20/09/2017
Back in the day, people who knew about cryptocurrencies were those operating within tech circles. It was very hush hush, operating out of the view of the average person. Fast forward to the present day, and the average Joe will have heard of the phenomenon.
Most people will have heard stories of how if you purchased Bitcoin years ago, how you’d now have millions of pounds worth. You’d literally be loaded! That story seemed to grab the attention of a lot of people around the globe.
The media spotlight sort of paved the way for more and more people to take note and delve a bit deeper into the world of cryptocurrency and its purpose. So, with this guide we want to give you a good understanding of what cryptocurrency is all about.
In this guide you’ll learn:
1. What is cryptocurrency
2. How cryptocurrency works
3. The origins of cryptocurrency
4. The advantages of cryptocurrencies
5. The differences between the top 5 cryptocurrencies
6. And now… ??
What Is Cryptocurrency?
Essentially a digital form of cash, cryptocurrency is purely online based and is not like other types of currency such as GBP or USD. With currencies such as the Great British Pound or the United States Dollar, you’ll find that the government backs them. Cryptocurrencies are not government backed; they are supported by their respective networks. So it’s goodbye to those notes and cards in your wallet, and you don’t have to put your faith in the government!
Cryptocurrencies are actually entries into a database that are created with cryptography, made secure through complex mathematics and not people. Validating transactions purposely takes a lot of trial and error, so if you haven’t got much patience, mining won’t be for you. We’ll find out more about mining later in the article.
Cryptocurrency databases are shared over a network, and it’s this network that prevents errors occurring. These errors can be things such as double spending (sending the same payment token to two different people), and nobody wants to do that. The entries in the database can only be altered through specific conditions being fulfilled.
There is no central authority or a central server that governs the cryptocurrency, approving and disproving transactions. The cryptocurrencies are created by the network, and the way they are generated is generally unique to each network and cryptocurrency type. Different types of cryptocurrency are not equal and not interchangeable.
Did You Know? A man from Wales threw away his old hard drive that was believed to contain around $4 million dollars’ worth of Bitcoins?
How Does Cryptocurrency Work?
So, we know that cryptocurrency is a digital form of cash that is decentralized, but how does it work? Well, the currency is transferred over a network. When it is transferred, it is confirmed on a public database through a process called mining. Different cryptocurrencies have different mining processes.
What Is Mining?
Mining is basically the process involved when confirming a transaction. For the entry to be added to the database, the miner has to solve a sort of mathematical puzzle, usually a very complex one. Anyone can be a miner as it is open source but does require a lot of computer power. The miner who solves the mathematical puzzle first adds a block on entries to the database. These entries cannot be made by anyone at any time or altered, that is the purpose of mining. Once the miner has completed the task, they will receive a fee and also newly created coins too for their work. Everyone will know that they have sealed off the block too, so it’s a moment in the spotlight situation.
What Is A Blockchain?
Blockchain technology was actually created by the founder of Bitcoin, Satoshi Nakamoto. It is a way that allows transactions to be stored in a public database; it’s basically a back history of transactions that have ever taken place. You could even look at the blocks that make up the blockchain like individual bank statements.
The database that updates in real time is stored and shared by the people connected to the network, or nodes, as they are commonly known as. It’s basically like a public database that has been shared thousands of times over a network, but the great thing is, it constantly stays up to date, for anyone with access to it. Those pesky hackers can’t get to work on the database either as it is stored in multiple locations, not just the typical centralized one.
Miners work on blockchains, looking to keep everything running smoothly. When a block is created they take the original information, and after applying a bit of brain power to a sort of mathematical formula, they are left with what is known as a hash. The hash seals off and secures the block. It confirms the transactions are legitimate.
It’s a sort of competition for miners. They are competing against rival miners to be able to seal off and secure a block.
The transactions that are made are always between two digital wallets where the cryptocurrencies are held. The transactions are sent to the database and are then confirmed through the mining process. Some cryptocurrency transactions take around 10-15 minutes to complete. A cryptographic signature (electronic signature) is used by digital wallets to provide evidence that the owner of the wallet is the one who is sending the payment and not an intruder.
The database takes care of performing checks such as checking whether the digital wallets in use can calculate balances accurately. They also confirm that the person spending actually owns the coins involved in the transactions. When it comes to anything of value, people want peace of mind after all.
The value of cryptocurrency can fluctuate, much like traditional currencies, due to the demand for them and also if there is a shortage.
The identities of the coin owners are always encrypted, with the person having complete control over it. They are the only one to know their personal key, thus giving them sole control over their account.
Did You Know? May 22nd is known as Bitcoin Pizza Day! A programmer paid a Bitcoin user 10,000 bitcoins for two Papa John’s pizzas on this day in 2010. Check the current price →
The Origins Of Cryptocurrency
Satoshi Nakamoto is named as the inventor of the first ever cryptocurrency, Bitcoin. It is believed that he started working on the project in 2007. Many theorists are of the opinion that Satoshi Nakamoto is a pseudonym for a group of people.
In 2008 the Bitcoin domain was registered on a site that allows the anonymous registration of domain names. Bitcoin.org was up and running a year after Nakamoto started working on the concept.
Nakamoto then quickly moved to publish a piece that explained in full what Bitcoin was, how it worked and how double spending would be prevented. This was all in an attempt to stop competitors and others copying the currency.
The first mining took place in January 2009 after the project was registered on SourceForge.net, which is a community website focused on open source software. A few days later the first ever transaction using cryptocurrency took place.
Nakamoto actually intended on creating a peer-to-peer electronic cash system and not a currency. Many had tried and ultimately failed in their attempts to design digital money previously. He wanted to create a digital payment system that was decentralized in the same way files are shared over a peer-to-peer network.
A payment system must be able to stop double spending from occurring, and this is usually prevented through the use of a central server. Nakamoto made this possible through the utilization of a peer-to-peer network, where double spending is avoided. If two transactions are completed with the same coins, they are both automatically rejected. It was a masterstroke by Nakamoto.
The first transaction using cryptocurrency was made by Bitcoin founder Satoshi Nakamoto, who sent Hal Finney 100 bitcoins on January 12th, 2009.
The Advantages Of Using Cryptocurrencies
First of all, as the money is digital, it cannot be forged or counterfeited. Payments cannot be reversed either like credit card chargebacks can. Once the transaction is complete, it is set in stone.
With the miners receiving payment for their work from the actual network, there aren’t usually transaction fees to worry about. There is no cryptocurrency transaction fee. Some people will use a third party service to help maintain their digital wallet. They are likely to charge for their services, very much in the same way that PayPal does.
With regular currencies and through the use of credit and debit cards around the world, you are often at risk of having your identity stolen. You input your credit card details or put it into a machine, and the payment is then requested by the merchant. Cryptocurrency transactions operate differently though. The owner chooses the amount to send, not the merchant. Identities are encrypted too during transactions.
If you have access to the internet, you have access to the use of cryptocurrency. With there being over 3 billion people around the world who have access to the internet, that ultimately means cryptocurrency is available for a huge number of individuals.
The main advantage of cryptocurrency is that you own the account and have full control over it. Nobody else. Every other digital cash system around the world can be controlled by other people. Your private key and the public key that make up your cryptocurrency is yours and yours only. Only you can access and control it.
Did You Know? The FBI owns 15 per cent of the world’s Bitcoins.
The Top 5 Cryptocurrencies
1. Bitcoin
Bitcoin is the original cryptocurrency and still the most valuable on the market today. It is the market leader due to its established reputation worldwide, its security and the huge community base powering it. Bitcoin holds significant value and has received media attention around the world. Retailers such as Amazon have started to accept Bitcoin by allowing consumers to purchase gift cards with the cryptocurrency.
2. Ethereum
Ether is seen as a sort of token, a fuel as described on their website that is used to pay for computation. It is not intended to be used as a form of currency. Ethereum differs from Bitcoin in the sense that it is completely programmable. The platform allows developers to build and activate applications within the blockchain technology. Miners work to earn Ether rather than mine for Bitcoin.
3. Ripple
Ripple is a digital currency known as XRP and the network where transactions using XRP take place. They take a similar approach to Bitcoin and want to enable money to flow freely, removing fees and waiting times. They operate using a peer-to-peer network and have many similarities to Bitcoin. Ripple don’t see themselves as rivals to Bitcoin though; they see themselves complementing the Bitcoin service.
4. Litecoin
Litecoin is another popular cryptocurrency, often known as LTC, which operates on a peer-to-peer network. Many believe Litecoin to be a direct competitor to Bitcoin as the way it works is very similar. The currency operates on a blockchain and mining takes place to verify transactions and to provide security.
5. Ethereum Classic
After The DAO (distributed autonomous organization) was hacked and funds were stolen, the Ethereum platform held a vote, and the majority of the community wanted changes to be made to return the funds to The DAO. Those who did not agree branched out and on the creation of a new blockchain, they decided to continue to mine the old one. Ethereum and Ethereum Classic are essentially clones of each other.
Did You Know? A journalist was once given a Bitcoin live on TV back in 2013. It was quickly stolen from him by a viewer. Lesson learned: do never expose your private key.
Where To Start
Now that you’ve a bit of a better understanding of what’s cryptocurrency all about, you may want to learn more about some of the specific currencies or get started by buying some.
If you want to go into depth on the technical specifics, I really recommend reading some of the whitepapers. For example those of Bitcoin and Ethereum. We also love to share with you the ‘Learn More‘ collection.
Did you get excited about cryptocurrency and have you always wanted to buy some? Coinbase is a good starters exchange to acquire some Bitcoin or Ethereum, however if coinbase is not available in your country, check the exchanges collection.
At the moment, we’re working very hard to write more guides. For example on storing, buying, mining & trading, besides continuously improving this starters guide. Want to get an update when we release a new guide? Then subscribe to our newsletter. (Which by the way has a lot of other cool content as well, such as exclusive community interviews).
We hope you got a little bit more excited about cryptocurrencies and have gotten a better understanding now! If you’ve any feedback for the guide, let us know ?
