What is cryptocurrency?


Cryptocurrency is money in a digital format. It exists on large amounts of networked computers connected to the internet allowing records of ownership and transactions to be publicly available offering a high degree of transparency.

It is secured by cryptography which makes it extremely difficult to counterfeit or hack. Cryptography is a method of encryption allowing data to be exchanged between sender and receiver in a secure manner.

The actual location of the individual bits of currency is spread out and replicated over many computers connected to the internet. This is called decentralisation, for example, a centralised currency owned by a nation state such as the British pound will be controlled by one entity, the Bank of England, whereas a decentralised currency is not under the control of one entity, but the entire network.

Decentralisation occurs by way of a distributed ledger, this records the transactions of each Bitcoin and is held on a digital blockchain, this blockchain is then distributed and replicated over the network to allow a viable record to be kept of transactions and ownership.

A blockchain works by individual bits of data recording date and transactions within that block, each new link in the chain records any new transactions creating an unbroken record of who the buyer and seller were at that time, making it impossible to change the data on any one link as the links before and after in the chain must verify this information and will record an error if links in the chain do not match up.

The records which make up the blockchain are immutable, meaning they cannot be changed, they can only be added to by creating more links recording transaction data. All this information is public and can be viewed by anyone with access to the internet with the correct software.

The advantages of a cryptocurrency are:

· Resistant to government manipulation and interference

· Faster and cheaper transactions

· Privacy of the individual holding the token as cryptocurrency transactions can be anonymous

· Disruption of old, legacy financial systems and institutions

· Robust currency due to decentralisation, no central point of weakness

· Ability of third parties to easily create DAPS (digital applications) which take advantage of the speed and low cost of transactions

What is bitcoin?

Bitcoin is a cryptocurrency, invented by the elusive Satoshi Nakamoto in 2009, although several people have claimed to be Satoshi it is still not clear who the individual or group of individuals is.

Operating without any central control bitcoin is powered by peer-to-peer software and cryptography.

The blockchain, or public ledger records all bitcoin transactions and copies this information over the network of servers and computers globally.

Bitcoin can be exchanged between individuals, exchanges, institutions…etc using a digital wallet.

Users of bitcoin store the coin on exchanges or in a wallet on their browser or local hard drive. If you want to trade bitcoin it is usually stored on the exchange which you use to trade, but if you want to hold on to the token and HODL, which means to “hold on with dear life” a term also referred to as Hodling, then you can disconnect your wallet from the internet where it can be more secure. However, a wallet requires passwords and keys to access it so make sure you keep a record as many times people have been denied access to their assets because they forget the password.

Your wallet will have a public and a private key, the public key will allow everyone to see value of your bitcoin and your transactions. Your private key is used to transfer bitcoins from your wallet to another wallet address, so it’s important to keep this secret and secure and written down is a safe place.

Your wallet’s address is safe to share and sometimes it will be needed for others to send you tokens.

What is bitcoin mining?

Bitcoins are created by computers which perform tasks resulting in new bitcoins being created, this is called “mining”. The mining creates new blocks which are added to the blockchain using a complex, mathematical process making it virtually impossible to mess with.

A computer requires a lot of energy to create these new blocks and the cost of electricity may be more than the value of the blockchain, making it cheaper to simply purchase the bitcoin on an exchange. But with economies of scale, vast “mining farms” have sprung up offering a profit to the miners for bit coin production. This has caused bitcoin to be viewed as an environmental problem when the electricity is derived from carbon-based generation.

The maximum number of bitcoins that can exist is about 21 million, as of 2021 there is currently 18.6 million bitcoins mined, which is about 90% of the total. It is estimated that this maximum number will be reached in 2140.

References:

https://www.britannica.com/topic/Bitcoin

https://www.fool.com/the-ascent/cryptocurrency/articles/7-facts-about-bitcoin-that-will-surprise-you/

https://en.wikipedia.org/wiki/Bitcoin

https://www.newscientist.com/definition/bitcoin/

https://www.bbc.co.uk/newsround/25622442

https://journalistsresource.org/economics/bitcoin-blockchain-cryptocurrencies-ico-explainer/

Photo by JJ Ying on Unsplash


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