The recent rally in Bitcoin, Litecoin, and other cryptocurrency values has created a lot of noise, and the cryptocurrency market is now a coffee table discussion (well, almost).
People are talking about it, but not everyone knows about it. So, let’s see, what exactly are cryptocurrencies and who invented Bitcoin?
But what does crypto mean?
While people call cryptocurrencies cryptos, in short, crypto means hidden. These virtual currencies take birth with the help of sophisticated programming called mining and cryptography secures the entire process, even the transactions. What is cryptography? Cryptography means encryption. A system of encryption ensures the amount in your wallet and also that involved in your transaction is safe.
Let’s start from the beginning to give you a better understanding.
When was bitcoin created?
From the beginning, I didn’t mean to start discussing the big bang. Bitcoin, the first and the most popular cryptocurrency came into existence in late 2008. Many of the early attempts to create digital currency systems failed because of problems with the companies behind them. And Satoshi thus designed a decentralized cash system.
The real identity of Satoshi Nakamoto is still unknown.
It is an alias used by a programmer or maybe a group. He introduced Bitcoin as a peer to peer electronic cash system. There is no central authority, and there are no servers to keep records.
The records are maintained in a digital public ledger called Blockchain. And who manages it? Everyone in the network (theoretically).
The role of Blockchain
The blockchain is what’s keeping the Bitcoin and other cryptocurrencies alive. It is a decentralized public ledger that keeps a record of all the transactions. Each of the digital currency has a ledger of its own. Peers can send an amount to other peers across the Internet, and there is no third-party facilitating this transaction.
This blockchain is available to everyone. But not everyone can add a transaction to the ledger. This is when the cryptocurrency miners enter the scene.
When A sends X bitcoins to B, the transaction is broadcasted across the network. The transaction file contains the public addresses of both the peers and the amount of the virtual currency involved, signed by A’s private key.
But before adding the transaction to the blockchain, it needs confirmation. The miners solve a cryptographic puzzle, confirm the transaction to be legitimate and combine it with other transactions to form a block. This block then gets added to the existing blockchain.
What do miners get? Cryptocurrency.
Purpose of Cryptography
While cryptography involved sending encrypted messages, it also led to the growth of tools such as hashing and digital signatures. These keep the system of cryptocurrency secure.
Hashing is used in the system to keep the data safe in the blockchain. It is also used to encode the transactions, the private keys of account holders. It’s not all; hashing is what creates those cryptographic puzzles miners decrypt.
The next prominent tool, digital signatures, allow a person to mark some information as their own and also to keep it secret. Users sign the transactions with their signatures to validate it as theirs.
The miners maintain this consensus-keeping process and in turn, earn. But it’s not easy.
What do miners do?
In theory, everyone can be a miner if they can solve the cryptographic puzzle (or function). But to do this, you need power, computing power. This computational power is used to find the “hash,” what you can call a result of the function.
In Bitcoin’s system, this function is called Proof-of-Work. These are hard-to-compute functions, but you can verify them easily. What the miners do is crack the crypto by trying every input possible using their computers.
When a miner finds a solution, he can then create a block of the pending transactions and add it to the blockchain. In the process, he also adds a coinbase transaction, giving the miner bitcoins for his efforts. Coinbase transaction is nothing but the name given to the first transaction in the block, which creates bitcoins and passes it to the miner.
Other popular cryptocurrencies
Bitcoins are so popular that all other cryptocurrencies are tagged as alt-coins (alternative to Bitcoins). Here are the top altcoins in the market –
This crypto holds the second position when you consider the market caps. It’s different from the Bitcoin in the sense that its blockchain not only processes transactions but also facilitates the development of apps. It can store different so-called states of operations (or processes). So, Ethereum’s technology can help in real life implementation of Blockchain, while also performing as a standalone currency.
While Bitcoin is termed “digital gold,” this Bitcoin fork is the “digital silver.” Because of the new mining algorithm, it is faster, and you can create a maximum of 84 million of Litecoins which is restricted to only 21 million, in case of Bitcoins. Although it isn’t prevalent, many other cryptocurrencies such as Dogecoin and Feathercoin used its codebase to come into existence.
Although among the lesser known ones, Monero is popular among the users because of its focus on privacy and private transactions. It is a feature Bitcoin doesn’t have. Every deal done is available in the public ledger, and a trail can be followed. Monero’s cryptonite algorithm uses something called ring signature to block that trail.
Uses of Cryptocurrency
Cryptocurrency is like your cash or card, another payment method that you can use to pay for goods and services. You don’t need an in-depth knowledge of its system. If you know how to use your real-world currency, you can use cryptocurrency. Let’s find out where to use them.
- Investment –
Although a high-risk thing, investing in cryptos is the hottest option in the current times. Bitcoin which hovered around $1000 some months ago is now soaring at a value over $10,000. The cost of Ethereum increased by about 3000% in a single year. There are some Bitcoin exchange available, but not the same is true for the other popular currencies.
- Buying goods and services –
As already mentioned, crypto-currency is a method of payment. The only problem is the acceptability. Not a lot of businesses accept cryptos as payments, but there is a range of online services which now allow Bitcoins. You can use these virtual tokens to book hotels and flights or buy apps. You can always exchange your virtual currency for Bitcoins. Apple store, though, accepts many coins other than Bitcoins.
Where to get Bitcoin?
Now that you know how to use them let’s find out where to get the cryptocurrencies. But before buying any, you need a wallet to keep them; a digital wallet. Each currency has its wallet, Bitcoins, for example, require a Bitcoin wallet. These are of different types. You can download one for your computer or mobile or use them online. Then there also are hardware wallets storing your treasure.
Whatever mode you use, these wallets don’t hold any actual coins (or currency). All they contain is a key, a key to your address on the ledger. This key is secured in the wallet, and you can use it to get your balance and do any transaction. It is true for almost any cryptocurrency available.
There also are paper wallets available, displaying QR-codes about your key and the public address. Now that you have a wallet (or probably get one soon), you need something to put in it. Following are the places from where you can avail cryptocurrencies –
- Exchanges –
One of the most popular ways to get these virtual currencies is to set up an account with the exchange of your choice. But before you start trading your cash with cryptos, you may need to link your bank account with them. Not everyone accepts the card. You can find many exchanges trading in Bitcoins, but for others, options are few.
Coinbase, for example, trades in both Bitcoin and Ethereum, and also Litecoin.
- Sellers –
If you don’t want to go through the procedures in the exchanges, you can make direct contact with someone selling the currencies. LocalBitcoins is one such website. You can also have face-to-face meetings to buy from a person. It’s the same as giving cash for goods, but you need to have your device to confirm if the transaction happened.
- ATMs –
Yes, there are ATMs too for these digital currencies. Still not widely available, you can find Bitcoin ATMs in many cities. They are not going to give you any physical money in exchange for your cash, but only codes. While some can directly connect with your wallet in the mobile, others throw out papers. These papers contain codes and instructions to complete the transaction and get your Bitcoins.
With so many new terms introduced, it’s normal to get confused. Understanding these concepts will take time.
Don’t give up if you don’t understand it at first. Start reading about them, explore the Internet and with each new information, you will get to know this system better, and eventually, all of it. Wish you all the best!