What is Cryptocurrency? Everything you need to know
History of Cryptocurrencies
The first established decentralized cryptocurrency and the one that most people have heard of is Bitcoin. Although there were other digital currencies being tested as far back as the early 80’s.
There is a long and interesting story behind Bitcoin and how it was created. In short, the concept came from a paper called Bitcoin - A Peer to Peer Electronic Cash System. It’s still unknown who the person or persons behind this paper are, which adds to the mystery. All we know is an alias Satoshi Nakamoto.
The major problem Satoshi Nakamoto solved is the one called "double spending". In a centralized system it is easier to achieve that, as you have a server with a database that keeps records of all transactions. So, every time a new transaction is happening the central authority checks the database and see if the money exist or they have been spent.
The innovation of Satoshi is that he managed to solve this problem with cryptographic proof instead of a central authority.
It was 2009 when the Bitcoin software was made available to the public. Mining of bitcoins began and transactions started being added to the blockchain.
In 2010 Bitcoins were traded for the first time. It’s a funny story for us, but not so much for the person who sold 10k of their Bitcoins.
As the story goes, they swapped them for two pizzas. Those 10k Bitcoins would have been worth around $100 million today - let’s hope they see the funny side of this and enjoyed those pizzas.
It never takes long for competitors to emerge in any market where there is money. In 2011 more cryptocurrencies started up, Litecoin and Namecoin were two of the new currencies that tried to improve on what Bitcoin was doing.
With more than 1k cryptocurrencies emerging since the launch of Bitcoin it was in 2016 when Bitcoin has its first serious rival, Ethereum.
The Ethereum platform uses a currency called Ether. This platform also brought Initial Coin Offerings (ICOs) to the masses through smart contracts.
ICOs are crowdfunding platforms allowing people to invest in projects without the red tape that comes with bank lending and the ability to remain anonymous.
At the time of writing this in 2018, Bitcoin and cryptocurrencies continue to grow in both financial stability, and trust in the eye of the public.
More and more places and businesses are accepting cryptocurrencies, the market is growing, there is greater recognition from banks and governments, and the future looks very promising.
What Is a Cryptocurrency?
To summarize what is cryptocurrency ; cryptocurrencies are forms of digital money, and they can be used in the same way as physical monies to buy and sell things.
However, cryptocurrencies are decentralized. They are not managed by governments or banks, instead they are run and controlled by a network of computers and their trading takes place online.
When a transaction takes place using cryptocurrency it’s recorded on what is called the blockchain. All blockchains are made public and you can see all transactions made , although the identities of the individuals made these transactions are kept anonymous.
These are some of the biggest pros to using cryptocurrencies for a lot of traders. They like being able to keep their personal data hidden when sending and receiving payments and being off the grid of the banking system.
Along with having lower fees than using traditional banking methods, easier international trading, convenience, speed, and the potential to earn on their investments too.
This also comes with some drawbacks, and the main concern is security. You have to be clued up and careful regarding security when using cryptocurrencies, but it’s nothing to be concerned about as long as you follow the best practices.
On the note of security, anyone who has been burned by the charge-back capability of credit cards allowing the person sending money to recall it within a set time period will be happy to hear this isn’t possible with cryptocurrencies.
Once you make a transaction in a cryptocurrency there’s no reversing it. This gives you some protection against fraud and any other less than scrupulous activities.
How Does It Work?
The biggest misconception about cryptocurrencies is that they are complicated or it takes a long time to understand how they work.
It’s actually quite simple. As I talk you through how they work from mining coins and making transactions, to the technology handling all the transactions you’ll see the logic and principles that make cryptocurrencies a robust and reliable platform.
In essence, using a cryptocurrency is similar to using money as you would via PayPal or a credit/debit card. The difference being the currency is native to the platform it belongs to and can’t be removed and taken in physical form.
Assuming you have an understanding of how to buy cryptocurrency and use a wallet, here is how transactions are handled in 4 simple steps:
- You make a request for a transaction
- The transaction is then broadcast to a network of peer-to-peer (P2P) computers (nodes)
- The nodes validate the transaction and add a new block to the blockchain
- After a short period of time (usually within couple minutes) the transaction is complete
To request a transfer you need to know the private key of your account and the address of the wallet you’re sending funds too.
As you can see, there is a network of computers (peers) that form the ‘backbone’ of cryptocurrencies. Each peer maintains a complete historical record of all the transactions known as the ‘blockchain’.
The blockchain stores blocks of information. Once the information is written it can’t be changed or reversed and the blockchain cannot be controlled by one single entity, making it robust and secure system.
I mentioned above it takes on average10 minutes or less to confirm a transaction. This is because the block generation time is 10 minutes for the system to be secure in the case of Bitcoin , and faster with some other cryptocurrencies (e.g. on Ethereum it's 12.5 seconds).
It’s also decentralized by definition as it’s made up of nodes that joined the network (everyone can do this) to generate transactions or to execute smart contracts. This means the nodes manage the database collectively, not one central authority such as a government or a bank.
So let's see an example of how this works.
Let's say Alice wants to send X number of Bitcoins to Bob (as all examples mention that Bob sends to Alice :)).
So, Alice logs into her wallet with her private key and send the amount of bitcoin she wants to Bobs public address. At the moment she executes the transaction a file signed with her private key is created and broadcasted to the whole network by peers sending it to each other.
Almost the moment the transaction is broadcasted it is known by the whole network but it is unconfirmed and can be altered. After a certain amount of time (mentioned above) the transaction gets confirmed by miners and is added to the blockchain. After that every node adds it to it's database and from this moment is irreversible and becomes part of the blockchain.
What Is Mining and What Do Miners Do?
The blockchain is built by miners. Mining, or crypto-mining as it’s also called is carried out by computers verifying all the new transactions that have happened since the last block generation.
The process varies a little depending on the blockchain, but typically a miner will be randomly selected to confirm all the transactions and add them to the blockchain.
This miner will then be rewarded with some of the currency. This is why they are called miners, as they effectively ‘mine’ some more currency to be included in the network. This process of creating currency is called Coinbase
Sounds easy doesn’t it? Interested in being a cryptocurrency miner or want to know how much money you can make mining cryptocurrencies?
You may have seen various adverts, blog posts, and courses offering to show you how to mine cryptocurrency and telling you it’s a profitable and passive way to earn some extra money.
It’s not quite that simple. Although, anyone can be a miner and it’s not that hard to get started. The hard part is being a profitable miner.
Being selected to mine transactions to the blockchain requires the selected computer to solve some extremely complex cryptographic puzzles.
This means you need an incredibly powerful bespoke computer and it saps a huge amount of electricity. Both of these costs are barriers to entry for most people, and even if you are all-in, there is no guarantee you’ll be profitable with the difficulty continuously rising .
Why Are Cryptocurrencies Revolutionary?
It’s taken some time for cryptocurrencies to part of mainstream conversations, but it’s really starting to happen and it’s an exciting time to be part of this revolution.
A sticking point a lot of people had to get over was trading in an intangible currency that they can’t see or touch.
It’s taken time for cryptocurrencies to prove themselves (which has now happened), as well as the fact that most people are always going to be resistant to change.
With the largest cryptocurrency, Bitcoin, starting in 2009 and more than 1,000 cryptocurrencies now in operation there is a good deal of historical data to work with now.
Here are some of the key benefits to cryptocurrencies and some of the reasons why they are proving to be a revolutionary way to buy, sell and trade online.
Easy Access for Everyone
You’re probably thinking it’s the same for banks, but it’s not. There are billions of people in the world that can’t use or have access to a bank account for various reasons.
Those people, you, and anyone else can sign up for a crypto wallet. All you need is a PC, phone, tablet, etc, and a stable internet connection of course.
It's a Universal and Global Currency
If you make a lot of international transactions then you’ll be familiar with the wins/losses and hassle with all the different exchange and interest rates.
Cryptocurrencies are free of interest and exchange rates. Meaning you can save time and money when making international transactions.
You're Protected Against Fraud
Being a digital currency removes a lot of the fraudulent activities that physical currencies are susceptible to.
You can’t simply counterfeit a digital currency, and transactions can’t be reversed once they are made.
Cryptocurrencies are not managed by a central body. They are managed by a global network of computers that all jointly manage the blockchain.
This means there is no one voice that can implement a change that affects everyone, for the good or bad. In most people’s eyes this is a very attractive feature of cryptocurrencies.
You Can Remain Anonymous
If you want to make transactions anonymously for whatever reason, then cryptocurrencies allow you to do this.
All transactions are visible to everyone with access to the blockchain, but your name, address, and other personal details are not visible.
How to Buy Cryptocurrencies and How to Store Them
If you want to get started with cryptocurrencies you first need to buy some. You’ll likely need either Bitcoin (BTC) or Ethereum (ETH) as these are the two largest currencies.
I recommend checking out Coinbase as a starting point. Coinbase is the largest online exchange for buying these cryptocurrencies, it’s easy to use, quick, and perfect for first-time buyers.
If you’re the kind of person who likes to shop around for the best exchange rates and fees you’ll find plenty of other exchanges.
Gemini, BitPanda and Switchain are three of the other well-known exchanges. They offer competitive rates and fees to compete for your business so you can potentially save some cash.
To store your cryptocurrency you need a wallet. Wallets contain your private key and public address, you’ll need this key to make transactions with your currency.
A wallet is basically just a website, app, or device. Check out MyEtherWallet for storing Ether or Bitcoin.com if you’re purchasing Bitcoins, they are free and easy to use.
Your private key is literally the only way you can access your funds, and there’s no resetting or recalling your key, so if you lose it you lose your funds.
With that in mind, if you’re concerned about losing your private key or risking compromising your funds here are the three most common ways people store their private keys:
Hardware wallets - Hardware wallets store your private key offline on a physical device that looks and works like a memory key.
They are secure, easy to backup, and you can keep them on you and just plug in and use when needed.
Software wallets - Software wallets store your private key online so you can access it from anywhere across all devices.
It’s the most convenient way to access your private key but not recommended for large amounts of cryptocurrency and leaves you vulnerable to hacking.
Paper wallet - If keeping your private key online or offline on a device is making you uneasy then I recommend using a paper wallet.
You can find tools to set up a paper wallet at MyEtherWallet or WalletGenerator. It will generate a file with your private key on and you can print a copy and put it somewhere safe.
Here is a list of the top 10 cryptocurrencies based on their total market cap at the time of writing this.
It’ll come as no surprise that Bitcoin is #1 with more than double the market cap of Ethereum. There are plenty of other strong currencies emerging however giving traders more options:
Launched in 2009 Bitcoin is the most well-known and largest cryptocurrency. It is a global payment system and has been connected with places like dark-net and cyber crime.
It has the biggest market cap of $105 bn and it's the most expensive one with a price of about 5k.
The identity of Satoshi Nakamoto, the author of the paper title Bitcoin: A Peer-to-Peer Electronic Cash System remains a mystery.
Ethereum was developed by Vitalik Buterin and released in 2015. Vitalik was a programmer involved with the Bitcoin Magazine, he wanted to develop a platform with a more general scripting language than Bitcoin. Ethereum smart contracts is the reason for the creation of thousands of DApps and the boom of ICOs.
It is second in market cap with almost 50 bn and a price of $500.
Ripple was developed by a web developer from Canada called Ryan Fugger in 2004. Ryan developed ripple with the intention to allow individuals to create their own money on a decentralized platform.
It is the favorite kid of the banks as they increasingly adopt it. It is also the most hated among crypto community as it is considered pre mined and not a real crypto.
It has a market cap of 19 bn and it's price is $0.50.
In mid-2017 developers opted to make a change to the Bitcoin code to speed up transactions. The change also called a Hard Fork, split the cryptocurrency in two and Bitcoin Cash was launched on August 1st, 2017.
The reason this fork happened is to increase the block size to 8MB from one and reduce confirmations to 6 from 2016.
It has a coinmarket cap of 13b adn the price of $765
EOS is being developed by block.one. It’s based on a white paper published in 2017 and due for release as open-source software on June 1st, 2018. It's ICO lasted for over 1 year.
EOS is much like Ethereum as it is a platform where people can built DApps. It is promised to be highly scalable easier to use and more secure that Ethereum.
It gas a market cap of 7 bn and it's price is $8.6
Released as open-source software in 2011 by a former Google employee named Charlie Lee, Litecoin is one of the longer established cryptocurrencies and has fast transactions times processing blocks every 2.5 minutes.
Litecoin us a global payment system like bitcoin and is considered a lighter version of it.
It has a market cap of almost 5bn and it's price is $83.3
Cardano was developed by Input Output Hong Kong and is run by Charles Hoskinson, a former co-founder of Ethereum and BitShares. It was released in September, 2017.
Cardano is a really promising coin and a really new one at the time of writing, Like EOS and cardano it is a smart contract platform with a layered architecture, focused on security.
It has a market cap of $3.6 bn and it's price is $0.14
Launched in 2014, Stellar was founded by Jed McCaleb and Joyce Kim and received $3 million in seed funding from the online payment processing company Stripe.
Much like Ripple, Stellar's platform is focused on worldwide payments and remittances.
It has a market cap of $3.8 bn and a price of $0.2
IOTA has been in development since 2015 and was first listed on the exchange in June, 2017. Through backing and partnerships with large companies it’s been quick on the rise to the top 10 list of cryptocurrencies.
IOTA is a transnactional platform for the Internet of Things. Those not familiar with the term Internet of Things is the is the sum of billions of devices connecting to the internet sharing and collecting data.
It has a market cap of $2.6 bn and a price of $0.96
The directive from the team behind TRON is to, “Create a decentralized internet that allows everyone to freely create content, including websites and applications, without relying on centralized services.”
Tron's is described as a decentralized content sharing and entertainment platform. The goal it to cut out middlemen like Google Play and Apple Store.
The market cap is $2.8 bn ad a price of $0.04