Cryptocurrency is a type of digital money that only exists on the Internet in a system of computers called a “blockchain.” These virtual currencies operate without being controlled by traditional banks but can still be bought and sold like regular money.
Bitcoin is the first and most famous cryptocurrency, but there are now over 1,000 others that use similar technology.
How Do Cryptocurrencies Work?
Cryptocurrencies are a kind of digital money that doesn’t have one person or group, like a central bank, in charge.
It’s a bit like how everyone on a file-sharing network shares files, and the files aren’t kept on just one computer. So, with cryptocurrencies, no single authority controls them.
Without a central authority, there’s no need to trust one entity to handle accounts, balances, and transactions. This means things are more transparent, and the risk of mistakes or fraud, like “double spending,” is reduced.
For new cryptocurrencies like Bitcoin, they get added to a database called the blockchain. Coins are made through a process called mining, where computers solve complex problems.
This mining process uses cryptography to secure transactions and make more units of the cryptocurrency.
In the network, every member has a record of all the transactions and the amount of money in each account. Cryptocurrencies are a way to show financial transactions. Look at the steps in a transaction’s life cycle below.
What Is Blockchain Technology?
Every time people use cryptocurrency, the details of those transactions are kept in a digital ledger called Blockchain.
Each new transaction makes a new “block” in the whole list of transactions, forming a “chain.” Blockchain uses technology that spreads out the ledger (DLT) to keep track of digital money transactions.
People who use cryptocurrency can see every transaction in the blockchain, but the name of the person doing the transactions is kept private. Each computer in the network has a copy of the blockchain, so there’s no need for a central ledger.
What Is Cryptocurrency Mining?
Cryptocurrency mining is like checking if crypto transactions are valid. Instead of using a shovel, it uses strong computer algorithms to solve tricky puzzles. Miners get some new coins as a reward for each verified transaction added to the blockchain.
Anyone with the right equipment can be a miner. Big operations in places with cheap electricity costs mine popular cryptocurrencies like Bitcoin and Ethereum.
What Is Encryption?
Cryptography uses math codes to keep information private. You can only understand the secret message if you have the key to change it back to normal language. Nowadays, with computers, encryption is really hard for our brains to figure out.
Computer algorithms are needed to encrypt and decrypt it. A well-known example of cryptography is the Enigma machine used by Nazi Germany in World War II. British codebreakers at Bletchley Park eventually figured it out.
How To Use Cryptocurrencies?
Cryptocurrencies are made to be another way for people to pay for things and do transactions online, but a lot of people haven’t started using them a lot yet.
The reason there’s so much talk about cryptocurrencies is because some think they’ll be used by a lot of people in the future, while others don’t think so. Essentially, investors are making bets on whether cryptocurrencies will become commonly used as a form of money.
Just a reminder, money is meant to do three things:
- A medium of exchange (can be used to buy and sell things)
- A unit of account (divisible into units that can represent the real value of different things)
- Store of value (maintains its value over time)
People argue a lot about whether cryptocurrencies can really do these things. Right now, the big issue with using cryptocurrencies as money is that their prices change a lot.
Because of this, many stores don’t take them as payment. If they did, the prices of things would need to change every day, and it’s hard to count on the value staying the same. Things might get better if the prices become more stable.
The Most Popular Cryptocurrencies
Here are the most popular cryptocurrencies:
- Bitcoin (BTC)
Bitcoin is the first and most popular cryptocurrency, created by someone named Satoshi Nakamoto in 2009 (although we don’t know who that is). Because Bitcoin is so well-known, other cryptocurrencies are often called “altcoins,” meaning alternatives to Bitcoin.
- Ethereum (ETH)
Ethereum is a blockchain network made in 2015. Unlike Bitcoin, it’s not just for tracking cryptocurrency ownership. Ethereum is used to run applications without a central authority. It has its own token called Ether, often confused with Ethereum itself.
- Ripple (XRP)
Ripple is a way to transfer money, but it’s not like Bitcoin. It doesn’t use blockchain and can move any kind of currency, like cryptocurrencies, regular money, gold, or even air miles. Banks like Ripple because it’s super fast (10,000 times faster than Bitcoin).
- EOS (EOS)
EOS is the cryptocurrency for EOS.IO, started in 2017. It works as a platform for smart contracts and a decentralized system to run applications and store data. EOS.IO tries to fix the problems of older systems like Bitcoin.
- Bitcoin Cash (BCH)
Bitcoin Cash is an improved version of the original Bitcoin, known as Bitcoin Classic. A “hard fork” made it possible to create a new currency with better scalability. The main change was making the block size bigger, so it can process more transactions quickly.