What is Cryptocurrency?

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All the basics regarding digital currency.

If you have been keeping an eye on financial news, or even the regular daily news for that matter, you may have found that Bitcoin has made a splash in finance and investing. You have probably heard things like “invest in Bitcoin” or different opinions on how the Bitcoin market is doing, or the phrase “mining for Bitcoin.” What is Bitcoin? Why is it all over the news?

Bitcoin is part of a bigger financial movement called cryptocurrency, a digital cash system with a fairly recent birth. To help you grasp the idea, I’ve laid out the basics of cryptocurrencies including what they are, where they came from, and what to do with them.

What is Cryptocurrency?

Most simply put, cryptocurrency is digital money that uses cryptography for security. Cryptography is writing and solving puzzles. With the cryptography step, it is difficult to counterfeit. The currency does not have a central authority and can be used for a variety of things such as buying goods and investing.

The history of cryptocurrency begins with Bitcoin in 2008 and as of 2015, there were of 14.6 million bitcoins in circulation. Since its launch, cryptocurrency has found its way into many aspects of our everyday lives that we may not even be aware of. There are now several different kinds of cryptocurrency.

Cryptocurrency has the ability to make transferring funds easier between two parties. The transactions don’t cost much and allow users avoid high fees experienced when using most banks and wire transfers.

Before we go over the uses of cryptocurrency, let’s go over where cryptocurrency came from.

Where did cryptocurrency come from?

Let’s start from the beginning. Bitcoin was the result of a side project by Satoshi Nakamoto, the alias of an anonymous programmer and the inventor of Bitcoin. Bitcoin was the first cryptocurrency and remains one of the most important. In 2008, Bitcoin was launched as a peer-to-peer electronic cash system. In simpler terms, it is a digital currency.

During the tech boom of the 1990s, there were many attempts at digital currency in systems like Flooz, Beenz, and Digicash. Different problems arose, such as fraud, financial issues, and tension between companies, leading to their failures.

Bitcoin’s most important use was decentralizing digital cash. Before Bitcoin, there were many attempts at creating digital money with a central entity. In digital money, you need to network that has accounts, balances, and transactions. Most digital cash systems have a central entity to prevent double spending, a fraudulent technique involving spending the same amount of money twice. With a centralized server, an authority is needed to control funds.

Satoshi eliminated the centralized system which means every single person is needed to keep track of the funds. Through a blockchain, everyone in the network can see every account’s balance. Every transaction is a file with a sender and recipient public key and the amount of coins involved in the transaction. The transaction is sent with a private key by the sender in the form of cryptography. After confirmation, the transaction is then broadcasted on the network.

Miners can then confirm the transaction by solving a cryptographic puzzle. A cryptocurrency network is based on the consensus of the legitimacy of all of the transactions. If there is a disagreement, the network would fall apart. Luckily, there are many rules in place that prevent that from happening. The consensus-keeping process is protected by strong cryptography.

What can I do with Cryptocurrency?

What good would a currency be if you couldn’t use it for anything? Because cryptocurrency is digital, it’s not as easy as just pulling it out of your wallet and spending it at a grocery store, but we’re not far off.

Invest

Cryptocurrencies have proven to be effective at making many tech-savvy investors more money. With the help of financial advisors, many not-so-savvy investors have thanked cryptocurrency for their growing wealth. Many also enjoy digital cash to support the idea of one free, hard currency for the world.

Cryptocurrency can also be used to hedge your portfolio against the dollar.

Buy Goods and Services

Cryptocurrencies, mostly Bitcoin, can be used to buy some of your daily supplies. Many people use their Bitcoin to buy gift cards. Surprisingly, you can actually buy yourself dinner at some restaurants. Though there are not many that accept digital cash just yet, who knows when more will begin?

One of the biggest, and most useful, goods bought with cryptocurrency is real estate. Many countries offer the ability to buy the property and pay fees and taxes with Bitcoin.

Mine

Mining for cryptocurrency means verifying and adding transactions to the public blockchain. This is also how new coins are released. Anyone with internet access and the correct hardware can mine.

Miners compile recent transactions into blocks and solve the difficult puzzles used to protect the transaction. Whoever can solve the puzzle first gets to place the next block on the blockchain and claims the reward. The incentive to solve the puzzle is the reward which consists of the transaction fees and newly released coins.

Common Cryptocurrencies

There are now many different types of cryptocurrency, some more popular than others.

  • BitcoinThis is the first and most common form of cryptocurrency.
  • Litecoin–  Launched in 2011, Litecoin is one of the first cryptocurrencies and is often referred to as the silver to Bitcoin’s gold. It is very similar to Bitcoin but it has a faster block generation rate which means faster transaction confirmation.
  • EthereumThis cryptocurrency allows Smart Contracts and Distributed Applications to be built and run without fraud, control, interference, or downtime.
  • Zcash Zcash is different because it offers added private and selective transparency of transactions that are recorded and published on a blockchain.
  • MoneroMonero sets itself apart from other cryptocurrencies by focusing on obscuring sender, recipient, and amount of every transaction.
  • DashThis is a more secretive version of Bitcoin, often called Darkcoin. It offers higher anonymity because it works on a decentralized master code network that is nearly untraceable.
  • GramThis cryptocurrency will be used with the platform TON (Telegram Open Network) by the chat service Telegram. TON allows for quick transactions that take about the same time as a simple credit card transaction and is clear of fees.

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