This article tells you everything you need to know about cryptocurrencies. So next time you hear or read the name of cryptocurrency, you won’t get all puzzled.
Cryptocurrencies are a type of digital or virtual currency that are used as a medium in financial exchanges. To secure and verify transactions, this type of digital currency uses cryptography.
Today, cryptocurrencies are a global phenomena while they are still not fully understood by many people.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.”– Thomas Carper, US-Senator
But beyond all the noise that cryptocurrencies have created, most people, even bankers or scientists do not know much about it. That is why I have decided to walk you through a step-by-step guide on cryptocurrencies to give you a better understanding of this trendy phenomena.
Where did it all begin?
In the 90s, there have been many attempts to create a digital currency but all of them have failed due to fraud or financial problems. Then in early 2009, Satoshi Nakamoto, an anonymous programmer invented the first and the most important cryptocurrency named Bitcoin. Bitcoin uses a decentralized and peer to peer electronic cash system.
After all the attempts to prevent double-spending through central authority failed, Satoshi decided to build a digital cash system without a central entity. This decision was in fact the birth of cryptocurrency and where it all started.
What is blockchain?
One of the problems with any payment network is double-spending. It is a technique of spending an amount twice. the traditional solution to this problem was to use a third-party to keep the records of transactions. However, this method entailed that an authority be in the control of your funds and your sensitive information. But in a decentralized network such as Bitcoin, every single participant needs to do this job and it is called blockchain.
To put it simple, in the language of cryptocurrency, a block is the record of a new transaction. Once each block is completed, it is added to the chain, hence, the blockchain. In fact, blockchain is a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.
What is cryptocurrency mining?
In a blockchain, every transaction is a file that consists of the sender’s and receiver’s public keys (wallet addresses) along with the amount of coin that is transferred. Also, the sender needs to sign off the transaction with his/her private key and then the transaction is broadcasted in the network after it is confirmed.
Because cryptocurrencies are encrypted, processing any transactions means solving complicated math problems. Within a cryptocurrency network, only miners are allowed to confirm the transactions and they do it by solving a complex crytographic puzzle. People who solve these equations are called miners and they are rewarded with cryptocurrency and the process of solving these equations is called mining.
Once the transaction is confirmed by the miner, it becomes unforgeable and irreversible.
What can be done with cryptocurrencies?
Due to their revolutionary properties, cryptocurrencies are sound money that is secure from political influence and is like digital gold. Cryptocurrencies are a fast and comfortable mean for payments with a worldwide scope. Here are some instances of what you can use crytpcurrencies for.
In the past, it was absolutely difficult to find a merchant that accepted crytocurrencies. However, the situation is now changed. There are a lot of online and offline merchants who accept Bitcoin as a form of payment. While Bitcoin can be used to pay for jewellery, flights, hotels, and apps, other digital currencies such as Ethereum or Ripple are not that widely accepted.
Of course, people who own cryptocurrencies other than Bitcoin can always exchange their coins for BTCs. Moreover, there are Gift Card selling websites like Gift Off, which accepts around 20 different cryptocurrencies. Through gift cards, you can essentially buy anything with a cryptocurrency.
Bitcoin is the most well-known digital currency to date. While in 2016 one BTC was valued at $800. In November 2017, the price of one Bitcoin exceeded $7,000. That is why many people belive that cryptocurrency is a hot investment.
There are many stories of people becoming millionaires by investing in cryptocurrencies, however, it is worth mentioning that cryptocurrencies are high-risk investments. This is because their market value fluctuates like no other asset and there is always the risk of them getting outlawed in a certain jurisdiction. In addition, any cryptocurrency exchange can potentially get hacked.
Much like trading, mining is an investment as it is the most important part of any cryptocurrency network. One point about mining is that the more people try to solve the puzzle, the more difficult it gets. So, as there are more people trying to mine popular currencies and that is why the process gets more difficult.
Back in the days, a lot of people made a fortune by mining Bitcoin and it was possible to do so with your computer or laptop. However, as for now, Bitcoin mining us profitable if you invest in industrial-grade hardware.
Accept as a form of payment
If you are a business owner and you are looking for a way to attract more customers, accepting crytocurrencies as a form of payment can be a great solution. People’s interest in cryptocurrencies has never been this high and there is no doubt that it will increase even more.
In order to be able to accept cryptocurrencies, there are many services that allow you to do so. For example, PayPax payment gateways allow you to accept Bitcoin as a form of payment from your customers.
In many countries around the world such as in US, cryptocurrencies are treated and accepted as cash, gold, or gift cards.
Most common cryptocurrencies
Among 700 cryptocurrencies in use, these are the most popular ones which you’ll be able to spend more easily.
- Bitcoin – It is the original cryptocurrency which is the most valuable and most popular one.
- Ethereum – A programmable currency that allows developers to build technologies that wouldn’t work with bitcoin.
- Ripple – Unlike most cryptocurrencies, Ripple does not use a blockchain. Instead, it uses an iterative consensus process which faster but more prone to hackers
- Bitcoin Cash – It is a fork of Bitcoin which is supported by ASICs Bitcoin mining chips. Although it has existed for a few months, it has managed to place itself in the top 5 cryptocurrencies in terms of market cap.
- Litecoin – Litecoin is also a fork of Bitcoin but it is four times faster than Bitcoin in generating blocks.
How to buy cryptocurrency?
Cryptocurrency market is extremely volatile. This means that exchange rates can fluctuate by day or even hour. Of course, Bitcoin is the most valuable cryptocurrency, but there are many other digital currencies such as litecoin, peercoin, dogecoin, monero and ripple which are worth exploring.
When you buy or receive an amount of cryptocurrency, you are given a digital key to the address of that currency. You can use this key to access and validate or approve transactions. You need a place to keep this cryptocurrency safe and this is where cryptocurrency wallet comes in. There are different types of cryptocurrency wallets you can choose from. Here are the examples.
- Desktop wallets
- Online wallets
- Mobile wallets
- Paper wallets
- Hardware wallets
What are the advantages of using cryptocurrencies?
Your credit card or your debit card already digitalize your money. But there are some advantages in using cryptocurrencies in comparison to regular cash.
- Low transaction fee – Miners are typically rewarded cryptocurrencies from the network itself. That is why there is little or no transaction fee.
- Ownership – The money that you store in a bank is limited by an entity. However, your cryptocurrency key is yours alone.
- Identity protection – Sending money through your debit or credit card requires that you enter your personal sensitive information that could be stolen. However, you can send cryptocurrencies without the need to enter any sort of personal information.
- Accessibility – Access to internet is available for billions of people around the world. For making cryptocurrency transactions, you do not need to have access to a bank and internet access would suffice.
What are the drawbacks of using cryptocurrencies?
Understanding the concept of cryptocurrency is difficult by itself. But it is not the only drawback of digital currency.
- General awareness – Although accepting cryptocurrencies is now becoming widespread, they are still not widely accepted as credit cards or debit cards.
- Volatility – Cryptocurrency exchange rates vary greatly. This means that the amount you pay or receive one day could be very different the next day.
Cryptocurrencies are a new way of storing and spending money anonymously and without using financial institutions. But this technology is reletively new and is not yet widely understood and accepted as a payment method. But the truth is that cryptocurrencies are growing quickly and they could make a large portion of future financial transactions.