A beginner’s guide for ‘Cryptocurrency’
What is Cryptocurrency?
Cryptocurrency, also known as Virtual Currency or Digital Currency is a medium of exchange that is created by and for the transaction over the blockchain. It consists of two terms ‘Crypto’ and ‘Currency’.
The term ‘Crypto’ is the short form of ‘Cryptography’ which means the art and science of concealing the messages to introduce secrecy in information security. The word ‘cryptography’ was coined by combining two Greek words, ‘Krypto’ meaning hidden and ‘graphene’ meaning writing.
‘Currency’ means money in circulation used as a medium of exchange. In other words, currency is a system of money (monetary units) in common use.
Currency can be classified as:
- Fiat money is a currency established as money by government regulation or law, and each type has limited boundaries of acceptance. The term derives from the Latin fiat (“let it become”, “it will become”) used in the sense of an order or decree. Fiat money is money declared by a government to be legal tender. It is state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard. Example: USD, GBP, Rupees etc.
- The first use of fiat money was recorded in China around 1000 AD. Since then, it has been used by various countries, concurrently with commodity currencies.
- Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves as well as value in their use as money. Example gold, silver, copper etc.
A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves.
- Representative money, is any medium of exchange that represents something of value, but has little or no value of its own.
Unlike fiat money, to be a genuine representative money, there must always be something valuable supporting the face value represented. Example gold certificates or silver certificates. It may be called “commodity-backed money”.
In my opinion, Cryptocurrency can be grouped as representative money, except it doesn’t exist in any physical form.
Key Features of Cryptocurrency
- Decentralized — It is not regulated by any central body (Govt.) and is in existence with the consensus of the participating nodes .
- Virtual Currency — It doesn’t exist in any physical form, but in digital form. Could be used anywhere and counterfeiting is impossible.
- Instant and inexpensive transaction — It can be sent anywhere in the world almost instantaneously. The transaction charge involved here is very less. So, it is one of the most efficient way of money transfer over the globe.
Birth of Cryptocurrency?
Satoshi Nakamoto, the inventor of blockchain, is also the inventor for first cryptocurrency called ‘Bitcoin’ (BTC).
A new cryptocurrency is minted as a result of the process of generating ‘Proof of Work’ (PoW), in order to facilitate transactions on the blockchain and to ensure that the computation done behind creation of each block in the blockchain is correct. This process is also called as mining because it is similar to the process of real mining (digging), except in this case for a new cryptocurrency and it is CPU time and electricity that is expended.
The birth of cryptocurrency involves extensive computations and is expensive too. It needs an absolute consensus of participating nodes, without a central authority. Since it uses the cryptographic features of the hash function, it is nearly impossible to generate counterfeit of the currency.
What are Altcoins?
Bitcoin is the first cryptocurrency. After that many digital / virtual currencies came into existence. They are supposed to be alternative of Bitcoin, hence named as ‘Altcoins’ meaning ‘alternate coins’. Example Ethereum (ETH), Ripple (XRP), Litecoin (LTE) etc. At present, there are more than 500 altcoins available.
How do I own cryptocurrency?
Looking at the market growth of cryptocurrency, many people are interested in owning cryptocurrency. According to coinmarketcap.com, at present digital currency has more than $111 Billion market cap.
A cryptocurrency can be obtained by one or all methods below:
- Purchase from an exchange — This is widely accepted method for obtaining any digital currency. Here, purchase can be made from any cryptocurrency exchange using fiat currency or any other cryptocurrency (mostly Bitcoin or Ethereum). Few trusted exchange are Coinbase, Poloniex, Kraken, GDAX, Bitfinex etc. You can select one as per exchange supported by your location.
- Purchase during Initial Coin Offering (ICO) — Purchasing cryptocurrency during is one of the most famous mode for owning the digital asset. Here, investor needs to be very careful while selecting the coin to buy during its ICO as there is no actual product available, but only concept written on the white paper. This also helps the creator of the currency to raise the fund for the project. In recent history, startup projects have raised more than $100 million. The purchase made here is before coin gets listed in any exchange and available for trade.
- Mining — Virtual currency came into existence as reward associated with Proof of Work (PoW) done for the verification of blockchain transaction, a process called mining. Satoshi Nakamoto started the concept of rewarding the miner with newly minted currency (BTC). The idea was to reward a fixed amount of newly minted currency for the PoW done on the blockchain. The reward in Bitcoin is designed to reduce by half after a fixed number of blocks every time. The process is known as ‘Halving’.
Today, mining of individual currency involves its own specification. It is done using different hardwares depending on the choice of currency you want to mine.
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Originally published at localhost on June 23, 2017.