- Elon Musk, Investor & Entrepreneur
If you are new to cryptocurrency, this is one of the most basic guides that you’ll find online. Read on to learn how cryptocurrency works, the lingo and whether or not it’s the future of finance. We live in an advanced world and our technology is smarter and more useful than ever. Are we staring at a future where blockchain will define the way we spend our money? Possibly.
What is cryptocurrency?
Cryptocurrency is virtual or digital currency that is designed by cryptography. It’s specific design makes it impossible to double-spend or counterfeit. The cryptocurrencies that exist today can be found on the blockchain, which consists of numerous networks that are decentralised. These cryptocurrencies are not created by any central bank or government, making it a lot more appealing to investors.
Proof of work vs proof of stake
Two things you’ll hear when talking about the blockchain is proof of work and proof of stake. Proof of work is used for mining purposes and has a goal of deterring any cyber attacks like DDoS (meaning distributed denial of service). In other words, it verifies if a transaction is legitimate while preventing double-spending.
Proof of stake, while similar to proof of work, has a different end goal. These are validators instead of miners. These validators will secure their Ether on the blockchain and put their stake in the Ethereum ecosystem. Validators bet on the blocks they believe will be added to the blockchain next. If the blocks are added, they are rewarded based on the proportion of the stake they have.
Is cryptocurrency the future of finance?
Although this debate is ongoing, the argument in favour is rather strong. For one, it’s an alternative currency that is useful when making transactions and two, it has an increase in value when pitted against other global currencies.
Many online stores and even major sites such as Expedia are already accepting Bitcoin as a form of payment. As long as the signs of stability and sustainability remain, cryptocurrencies could see themselves as a solid alternative to regular forms of payment such as cash or debit cards.
How does a cryptocurrency work?
When exchanged, cryptocurrencies work just like a card or digital payment gateway like PayPal. If you need to make a transaction, you’ll use a cryptocurrency wallet (a type of software that allows you to store your cryptocurrency securely). You’ll then enter your wallet address and transfer the amount of cryptocurrency to another person or vendor.
A private key is needed to successfully complete a transaction. Once a transaction is complete, it will be added to what is known as a public ledger. The public ledger does not, however, reveal the identity information of those involved in the transaction.
Cryptocurrency architecture consists of peer-to-peer (or P2P) networks. The entire network is completely decentralised and not tied down by any one server, meaning the blockchain network is controlled by everyone that is in the network as opposed to just one person.
Every member will ensure their records are accurate and that each transaction is approved accordingly. The three types of blockchain architecture are public, private, and consortium. Most cryptocurrency blockchains are part of the public blockchain architecture where consensus is required from all miners, no permissions are needed and there is no centralisation. Handy tip: compared to private and consortium blockchains, public blockchain is almost impossible to tamper.
Kraken is one of two cryptocurrency platforms that we recommend for new users. You can buy, sell, or trade cryptocurrency while paying fees that are volume based. Trade at low volumes to avoid paying high fees.
Another popular cryptocurrency platform worth checking out is Coinbase. You can buy, sell, or trade Bitcoin, Ethereum, and a handful of other cryptocurrencies. Like Kraken, you can trade either on a desktop or using a mobile device.
How do I use cryptocurrency for secure purchases?
This will depend on the vendor that accepts cryptocurrency. Once you check out, you can choose the cryptocurrency section and the type of cryptocurrency you have. All you need to do is enter the amount you owe and add your wallet key information so it’s withdrawn from your wallet. The payment may take anywhere from a few seconds to a few minutes.
What is a blockchain?
A blockchain consists of a database that is shared by a computer network made of nodes. This database will store information securely in what are known as blocks. Once a block is full, it is closed and added to the blockchain right next to the previous block. This process will be repeated for as long as possible.
How do I buy Bitcoin?
You can purchase Bitcoin through various platforms that offer cryptocurrencies such as Kraken and Coinbase. Keep in mind that some of the exchanges outside of these two places can also charge you various fees. After you open an account, you will be asked to set up your purchasing method which requires a valid bank account (however you can also purchase crypto with a credit or debit card). Purchase your desired amount and it will be received almost instantly.
How do I invest in cryptocurrency?
Similar to purchasing Bitcoin, you can purchase cryptocurrency through an exchange using your preferred method of payment. You can also invest your Bitcoin (trade in) for a different type of cryptocurrency. Keep in mind that you may be paying fees higher for one type of cryptocurrency compared to another so do your research.
Cryptocurrencies must meet six conditions.
- The system does not require a central authority
- The system keeps an overview of cryptocurrency units and their ownership
- The system decides if and when new units are made
- Ownership must be proved cryptographically
- The system can allow transactions to be performed in which ownership of the cryptographic units can change
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system only performs one of them
Looking at cryptocurrency from an economic standpoint, the volatility of the price can drop if there is an increased usage. Thus, if not a lot is used, the price goes up (supply and demand).
Cryptocurrency has really made its mark over the last decade and it has proven itself as a formidable challenger to regular currency. The future is looking bright and there’s no time like the present to do your research and invest.
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