Cryptocurrency has taken the world by storm. It has been around for less than a decade and yet some cryptocurrencies like Bitcoin are already worth more than an ounce of gold.
As with any new financial innovation, cryptocurrency does pose great risks as well as exciting opportunities to savvy investors who understand how it works and its potential impact on the economy.
This article will cover some ‘must know’ facts about cryptocurrency in order to better understand how it works, where this phenomenon is heading in the next decade and beyond.
20 Years in Development
Although cryptocurrency was officially launched in 2009 with the creation of Bitcoin by Satoshi Nakamoto, its roots go back as far as the 1990s when Wei Dei created b-money and Nick Szabo created BitGold. Back then, cryptocurrencies were nothing more than an idea and a distant dream for computer scientists.
These early pioneers laid the groundwork for Bitcoin to emerge as a viable currency alternative to government-backed fiat currencies, such as the U.S. dollar or Mexican Peso. Today, there are hundreds of other digital currencies besides Bitcoin, often referred to as “altcoins.”
Blockchain is the backbone of Cryptocurrencies
The main technology behind cryptocurrencies is blockchain, which was initially used to create and record bitcoin transactions. Blockchain serves as a public ledger for bitcoin that shows every transaction ever processed. It also keeps track of each digital wallet’s balance. But it’s not just for bitcoin! Many people are exploring uses for the blockchain in medicine, government, real estate, and other industries.
Transactions in digital currency are added to “blocks” or the links of code that make up the chain, then completed with a unique cryptographic signature. The miner hashed the transaction data, ensuring it remains anonymous while protecting personal information like names and account numbers.
Bitcoin was the first cryptocurrency – but it isn’t alone
In fact, there are thousands of other cryptocurrencies known as Altcoins. For these cryptocurrencies, they have their own wallet and can be mined using your computer’s CPU or GPU processing power, whereas Bitcoin can only be mined using specialized hardware known as ASICs (application-specific integrated circuit).
Bitcoin, Litecoin and Ethereum are the three most popular cryptocurrencies in use today.
Cryptocurrency has no physical forms that exist
Unlike cash and other forms of currency, cryptocurrencies only exist in the digital realm. They don’t exist as coins or bills and they can’t be stored anywhere physically — not even on a hard drive or thumb drive. It’s all just ones and zeroes!
Cryptocurrency accounts are pseudonymous, not anonymous
All transactions with a cryptocurrency are associated with a public wallet address. The public key is part of the cryptographic pair that is linked to an individual’s or entity’s private or secret key. So while it may be difficult to trace the sender and receiver of a cryptocurrency transaction, it’s possible with enough data mining and analysis .
It’s supply is not controlled by governments or banks
There’s no central authority when sending or receiving money, meaning that the average transaction fee is much lower than what you’d pay with a credit card. A digital wallet doesn’t actually store money, but instead holds the private key needed to access bitcoin. If your phone gets lost or stolen, you can always get a new one with all your bitcoins intact!
This, however, could change as Bitcoin Cash has a larger block size and can process transactions much faster, but Bitcoin is the original cryptocurrency.
Cryptocurrency isn’t printed at all – it’s mined!
By maintaining a complex encrypted digital ledger of every transaction ever made, cryptocurrencies are able to make a decentralized system of money that works for everyone. Without this sophisticated system of cryptography, Bitcoin wouldn’t exist.
Caution is still needed
Despite their decentralized nature – cryptocurrencies are not immune to malware. Infectious software, known as malware, is created every day with the goal of stealing valuable cryptocurrencies.
This malware could show up in many forms; mining keylogger, wallet stealers, crypto jacking, spyware and trojans. As cryptocurrencies increase in popularity, so will the malware… on a global scale.
The crypto world is a vast, wonderful, and scary place. Be sure to educate yourself before getting involved with cryptocurrency. Education is an important factor when it comes to making sound financial decisions!