Cryptocurrencies have become a global phenomenon today, but understood by few people. Consequently, more people are getting curios about cryptocurrencies. In fact, one of the most frequently asked questions is what cryptocurrency is.
Cryptocurrency comes from the word “Cryptography” that refers to the consensus-keeping process secured by strong cryptography.
In simple terms, cryptocurrency is a digital version of money in which transactions are done online. A cryptocurrency is a medium of exchange just like your normal everyday money such as the USD, but designed for the purpose of exchanging digital information through a process known as cryptography. Do you also Want to Trade Like an Expert? Follow this complete guide to know how cryptocurrency usage can benefit you in your trade.
Only few people know that cryptocurrencies emerged as a side product of another invention. Satoshi Nakamoto, the inventor of Bitcoin, the first and still most important cryptocurrency, never intended to invent this digital currency. Satoshi found a way to build a decentralized digital cash system. This is the most important part of his invention. There were many attempts in the nineties to create digital money, but all failed.
Seeing all failed centralized attempts, Satoshi was determined to build a digital cash system without a central unit. In late 2008, Satoshi announced Bitcoin and his development of “A Peer-to-Peer Electronic Cash System“.
Satoshi aimed to develop something that many people failed to create. The first ever-successful cryptocurrency developed from the invention of Bitcoin. Other types of cryptocurrencies then emerged competing against Bitcoin.
For digital cash to be realized, you need a payment network with accounts, balances, and transaction. The number one problem every payment network has is double spending. Double spending happens in instances such as when you purchase things online, and you have to pay for unnecessary and expensive fees. Usually, a central server who keeps record about the balances does this.
In a decentralized network, there is no server. Therefore, every single entity of the network need to do this job. Every peer in the network will have a list of all transactions to check if future transactions are valid or if there’s an attempt to double spend. If there’s a disagreement between the peers in the network about only one single balance, everything is broken. An absolute consensus is needed.
Usually, you need a central authority to affirm the correct state of balances. However, how can consensus be achieved without a central authority? Nobody knew until Satoshi figured it all out. In fact, nobody believed it was even possible, but Satoshi proved it was. His major creation was to achieve consensus without the need of a central authority. Cryptocurrencies are only a part of this solution.
A decentralized system is a network powered by its users or peers without having any third party, central authority or intermediary controlling it. Not the central bank, the government, individual or any organization has power over this system. This system is known as the Blockchain Technology. The blockchain is like an online ledger, where every transaction is recorded and made visible to the whole network.
Let’s illustrate an example. A cryptocurrency like Bitcoin consists of a network of peers, the users. Each user has a record of the complete history of all transactions and of the balance of every account.
A transaction is a file that says, “A gives X amount of Bitcoins to B“, and is signed by Bob‘s private key. It is just a basic public key cryptography. After it’s signed, the transaction is broadcasted in the entire network, wherein the information is sent from one peer to every other peer. This is what is known as p2p-technology (peer-to-peer).
Confirmation is a crucial in the cryptocurrency system. While confirmation of a transaction is still pending, it has the possibility of being hacked and forged. When there is confirmation, the transaction is set in stone. It cannot be reversed, it’s impossible to hack, and it’s not forgeable. It becomes part of a permanent record of the historical transaction, the Blockchain.
This is to say that, cryptocurrencies are not secured by people or organizations, but by math. It is extremely secure and it’s impossible for an address of a currency to be compromised.
Only miners are have the capability to confirm a transaction. This is their role in the cryptocurrency network. Miners record transactions, verify them, and disperse the transactional information in the network. For each completed transaction monitored and facilitated by the miners, they are given rewards with a token of cryptocurrency, such as Bitcoins.
What is the Role of a Miner?
Anyone can be miner. Because of the nature of the decentralized network, miners are needed to prevent any form of network in the system.
For you to become a miner, you would need to solve a cryptologic puzzle, which is a set of very complex mathematical questions set by Satoshi Nakamato himself. If you can successfully solved the puzzle, as a miner you can build a block and add it to the blockchain.
The miner is also permitted to add a crypocurrency transaction to the system, which automatically grants him a specific number of bitcoins. This is the only way to create valid bitcoins. The generation of Bitcoins only happens if a miner can solve a cryptographic puzzle. The level of difficulty increases with the amount of computer power the miners invest.
How Are The Cryptocurrencies Value Determined?
The value of cryptocurrencies depends on the market. Prices of various cryptocurrencies vary, and is one of the most fluctuating and volatile markets to date.
Like any other products, the price of cryptocurrencies is dependent on supply and demand. If more people demands a particular currency and it is short in supply, then its value increases. Miners mine more units to balance the flow. However, most cryptocurrencies limit the supply of their tokens.
For example, if the total amount of Bitcoin issued is only 21 million, Bitcoin’s supply will decrease in time, and will reach its final number by 2140. This also explains why Bitcoin’s value is higher than other cryptocurrencies.
What is cryptocurrency used for?
You can spend cryptocurrencies for different purposes and all transactions are completed online. Three different transactions can be performed when using cryptocurrency, namely Bitcoin trading, personal spending, and crowd funding
Whether you’re a professional or beginner, Bitcoin trading can be very profitable. Market is new, where arbitrage and margin trading is available. Bitcoin has very little barrier to entry as compared to other financial currencies. As long as you own Bitcoins, no verification is required and you can start trading almost instantly. Furthermore, Bitcoin is not fiat currency, which means the price is not related to the economy or policies of any country.
Unlike stock markets, there are no official Bitcoin exchanges. Instead, hundreds of Bitcoin exchanges operate 24/7 all over the world. Because there are no official exchanges, there’s no official Bitcoin price where the currency is known for its rapid and frequent price movements.
You can use Bitcoin to purchase almost anything online, from cars to travelling the world.
In December 2013, a Tesla model S was bought for 91.4 Bitcoins. The dealer continues to accept Bitcoin as a means of payment. They also managed to sell a Lamborghini Gallardo for 216.8 Bitcoin.
You can also pay for your travel using Bitcoins at www.cheapair.com. On November 2013, they announced that they are the first online travel agency to accept Bitcoins. With Bitcoins, you can purchase flights, hotels, car rentals, cruises, and even book the whole package.
Cryptocurrency also allows you to give back to society through crowd funding. You can be part of someone’s success story by donating to a crypto crowd funding project. Companies like Lighthouse built their crowd funding platform using Bitcoins.
There are benefits of donating through this system. You will not be charged for your donation and funds will not be released unless the project meets its criteria. You can also withdraw from the campaign before its completion. With crowd funding, you have complete control over the donation.
There are many reasons why you should use cryptocurrency. It is secure and is run through a decentralized network. It is also considered as a potential investment vehicle, which may bring huge returns.
Cryptocurrency transactions are fast and global. Transactions are broadcasted immediately in the network and are confirmed within minutes. Since a global network of computers manages the transactions, they do not take into account your physical location. You to send your cryptocurrency to the person next door or to anyone on the other side of the world.
Since currencies are in controlled supply, there is a high chance that the value of the currencies appreciates over time.
With cryptocurrency, you have more control of what is going on in your account and how the system works and operate. This is because of the decentralized network of peers that keeps a consensus on transactions made and account balances. Unlike your physical bank account, This system cannot be changed and controlled by people you don’t see and governed by rules you don’t even know. However, it is necessary that the security of the account is maintained therefore, there are many authentication methods being implemented. The records of all the transactions are preserved over the network so it is easy to review the transactions.