B21 Cryptocurrency Education Series: How Cryptocurrency Works!
As pioneers for cryptocurrency education, we are adding a series of education posts to our Medium blog to complement our free cryptocurrency education app, B21 Life.
Each week we will publish a new post that will cover some of the basics to help you to get to grips with the crypto space and answer some of the most important questions that you might have. We aim to make 2019 the year of cryptocurrency education and so if there is a particular area of cryptocurrency that you would like to find out more about, feel free to comment below and we will dedicate a blog post to addressing your crypto confusion.
The first post in our cryptocurrency education series takes a look at exactly how cryptocurrency works!
What is Cryptocurrency?
Cryptocurrency is a digital currency that is designed to acts as a store of value and a medium of exchange. The main motive of cryptocurrency is to eventually replace money as we know it today!
Bitcoin the very first cryptocurrency was introduced in 2009 by an anonymous individual or group known as Satoshi Nakamoto, to this day no one knows who Satoshi Nakamoto is. Since the launch of Bitcoin, thousands of new digital currencies have appeared on the market, these are referred to as altcoins. The definition of the word ‘Altcoin’ refers to every cryptocurrency that is not Bitcoin! Some of these altcoins are similar to Bitcoin in that their main objective is to act solely as a medium of exchange, while others serve another purpose such as the facilitating of platforms that specialise in things such as the development of decentralised apps (DAPPS) and smart contracts.
You might have heard of some of these altcoins such as Ethereum, Ripple, Bitcoin Cash, EOS, Stellar and Litecoin. Take a look at our training lesson on ‘What are Altcoins’ on B21 Life for more details about altcoins, their functions, purpose and how they differ from each other.
Cryptocurrency is powered by blockchain technology, which is decentralised, this means that unlike with fiat, no one individual, government or corporate controls the blockchain or cryptocurrency.The blockchain can be described as a digital database, which is stored on the web. Similar to other databases the blockchain records and stores information, in the case of cryptocurrency the blockchain contains every piece of vital information about financial transactions such as who buys and sells a specific cryptocurrency, in the form of blocks.
These blocks are created using a special form of math called cryptography, a process referred to as mining. Cryptocurrency mining is not a simple process, it has purposely been designed to be resource intensive and requires tough mathematical problems to be solved. Once data has been recorded inside the blockchain it is locked away, making it almost impossible to change or cheat the system. This is what makes the Blockchain safe.
Mineable vs Pre-mined cryptocurrencies
You might have heard of the term minable and pre-mined cryptocurrency and wondered what this means and what the difference is. Unlike with fiat, there is a limit set on the total number of coins that will ever exist for some cryptocurrencies such as Bitcoin for example — there will only ever be 21 million bitcoin available, when that number of Bitcoin has been mined, there will be no more created!
In some cases, the finite number has already been created, while with others it is an ongoing process.
A mineable cryptocurrency refers to coins where the total number of that specific cryptocurrency have not yet been mined. Here individuals (miners) are rewarded for mining new cryptocurrrency. An example of a mineable cryptocurrency is Bitcoin.
The term ‘Pre-mined cryptocurrency’ means that the developer generates all of the coins at the start of the project (before the cryptocurrency is launched to the public) and then distributes them among the mass market . An example of a pre-mined cryptocurrency is Ripple (which has a finite quantity of 100 Billion), or Ether (Ethereum) which does not have a cap on the total number of coins that can be mined!
How do I buy Cryptocurrency?
There are a few ways that you can purchase cryptocurrency, it is advised that first-time investors look at registering with a renowned exchange site such as Kraken or Coinbase. Here you will need to register and add some details such as your name, email address and will also need to verify your home address and provide proof of identity ( a process that can take a few days to complete). Once the verification process is complete, you should receive and email to tell you, you are up and running and ready to register your bank card and begin purchasing any cryptocurrency of your choice.
Alternatively, you can buy cryptocurrency via a Bitcoin ATM, which you can find located around the world. Those that are looking to take a more direct route when buying cryptocurrency can opt for a peer to peer service such as LocalBitcoin or BitQuick, which allows you to buy cryptocurrency directly from the seller — if you choose this route it is advisable to make sure that you conduct your own thorough research.
Before making any purchase it is advised that you create a cryptocurrency wallet, this is where you will store your cryptocurrency. A crypto wallet contains your private and public keys, which enables you to send and receive coins safely through the blockchain.
What is a Public and Private Key?
When a user initiates a transaction with cryptocurrency, a unique pair of keys, a public key and a private key are created.
These keys allow users to send and receive cryptocurrency. Each of these keys consists of a long string of alphanumeric characters.
The public key address is where the funds are deposited and received, similar to an individual’s bank account. But the user won’t be able to spend, withdraw, or transfer the tokens without the unique private key.
The private key is known to the user alone and acts as the user’s digital ID, similar to the secret PIN number to access your bank account.
It is very important that you store your private key in a safe place, do not lose it and do not share it with anyone. Anyone who has this key can access your cryptoassets. If you lose your key then you will also lose your cryptocurrency balance.
Cryptocurrency Wallets Explained
There are a few different types of wallets that provide different ways to store and access your digital currency, these include online, mobile, hardware and paper wallets.
An online wallet is cloud-based, it can be accessed from any computer anywhere, which makes it easy and convenient for the user. However as this type of wallet stores your Bitcoin online it is more vulnerable to hacks.
A mobile wallet is similar to an online wallet, but it is usually much simpler to use. Mobile wallets can be accessed by downloading a mobile app from the app store and allows the mobile owner to spend the cryptocurrency by scanning a specific QR code.
A hardware wallet stores a user’s private key on a hardware device such as a pen drive. These wallets can be plugged into any computing device and are activated by a personal passcode. All hardware devices are used to make transactions online, but they store your cryptocurrency offline — providing extra security.
A paper wallet is a printed document that contains your private keys and cryptocurrency addresses, which is stored offline. Paper wallets are easy to use and provide an extra level of security — however, you need to make sure that you keep your paper wallet in a safe place.
Take your time when deciding which cryptocurrency wallet to use, make sure that you select an option that works best for you.
Once you have your wallet set up and are registered on an exchange you can then begin to purchase your cryptocurrency. It is then up to you whether you hold your crypto as a long term investment opportunity, play around with selling and buying more, or decide to make a purchase with cryptocurrency online.
The above was created to give you a brief understanding of how cryptocurrency works.
In addition to following us on Medium, you can also download our free cryptocurrency education app, B21 Life, where you will find more posts like the above from B21 including fun cryptocurrency facts, the top cryptocurrency news and free cryptocurrency courses.