Cryptocurrencies were initially celebrated as a revolutionary technology that would disrupt the financial institutions of the world and liberate people from the excessive fees and controls on the part of banking establishments. The digital asset has just as much been tarnished by criminal activities and rather wild market speculation.
Everyone has heard about names such a Bitcoin and Ethereum among a sea of others, but very few really understand the basics of cryptocurrency how they work. This is especially in the context of personal finance. To avoid getting misinformed, ripped off, and to invest appropriately, you need to understand what digital currency is from the core. Along the line, you may be able to determine whether or not they are for someone like you.
So What Is Cryptocurrency?
Basically, cryptocurrency represents the digital way to hold and transfer value online. Crypto tokens or coins can be purchased on the web using a credit card or with traditional money. They are built in such a way that no one person or financial institution has control over the system. Dozens of despairing crypto assets are available on the interwebs, the biggest and most popular of which being Bitcoin and Ethereum.
The value of a digital coin at any particular time is dependent on underlying market conditions - supply and demand. Usually, there is a fixed amount of any token available at a given moment. As such, the more people want to use it, the higher the value will be in the market. Case in point, the value of a single BTC (Bitcoin) skyrocketed to about $20,000, after which nose-dived to roughly $4,000.
How Did It Come About?
Few people are aware, but digital currencies were born as a byblow of another invention. The famous Satoshi Nakamoto, who is storied to have invented Bitcoin - the mother of all cryptocurrency - actually never intended to invent a currency. Per his 2008 announcement, Nakamoto said he had developed a peer-to-peer electronic cash system. He wanted to create something many people failed to invent before digital money.
Bitcoin was not the first known digital currency. Before it, there were a few attempts to create something with similar goals to Bitcoin. However, they were not able to climb up the ladder of wide acclaim. Examples of prior crypto concepts were B-money and Bit Gold, both of which incorporated the solution of math problems into the hashing of a blockchain. Written by Nick Szabo, B-money's proposition also involved decentralization.
How Does It Work?
The single essential part of Satoshi's idea was that he discovered a way to create a decentralized digital cash system. Back in the 90s, many attempts were made to create digital money, but they all did not see the light of day. A decentralized system; the industrialized network needs every entity of its and does not need a server. Each peer in the network must have a list of transactions to find out if to-be transactions are valid or an attempt to double spend.
If the peers of the network do not agree on a single minor balance, everything goes down the drain, hence the need for an absolute consensus. Often, one would take a central authority to declare the correct state of balances. Before Nakamoto, no one knew how they could achieve a consensus without a central authority. Even no one believed it was a possibility. But Satoshi was able to achieve this, a solution which cryptocurrencies are a part of. Crypto made the invention thrilling, fascinating and helped the solution to roll all over the world. Brilliant, right?
Cryptocurrency Is Mined
All the cryptocurrencies on the market today are mined. So either you buy them, or you try to mine them. Typically, anyone can be a miner. Because the network is decentralized (does not need a central authority), a digital coin needs some kind of system to prevent one person from ruling over and potentially abusing it.
If someone creates thousands of peers and spread forged transactions, the system would instantly break. As such, Nakamoto established a rule that mandates the miners to invest some work from their computers in order to qualify. They need to find a hash that connects the new block with the previous one. Hash, in context, is a product of cryptographic function. The entire system is called the Proof-of-Work.
How Can They Be Stored?
Irrespective of how you buy any cryptocurrency, you will need a digital wallet to obtain it. A crypto wallet is a public key and a private key, both of which prove the identity of the user and links the person to the blockchain. There are different types of wallets out there - many, in fact. Nevertheless, whether they will support your desire crypto asset will be a huge factor.
The safest among the bunches upon bunches out there are hardware wallets and paper wallets. The former can connect to a computer to ease crypto purchase while the latter is typically your public and private keys on a piece of paper with no need to connect to the web.
Hardware wallets can be pricey. The software versions are less expensive, but they come with more security risks. They could get hacked or go with a computer crash. Nevertheless, a credible software wallet running on a computer with efficient anti-virus and anti-malware protection should be able to store your crypto safely.
Are Cryptocurrencies Safe?
There are crypto scams to be wary of, and most of them look authentic. Because it is a relatively new concept people are yet to understand fully, it is easy to rip off people. If you are careful, cautious, and make informed decisions, it will be safe to use. With cold storage, you can keep your crypto assets offline. Make sure to keep your computer updated and protected. Research very well before deciding on a cryptocurrency and exchange platform to use, so you do not meet a pitfall even before you get started investing.
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