A cryptocurrency is a digital asset referred to as “coins” or “tokens” designed to work as a medium of exchange that uses cryptographic (encrypted) hash algorithms (mathematical puzzles) to secure its transactions, control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are a type of digital currency, alternative currency and virtual currency. Each unit of a cryptocurrency is linked to a private key (unique identification number) and is recorded every time the coin is used in a transaction to the public key (identification number associated with the hash algorithm). Cryptocurrencies use decentralized control as opposed to centralized electronic money and central banking systems.
The decentralized control of each cryptocurrency works through blockchain technology, which is a public transaction database functioning as a distributed ledger that records and validates all transactions chronologically. The blockchain consists of an ever-increasing number of linked blocks. Each block within the chain holds batches of validated transactions including the cryptographic hash (information) of the prior block thus guaranteeing the integrity of all blocks in the blockchain. New block creation is dictated by the algorithm and proof scheme each cryptocurrency utilizes. The complete blockchain data is stored on many different networked nodes (computers running the core software) across the network and anyone can create a node if they have the right pieces.
Bitcoin is the first open-source decentralized virtual currency developed in 2009 with the highest market capital that uses peer-to-peer technology to operate without a central authority or banking institution and manages transactions which issues new Bitcoin, also known as mining, using the collective network. No one person or organization has total control over the entire network. The price of Bitcoin (BTC) is determined by supply and demand. If the demand increases so does the value.
Altcoin refers to all cryptocurrencies other than Bitcoin. There are currently over 1500 altcoins in existence.
Depending on the specific cryptocurrency being used, the process of secure record keeping and creation of new blocks is accomplished by a Proof-of-Work (PoW) or Proof-of-Stake (PoS) scheme. Both systems serve the same purpose for the blockchain but complete the process in a different way.
Proof-of-Work is a computer algorithm-based consensus method or “consensus algorithm” used by cryptocurrencies to record and validate transactions as well as create new blocks on the blockchain. Proof-of-Work is the original method created and utilized by currencies such as Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and many others. The process of “mining” refers to using computer hardware to constantly solve the extremely complex and computationally difficult mathematical equations required to add blocks to blockchain. This is a lengthy endeavor eventually producing a single piece of data that fits within the cryptocurrencies hash algorithm. Miners are rewarded with newly generated coins if their computer finds this piece of data first, also known as “finding a block”. That piece of data is the base information for the next block in the chain. Once the data is found a block is created and the race begins again to find the next block.
Proof-of-Stake is an alternative consensus algorithm used to verify and reach agreement amongst all connected nodes. Proof-of-Stake blocks are not mined, they are instead “forged” or “minted”, and individuals contributing to the expansion and integrity of the blockchain are referred to as “validators” (the equivalent of “miners” in PoW algorithms). A person with a substantial quantity of the specific cryptocurrency can stake (deposit) their holdings on the network usually via a specialized transaction. The process of creating and agreeing to new blocks is then done via the consensus algorithm that all current validators are participating in via their stake. Validators are rewarded for validating a block in the form of coins that were collected from users by the network as a transaction fee. Validators are selected on a pseudo-random basis for forging blocks and adding them onto the blockchain. Factors such as the size and length of a person’s stake influences validator selection.
A transaction consists of the sending or receiving of cryptocurrency between two cryptocurrency wallets. Each wallet has a private key often called a “seed”, or "wallet seed”, which is used to digitally sign the transaction and provides the mathematical proof that it came from the correct owner of the wallet. A user defines where the coins will go by inputting the recipient’s wallet receive address, and the amount of cryptocurrency to be transferred. Transaction completion time varies by cryptocurrency, while some can take seconds others can take hours. Additionally, some cryptocurrencies charge transactions fees for every transaction. The transaction is complete when the network has verified and recorded the transaction within the blockchain.
Miners are the record-keepers that maintain the blockchain by constantly verifying and collecting newly broadcasted transactions from the network and recording them into groupings called blocks. The process uses computer processing power to continually solve the extremely complex and computationally difficult mathematical equations required to add blocks to blockchain. This is a lengthy endeavor eventually producing a single piece of data that fits within the cryptocurrencies hash algorithm. Miners are rewarded with newly generated coins if their computer finds this piece of data first, also known as “finding a block”. That piece of data is the base information for the next block in the chain. Once the data is found a block is created and the race begins again to find the next block.
Bitcoin, Litecoin, Ethereum and most cryptocurrencies can be purchased using your credit/debit card, wire transfer or PayPal from many exchanges available online. Most exchanges have apps that process those transactions and even downloadable apps that act as your cryptocurrency wallet. Make sure to purchase through a reputable exchange. You may also purchase cryptocurrencies from another user through a blockchain.
There are over 2000 variations of cryptocurrencies, the top 5 in order of market capitalization are:
With cryptocurrencies like Bitcoin you can make transactions of value anonymously if you choose so, without paying your typical bank per transaction or monthly fee essentially lowering that cost for buyers and sellers and without concern for currency conversion. This makes cryptocurrencies efficient and almost instantaneous where transaction confirmations are received anywhere in the world within 10 minutes or less typically and transactions can’t be reversed once made. There are also platforms that you can use to trade, lend and invest cryptocurrencies to create daily percentage profits. Many companies are now accepting cryptocurrencies for goods, services and almost anything of value.
A cryptocurrency wallet is the interface used to store, send and receive cryptocurrency. It works by storing the public and private key data linked to individual coins and wallets. Wallets can come in several different forms such as desktop wallets (software), online wallets (websites), mobile wallets (phone apps) and more. A wallet can contain multiple public and private key pairs. The cryptocurrency itself is not in the wallet. In the case of bitcoin and cryptocurrencies derived from it, the cryptocurrency is de-centrally stored and maintained in a publicly available ledger (blockchain). Every piece of cryptocurrency has a private key. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency.
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