Cryptocurrency is a form of digital cash that can be exchanged for goods and services. It’s not backed or regulated by governments like traditional “fiat” currency. Instead, cryptocurrency operates with a “blockchain,” also known as a public ledger. Users around the world verify transactions by using their computers to solve complex algorithms.
Cryptocurrency, often referred to as “coins,” can be transferred directly from person to person without involving a third party, like a bank. These transactions happen much faster than traditional money transfers and can be done in a matter of seconds.
Unlike traditional currency, cryptocurrencies don’t have a physical object that represents value. There aren’t actual coins or bills. These currencies exist entirely within the digital realm.
Cryptocurrency has gained popularity but is still widely misunderstood. Before investing in cryptocurrency, you should understand:
Cryptocurrency was developed in the wake of the 2008 financial crisis as an alternative to existing banking. The idea for this new system was developed by a person, or persons, going by the alias Satoshi Nakamoto. In 2009, Nakamoto released a white paper that explained the concept as well as software for the first and most famous cryptocurrency—Bitcoin.
Soon, new cryptocurrencies began to emerge. These Bitcoin alternatives are commonly called altcoins. Today, there are over a thousand different of altcoins. Some tweak Bitcoin’s original code, but all function essentially in the same way, by using a blockchain.
A blockchain is a decentralized database of transactions, commonly called a public or distributed ledger. It’s like an accounting ledger that records transactions and is available to anyone who wants to download it. This allows a community of peers to verify information instead of a single central authority.
Multiple transactions are grouped together into blocks. These blocks are then verified by a community of users, and all together form a blockchain. The blockchain contains a list of every single transaction involving the coins all the way back to the genesis of that cryptocurrency and is continuously updated as new transactions occur.
Transactions are verified when users in the network use their computers to solve a complicated algorithm within the blocks. The algorithm contains a piece of encrypted information, a “hash,” that links a current block to the previous one. This link between blocks means that established blocks can’t be altered without changing all subsequent blocks. The public distribution of the blockchain help to prevent tampering because it would be almost impossible to change everyone’s ledger.
This system of tracking verified transactions adds stability and legitimacy to cryptocurrencies. It prevents users from double-spending their coins and prevents the creation of fraudulent coins.
Although all transactions are recorded on the blockchain, the personal information of the people exchanging coins isn’t.
Cryptocurrency is made up of two parts: a public key and a private key. Both are needed to verify a transaction. The public key is recorded on the blockchain anytime that coin is used in a transaction. The private key is known only to the owner of the coin. It acts as a kind of signature or authorization from the coin owner during transactions, ensuring that the transaction is legitimate.
The use of both public and private keys provides anonymity for users since transactions don’t require identity verification, unlike with credit cards and bank accounts. This allows users to have much more anonymity when they want to make private transactions.
Before you can get cryptocurrency, you need a “digital wallet.” A wallet allows a user to store, send, and receive cryptocurrency. These wallets can be on desktop computers, smartphones, online websites, and even on paper; it all depends on a user’s preference and needs.
After setting up your digital wallet, there are several different ways to get cryptocurrencies:
Some people use cryptocurrency as a cash alternative. Others think of coins as a type of digital gold. Most financial professionals are still skeptical about investing in these coins, but the use of cryptocurrency is growing. As more institutions begin to accept these coins as payment, at least some types of cryptocurrency are likely to be around for the foreseeable future.