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Cryptocurrency: A Beginner's Guide
What is Cryptocurrency?
A cryptocurrency is a digital currency that uses cryptography as a means of security. Most cryptocurrencies operate without the need for a central authority like a bank or government, and operate instead through a distributed ledger to spread power among its Community. Cryptocurrencies are decentralised systems that allow for secure online transactions through the use of public and private keys.
One of the first and most popular cryptocurrencies is Bitcoin, which was created in 2009. Since then, thousands of other cryptocurrencies have been created, each with its own unique features and use cases.
Cryptocurrency transactions are typically fast and inexpensive, and they offer a high degree of anonymity compared to traditional banking systems.
Overall, Crypto is a rapidly evolving technology that has the potential to change the way we think about money and financial transactions. While it’s still in the early stages of adoption, it has already attracted a large following of proponents who believe it has the potential to revolutionise the financial world.
How Does It Work?
In order to use cryptocurrency, you need a digital wallet that can store your coins and enable you to send and receive payments. When you send a payment, the transaction is verified and recorded on a public ledger called a blockchain. This ledger is maintained by a network of computers around the world, and the integrity of the system is ensured through the use of complex mathematical algorithms.
A blockchain consists of blocks, which hold individual transaction information. This information is timestamped and posted to the ledger so that each transaction can be verified by other blockchain stakeholders and never be altered. In order to conduct a transaction on the blockchain, users agree to pay a small fee, which helps maintain the security of the blockchain itself.
Let’s say you want to send your friend a small amount of Bitcoin. You create a transaction using your Bitcoin wallet and request to send Bitcoin to your friend’s wallet, agreeing to pay a nominal transaction fee along the way. After you make the transaction request, your transaction gets grouped with other transactions into a block on the Bitcoin blockchain. This block is verified by miners and posted to the blockchain, making the transaction complete.
Through this process, you can send cryptocurrency to anyone, anywhere around the world, with low transaction fees. Want to send $1 million Ethereum to your family in France? Go right ahead! Not only will the transaction usually be completed in a matter of seconds or minutes, it will only cost you a fraction of the fee you would have paid using a traditional money transfer service.
What is Cryptocurrency Used For?
One of the early appeals of cryptocurrency was that it offers you the opportunity to transfer large amounts of your wealth anonymously without any government or institutional interference. These days, cryptocurrency is used by some owners to take care of routine matters such as paying bills.
Still others put their digital currency to use by investing in business start-ups. The combination of innovative tech ventures and cryptocurrency seems like a natural fit. You can also use your digital currency to travel the world. Arrive at your destination in the luxury vehicle you purchased with your cryptocurrency or on the airline that readily accepted your Bitcoin.
What is Cryptocurrency Mining?
Cryptocurrency mining refers to the reward gained from verifying transactions on a blockchain. Blockchain transactions are encrypted when added to a block. Therefore, these transactions need to be verified for accuracy before the blockchain can continue adding transactions to the next block. This is where miners come in. Miners use their computing power to solve complex mathematical problems to verify transactions in a block on the blockchain. This process requires a lot of computational power and energy, and the difficulty of the problem is adjusted regularly so that new blocks are added to the blockchain roughly every 10 minutes. As a reward for their efforts, miners receive a certain number of newly created coins and also a small transaction fee from the users who made the transactions that are included in the newly added block.
The process of cryptocurrency mining requires specialised hardware, such as a specialised computer called an ASIC (Application-Specific Integrated Circuit), which is designed specifically for mining purposes.
In summary, cryptocurrency mining is a process that verifies and adds new transactions to the blockchain ledger and creates new coins as a reward for the miner who solves a complex maths problem.
Why is Cryptocurrency Popular?
With cryptocurrency, there is a new way of transacting and storing value that is markedly better than traditional fiat. In fact, cryptocurrencies fare better in many of the properties that are needed for sound money:
- Portability — How easily the currency can be transported
- Divisibility — The degree to which currency can be divided into smaller amounts
- Censorship Resistance — The ability for governments and regimes to censor its use
- Scarcity — How prevalent it is in society and its future supply
- Security — How secure it is to use
- Backing — Who is backing the legitimacy of the currency
With fiat currencies, nations can print and restrict the printing of money however they please, so the value can occasionally fluctuate. For those living in countries with hyperinflation and unstable economies, cryptocurrencies may be a better choice for storing value than fiat currency. Cryptocurrencies have a set, defined monetary policy that cannot be changed by anyone, regardless of who they are. For example, there will only ever be 21 million Bitcoin created, with no exceptions. Knowing this creates a sense of stability that cannot be found in the monetary policy of fiat currency.
Cryptocurrencies are also easier to transport and divide. As opposed to lugging around pounds of gold or huge wads of cash, cryptocurrencies are just pieces of information that are used to keep track of transactions and values. These can be transported across any border without censorship, and even be divided into fractions of a penny if desired.
Why Do Cryptocurrencies Have Value?
It seems strange to some people that cryptocurrencies have value when most of them are not official products of a sovereign nation. However, the misunderstanding goes hand in hand with a misunderstanding of the definition of currency. Simply put, currency is anything that buyers and sellers agree will serve as a form of exchange between them.
There are enough investors and traders of cryptocurrency to make it an attractive form of currency to people around the world.
Is Cryptocurrency Safe?
Let’s look at two aspects of cryptocurrency safety: investment and storage.
Of course, cryptocurrency carries risk like any other investment. However, the gains and losses of cryptocurrency tend to occur much faster than with other currency investments. Successful traders and investors have built digital fortunes thanks to the volatility of Bitcoin. However, others who weren’t so lucky, lost their funds quickly.
Once you have acquired digital currency, you will want to keep it safe in a crypto storage device called a wallet. The encryption technology that these storage devices use to keep your currency safe continues to evolve to stay ahead of 21st-century digital thieves.