Most of us are now quite familiar with the term “Cryptocurrency” but very few actually understand what this is and how it is used for transactions. Therefore, let us introduce you once again to what cryptocurrency is and how it works.
What is cryptocurrency?
1. A cryptocurrency is a digital currency created and stored electronically in blockchains.
2. It uses encryption techniques to control creation of monetary units and to verify the transfer of funds. Hence, it is very secure.
3. It has no physical form and is not redeemable in another commodity like gold.
4. Its supply is not determined by any central bank or authority and the network is completely decentralised.
5. Bitcoin, Litecoin, Ethereum and Ripple are a few examples of cryptocurrencies.
Where did this Cryptocurrency Come from?
The first decentralized form of CryptoCurrency was introduced to the world in 2009, by an individual (or group) operating under the pseudonym ‘Satoshi Nakamoto’; this was dubbed ‘Bitcoin‘ and is now the standard under which other cryptocurrencies operate. Bitcoin uses the SHA-256 cryptography, designed by the U.S. National Security Agency (NSA).
Where is Cryptocurrency stored?
Cryptocurrency is typically stored in digital wallets that exist on the blockchain. These wallets can be accessed from anywhere in the world as long as you have an internet connection.
A cryptocurrency wallet is a secure digital wallet used to store, send, and receive digital currency like Bitcoin. Most coins have an official wallet or a few officially recommended third party wallets. In order to use any cryptocurrency you will need to use a cryptocurrency wallet.
Some of the salient features of Cryptocurrency include :
- Cryptocurrency can be converted into other forms of currency and deposited into user’s accounts at a lightning speed.
- Most Cryptocurrency can be transacted anonymously, and can be used as discreet online cash anywhere in the world. Users therefore do not have to pay for any currency conversion fees.
- While not 100% immune from theft, Cryptocurrency is generally safe to use and difficult for malicious hackers to break.
- Bitcoin and other Cryptocurrency can be saved offline either in a “paper” wallet or on a removable storage hard drive which can be disconnected from the internet when not in use.
Cryptocurrency transactions happen directly between individuals instead of through a bank. Every time a person makes a transaction using a cryptocurrency — for example, using funds stored in his or her crypto wallet to send bitcoin to someone else — the transaction is recorded on a digital ledger called a blockchain. Every cryptocurrency has its own blockchain, and computers doing complex math in a large network maintain it.
Once users make a specific number of transactions using a cryptocurrency, the computers group these transactions into a “block.” In order to send a block, adding transactions to the blockchain and winning a monetary reward, a computer has to solve a complex math problem called a cryptographic function.
Basically, the cryptographic equation is throwing a pumpkin (the block) off a building and telling you what the splatter pattern looked like. The only way users can match the splatter pattern — and send the block — is to hurl a bunch of pumpkins off a building themselves. So people who “mine” cryptocurrency are actually just using their computers to smash billions of pumpkins in order to find the winning pumpkin with the right splatter, which validates their block.
In other words, the first computer that can solve a complex math problem gets to add its block of transactions to the blockchain and receive a monetary reward for doing so (this is what people mean by “mining” crypto). Every computer in the network adds the new block to its copy of the digital ledger, and the process continues.
While how this cryptocurrency works may seem a bit complicated at first, once you actually get into it, you’ll find you don’t really need to know exactly HOW it works, but just to know it does work. If you have any experience trading in FOREX, it will probably seem familiar to you. The only difference is that this is a virtual currency, which means there is no physical money involved. The talk of it being decentralized means that you can trade in CyberCurrency without ‘Big Brother’ looking over your shoulder. It also means that you are going to take some risk in trading in this virtual currency. However, the rewards of trading can make the risk worth it, especially when it comes to newer altcoin startups, where you can get in at the ground level and watch the value of the coins rise over a short period. It is important to know, though, that as with trading of any kind, the real trick is in knowing when to get in and when to get out.
Whatever you decide, whether you want to trade in these virtual currencies, or simply provide a ‘nest egg’ of sorts, in case our ‘real’ economy collapses, I would encourage you to do some in-depth investigation, and look into the myriad of options available.
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Originally published at www.coingraph.io on January 14, 2018.