It’s highly likely that you’ve heard about Bitcoin and other buzzwords surrounding this mysterious new digital currency phenomenon that many people are talking about, but you really want to know — what is cryptocurrency, how does it work and how can it benefit me?
What Are Cryptocurrencies?
Commonly abbreviated as “cryptos” by individuals who live and breathe this stuff, cryptocurrency is an asset that exists in the digital world. It was created as a way to conduct transactions, and it uses cryptography to create additional units and provide security for the transactions. Here are some characteristics to think about:
– It’s not physical. It is digital money that was created from code.
– Has no intrinsic value — you cannot redeem it for a commodity like gold
– It is encrypted.
– The network is completely decentralized — free of government oversight.
When you think about most currencies like the United States dollar, British pound or Japanese yen, you probably picture a physical bill or coin that you can place in your wallet or spend at the local store. These currencies are controlled by central banks all around the world.
In the United States, the central bank is known as the Federal Reserve. In 1913, it was created by Congress to provide a stable financial and monetary system. The Federal Reserve is in charge of printing United States currency and monitoring its supply.
Cryptocurrency is quite opposite — this monetary system is decentralized. It’s similar to a peer to peer network where many different nodes work together to provide a solution.
How Does Cryptocurrency Work?
To explain how it works, it’s best to use an example. Let’s imagine that you have one Bitcoin in your digital wallet and you want to make a transaction. For this scenario, you want to send it to a popular exchange like Bittrex, which is an online digital currency exchange that people use to trade cryptos like Bitcoin.
Your request is sent to the P2P network of computers that are working as nodes. They verify the transaction by using a specified algorithm. Once the transaction is verified, it’s combined with other transactions and permanently stored as a new block of data. This block gets placed on an existing blockchain that is permanent. Once this occurs, the transaction is complete and you have a Bitcoin in your Bittrex account.
The most important and critical concept about cryptocurrencies is the confirmation. In the previous example, when you sent your request to the network to send your 1 Bitcoin to Bittrex, the whole network knew about the transaction in just a matter of seconds. Yet, it was still not confirmed.
When a transaction hasn’t been confirmed, it can still be forged and is in a state of pending. However, once confirmed, that transaction is set in stone. It’s unable to be reversed and will stay on the blockchain for as long as that cryptocurrency is in existence.
Transactions are confirmed by miners. They run the transactions through an algorithm to confirm that they are real. After confirmation, the data is added to the blockchain and can be accessed by every other node. As a reward for confirming the transaction, a miner gets rewarded a specific amount of cryptocurrency for its effort. Without miners, the whole process would not be able to operate.
The Role of Miners and Currency Creation
Anyone can mine cryptos. It just requires buying or building a mining rig and hashing the digital currency of choice. To mine a cryptocurrency like Bitcoin, a miner must invest some work — this is done by utilizing hardware and electricity. Otherwise, a person could create multiple peers and forge transactions. This would destroy the whole system.
Proof-of-Work is required for a miner to get compensated. This requires them to run a cryptographic hashing function and solve a complex puzzle. A mining rig provides the computing power to solve the puzzle. If that miner is the one to provide the solution, a reward is provided. This reward is a specific amount of the same digital currency that a miner is mining.
It’s important to compare this scenario to the way that United States currency is created. The Federal Reserve just mandates that more money is needed during certain economic conditions. You may have heard the term that the Federal Reserve is printing money — well, they actually don’t turn on printing presses and crank out $100 bills. It’s done by adding credit to the Federal Reserve Banks — 12 total in the United States. There’s no real work involved in this type of currency creation. You basically have people in charge that are making the rules.
Compare that to cryptocurrency — there is a huge difference. Can you now see why this is a big deal? Digital currency like Bitcoin, Ethereum or Zcash takes the control out of the hands of a few individuals and places it into many. Everyone in the network agrees with the transactions that are confirmed on the Bitchain.
Again, compare that to your bank. They tell you how much money you have in your account. What if they get it wrong? There’s no other peers to correct the mistake. You won’t ever have that problem with this new form of digital currency. People don’t control Bitcoin. It’s controlled by cryptography and math.
What is Cryptocurrency Used For?
Cryptos can be used for making purchases all over the globe. They can also be used as a way to speculate and invest in an asset that stores value. Some big brands are now accepting Bitcoin — Dish Network, Newegg.com, Steam, Expedia.com and Subway, just to name a few.
As an asset to hold for speculation or investment, many cryptocurrencies have done quite well. Bitcioin has continued to rise. Its price skyrocketed to $5000 in 2017. Another crypto, Ethereum, had its price explode to the $400 range in only eight months. It was only trading at around one dollar in January 2017.
Some Important Characteristics
When you make a transaction, you don’t need to list your name, any bank information or other information that you typically would when you make a transaction with physical based currency. The only information that you need to supply is an address where you want your crypto sent.
Strong cryptography is used as the basis for the data that is kept on the blockchain of each digital currency. This makes it impossible to break. It also ensures that there is no way for your personal data to be stolen.
There’s absolutely no way that a transaction can be reversed. Once a transaction has become confirmed by the network, it can’t be changed. There’s no way to manipulate this, and it’s completely transparent to everyone who accesses the network.
There is no central bank controlling this currency. It can be accessed by you or any other individual around the world at any time. This means that there are no limitations. It won’t be closed on holidays or special events — you can make transactions 24/7, 365 days a year.
Transactions can be completed fast. Compare this to an international money wire that requires you to fill out an exorbitant amount of information and pay a high fee to send any money.
How To Buy Cryptocurrency
If you’re interested in buying cryptocurrencies, you’re in luck. There are many different places on the internet where you can buy and sell. Typically, one of the easiest ways to do this is by using your current bank account and transferring the money over to a crypto exchange like Coinbase. The site will allow you to purchase Bitcoin, Ethereum and Litecoin. After that, you’re good to go. You can start making transactions with the digital currency that you own.