A young boy barely 12 years old named Erik Finman started purchasing Bitcoin at $12 each back in May 2011. He received a $1,000 gift from his grandmother, which at the time seemed a great deal of money. Not sure what to do with it, Finman took the advice of his brother and invested it in Bitcoin. As of the time this article was written, that boy owns about 403 bitcoins, and at today’s value, they are worth over $1.08 million.
This story is impressive and leaves many asking, "What is cryptocurrency, and how does it work?" Here is a quick breakdown to help you understand the basics and what you most need to know.
People have traded physical assets for goods since the beginning of time. Those currencies today are mostly printed bills or coins, governed by a centralized authority such as the government and tracked by financial institutions. But in 2009, the founder of bitcoin, Satoshi Nakamoto, launched an idea that would change how people think about money. What if currency were regulated by math rather than by governments?
Cryptocurrencies are a digital form of money that run on a totally new monetary system, one that is not regulated by any centralized authority or tracked by a formal institution. There are many types of cryptocurrency with various functions. Regardless of each function, each digital currency is supported by a decentralized peer-to-peer network called the blockchain. Blockchain technology ensures that all cryptocurrencies are kept track of, regardless if they are being held in a digital wallet or being used in trading.
The effectiveness of running such a system, however, requires an infrastructure that ensures that cheating and gaming the system isn’t possible. Bitcoin was the first to market, setting up a system in which two people - the sender and the receiver of coins - must sign off on payments to create a digital signature. Each person has a public and a private encryption key, which makes this possible. Every transaction is verified for accuracy, and the system is anonymous and totally transparent. At the center of this infrastructure is the ledger. So let’s dive into how that works.
A cryptocurrency has a ledger, where all transactions are made public so that total visibility is provided. Having a ledger forces everyone to "play fair" and takes away the risk of double spending.
The ledger is a list of entries in a database that nobody can change without fulfilling specific conditions. Nobody owns the ledger or the cryptocurrency blockchain; instead, it’s decentralized meaning self-run and self-governed without the interference of outside parties.
Let’s say that you want to invest in cryptocurrency, such as Bitcoin, through a major cryptocurrency exchange. After purchasing it, you decide to spend it. What happens now? At first, the transaction is unconfirmed, which means the transaction is not yet official, and it doesn’t become "set in stone" until it goes through a verification process. Once confirmed, the transaction becomes part of a record of historical transactions housed on the blockchain.
Cryptocurrency Miners verify the transactions and then add them to the public ledger. They use powerful computers to solve complex math problems that are the key to the verification process. Cryptocurrency Mining is open source, so anyone can confirm a transaction, and the first miner to solve the problem gets to add a block to their transaction ledger. This process is called the "proof-of-work system."
After adding a block to the ledger, the miner is given a reward for their efforts, which varies based on the cryptocurrency. For example, Bitcoin originally awarded 50 BTCs, but that award halves at preset times and today has decreased to 12.5 BTCs.
Top Cryptocurrencies will play an important role in the future, with the use steadily increasing over the past several years. Bitcoin is currently used in 96 countries and growing, with 12,000 transactions occur every hour. Understanding more about cryptocurrency is the first step, and the second is to try it.
Purchase a small amount of cryptocurrency through an exchange, test it out, and complete a few transactions. After you get a feel for the process, you may decide to try mining. But whatever your path, know that the future of cryptocurrency is bright, and the list of cryptocurrencies is only expanding.
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