How cryptocurrencies actually work

By Mary Ann Callahan, guest contributor

Photo of Mary Ann CallahanAug. 15, 2017 – The word cryptocurrency has become more recognizable than ever before. An increasing number of people who use various cryptocurrencies and the different kinds of services associated with it make the industry more stable than it was yesterday. This article intends to cover all the main aspects about crypto currency and help you understand how and why people use it.  

A short excursus to the history

What’s interesting is that in 2009, when the world caught sight of the first-ever cryptocurrency, it wasn’t actually called cryptocurrency. It was a new and partly doubtful concept of a so-called Bitcoin, the main idea of which was a decentralized ledger with peer-to-peer access. The inventor’s name is Satoshi Nakamoto and what’s intriguing is that no one has ever seen him, so there is no certainty about him at all. This mystery added some doubts about Bitcoin when it had just emerged on the internet. Although after some time, Bitcoin proved itself as a working and moreover breakthrough mechanism, people started inventing similar ones, and eventually called this cryptocurrency. Now there are hundreds of different kinds of them, the most successful ones will be described further in the article.

Graphic drawing of a microprocessor with a large letter B in front of it representing Bitcoins.The main idea of cryptocurrency

Following are the main characteristics of cryptocurrency.

Although the word money wasn’t yet mentioned in the article, the first thing you need to know is that cryptocurrency is money.

  • It is digital money. You never can apply it in the physical world. Cryptocurrency lives entirely on the internet, or in the device that stores it in a form of certain public and private keys needed to conduct transactions. However, it doesn’t mean that you are confined to use this money only on the internet. You always can exchange internet currency into any other currency using certain services that will be described hereafter.
  • It is decentralized. This currency is never influenced by any political, religious or monopolistic movements. Blame it on a decentralized and peer-to-peer nature of the whole mechanism: 100 percent of all the people have the same access permissions, so there’s no way a certain authority or an individual will come and change the rules of the game.
  • It is safe. Crypto means encrypted. Since we’re dealing with money, we must be sure that no one’s going to steal them or try to fool us by conducting a fake transaction, having no money at all. And it’s not only the encryption since it is decentralized – everybody's watching, so you cannot do double-spending or reverse the transaction you have just conducted.
  • There are practically no fees. There is no third-party that keeps track of transactions made among the users. They are replaced by miner rewards generated by the system. So even if you pay fees, they are pitifully small and don’t depend on the amount of money you transfer.

The most successful cryptocurrencies and their distinctive features

The number of cryptocurrencies is increasing rapidly, but not all of them correspond to the above-stated characteristics. That’s why it’s important to know which ones are reliable.

All the crypto currencies are split into two main categories: Bitcoin and altcoin – alternatives to Bitcoin.

Photo of a Euro bill and stacks of coinsBitcoin

Undoubtedly, Bitcoin remains the first among all the alternatives. Although it’s not the most important significative, take a look at BTC to USD and you’ll see that it is the first by a large margin.

Bitcoin market capitalization almost has reached the index of 50 billion USD. This significant number induces more companies and individuals to accept bitcoins as a payment for their goods and services.

Ethereum

Here is one of the representatives of an altcoin. Based on the core idea of Bitcoin, Ethereum claims itself as an improved version of Bitcoin. Inventors highlight it as not only the means of payment but also a beneficial instrument in the business sphere. It’s up to anyone to decide whether this is right or not, but the fact that the market cap of this one has almost reached the point of 25 billion USD, which is only half less than Bitcoin market cap, considering that its exchange rate is 10 times less, makes people regard Ethereum as an authoritative alternative to the first-ever cryptocurrency.

Litecoin

More than once you have probably heard that Bitcoin is a digital gold. Thus, Litecoin is believed to be a digital silver. It’s all about the price ratio that is very similar to the ratio of gold and silver. They are very similar, except for some technical details like, for example, the time of new block generation in the blockchain.

The market of crypto services

The crypto market is increasing and every day you can find more and more useful services that capitalize on the expanding popularity of cryptocurrency.

  • Photo of hundreds of pennies spilled out of a glass jar onto a table.Exchanges. With their help, you can buy or sell cryptocurrency. This is probably the most well-spread way of purchasing Bitcoins or Altcoins because it appears to be the most convenient one. The only thing you need is to create an account, link your bank card to it and fund the account with money. Since you provide your bank card details to the exchange, be very cautious and don’t use the unknown and uncertified ones.
  • Wallets. When you’ve bought any cryptocurrency you need a place to store it. That’s where wallets definitely will help you out. Online wallets store your money on the servers, so, again, be attentive and don’t use the unverified ones. The major exchanges can also provide you with wallets. In fact, for many that’s the easiest way of buying, selling and storing bitcoins in the same place.
  • Margin trading. A service with the help of which you can earn bitcoins. The main idea is to borrow or lend funds, just as a bank does, but the difference is that you are actually the bank. And what’s good about it is that it does this automatically. You don’t even know the guy to whom you lend your money, you only see the interest rate that proceeds from your deal. Today several top exchanges offer such services.

As you can guess, the number of services around cryptocurrency is larger, it’s just that these are probably the best for you to be aware of at this stage.

Considering how auspicious the beginning for cryptocurrency was, you’ll get the idea that we are only at the very beginning of this young and rapidly developing industry. It’s hard to say what it will be like after some time, but for sure it will only continue to expand. Experts predict that bitcoin will be worth an unimaginable sum of money in the future. It’s up to you to decide whether to trust it or not but regard the fact that at the very beginning Bitcoin price was less than one dollar. And now it’s $ 4,515, according to CEX.IO. So, you can see the growth rates for yourself.