforms out there that exist merely for people to trade, which are centralized (ironically).

The exchange offers buyer s the chance to either buy or sell cryptocurrency while taking a fee. There are other exchanges like peer to peer ones that offer you the chance to contact the trade you are buying from directly. Buying Bitcoin and other currencies on an exchange are simple, as you can do it with a credit or debit card. There are also Bitcoin ATMs that have come up around major cities that can be bought from.

What Is Cryptocurrency Used For?

There is a lot of conversation that goes on about what to spend the currency on once you have it, and it can be confusing for new owners. The key is in the name: currency. Most owners of cryptocurrency tend not to out-and-out spend it; they invest it, and it’s becoming more popular for cryptocurrency owners out there. Investing is much easier than spending it, and after you buy it, you keep it. It’s a long term investment prospect, and while it’s a risk like any investment, it’s worth the investment if you are willing to wait and let it grow.

The Most Popular Cryptocurrencies

Those who are interested in getting involved with cryptocurrency should be interested in the different currencies available. Here are some of the most popular on the market right now, so that you can make the right choice:

  • Ethereum. It’s second to Bitcoin when it comes to market cap, and it stands out because instead of working as a currency and disruption for banking, Ethereum can disrupt online data storage. People use the blockchain on Ethereum for storing smart contracts.
  • Ripple. Ripple and its XRP try to help financial institutions, and its strength as a currency is leveraged in its ability to be used in the middle of a transaction to minimize liquidity. It’s not mined, but there are 100 billion XRP created just to exist. It has a faster transaction speed than Bitcoin, too.
  • Litecoin. Another faster transaction speed compared to Bitcoin and is another contender for the top cryptocurrencies out there.
  • Zcash. This is meant to be used for cash, but mainly for private transactions which are not visible on the public ledger.

Cryptocurrency is still relatively new, but with caution, it can be safe. Using cold storage – keeping your wallet offline – can keep your cryptocurrency offline, enhancing safety. Before you invest, do as much research as possible so that you are well informed!