A cryptocurrency is a type of crypto currency created from computer code. They operate autonomously outside of traditional banking and government systems.
Cryptocurrencies use cryptography to secure transactions and regulate the creation of additional units. Bitcoin, the original, and by far the best-known cryptocurrency, was launched in January 2009. At present, more than 1,000 cryptocurrencies are available online.
Cryptocurrencies differ significantly from traditional fiat currencies. However, you can still buy or sell them in the same way as any other asset. You can also trade on the price movements of several cryptocurrencies through CFD trading.
Cryptocurrencies fall under the banner of digital currencies, alternative currencies and virtual currencies. They were originally designed to provide an alternative means of payment for online transactions. However, cryptocurrencies have not yet been widely accepted by businesses and consumers and they are currently too volatile to agree when it comes to payment methods. As decentralized currencies, they were developed to break away from government control and influence and the cryptocurrency economy is monitored instead by peer-to-peer internet protocols. The individual units composing a cryptocurrency correspond to strings of data that have been encoded to represent a unit.
Bitcoin is known to have been the first decentralized cryptocurrency. Like all cryptocurrencies, it works through a transactional database called a ‘blockchain’, functioning as a distributed public ledger. Bitcoin was created by Satoshi Nakamoto but we don’t know if it is an individual or a group.
One of the features common to most cryptocurrencies is the fact that they have been designed to gradually reduce production. Therefore, only a limited number of units of the currency will forever be in circulation. This is in contrast to commodities like gold and other precious metals. For example, the number of bitcoins is expected not to exceed 21 million. Other cryptocurrencies, like ethereum for example, work in a slightly different way. The issue is capped at 18 million ethereum tokens per year, corresponding to 25% of the initial stock. Limiting the number of bitcoins brings scarcity, which in return gives it its value. Some even believe that the creator of bitcoin actually modeled the cryptocurrency based on precious metals. Therefore, mining cryptocurrencies becomes more and more difficult over time due to the fact that the reward related to mining is halved from year to year until the time it reaches zero. Main features of cryptocurrencies
There are a few key principles that govern the use, exchange, and transactions of cryptocurrencies. Cryptography
Cryptocurrencies use advanced cryptography in different ways. Cryptography was born from the need to establish secure communications during the Second World War in order to convert easily decipherable information into encrypted code. Modern cryptography has come a long way since then, and within today’s digital world is based primarily on computer science and mathematical theories. It also derives from the science of communications, physics and electrical engineering.
Two of the main elements related to cryptography apply to cryptocurrencies, ‘hashing’ and electronic signatures:
- Hashing verifies the integrity of data, maintains the structure of the blockchain and encodes account addresses and individuals’ transactions. It also generates cryptographic puzzles to make block mining impossible.
- Electronic signatures allow an individual to prove that they have a piece of encrypted information without revealing that information. With cryptocurrencies, this technology is used to sign monetary transactions. It proves to the network that the account holder has given his consent for the transaction.
Blockchain technology
A blockchain is the public ledger or list of all cryptocurrency transactions. The completed blocks, consisting of the latest transactions, are recorded and added to the blockchain. They are stored in chronological order as an open, permanent and verifiable register. A peer-to-peer network made up of market participants manages blockchains and they follow a whole series of protocols to validate the new blocks. Each ‘node’ or computer connected to the network automatically downloads a copy of the blockchain. This allows everyone to track transactions without the need to maintain a centralized ledger.
Blockchain technology creates a ledger that cannot be changed without the agreement of the rest of the network. The concept of blockchain is attributed to the founder of bitcoin, Satoshi Nakamoto. This concept has been the inspiration for other applications based on digital currencies and money. Block mining
Block mining is the process of attaching new transaction ledgers as blocks to the blockchain. During this process – taking bitcoin as an example – new bitcoins are produced, thus increasing the total number in circulation. Cryptocurrency mining requires certain software used to solve mathematical puzzles and this validates the legitimate transactions that make up the blocks. These blocks are added to the public ledger (blockchain) every 10 minutes or so. While the software solves these transactions, the miner is rewarded with a given amount of bitcoins. The more the miner’s hardware can perform the mathematical problems, the greater the probability of validating a transaction and getting the reward in bitcoins. Which cryptocurrency to invest in? Bitcoin
Bitcoin is known to be the first and best known cryptocurrency. Satoshi Nakamoto, a person or group of individuals under this name, created it in 2009. Presumably, its characteristics are closer to commodities than conventional currencies. This is reflected in the fact that it is currently used more as a form of investment than as a payment method. At the end of December 2017, there were about 16.7 million bitcoins in circulation (there could be a total number of 21 million available). Traders can either buy bitcoins through a centralized place, or speculate on the movements of its prices through CFDs. Learn more about how to trade bitcoin. Ethereum
Ethereum is relatively new in the world of cryptocurrencies. The latter was launched in 2015 and, at the time this article was written, is currently the second most important cryptocurrency. It works similarly to bitcoin, allowing people to send or receive tokens representing its value through an open network. Tokens are called ether and this is what is used as a payment method on the network. However, the primary use of ethereum is to operate as smart contracts rather than as a form of payment. Smart contracts are code scripts that can be deployed in the ethereum blockchain. The limit set on ether works slightly differently than bitcoin. The issue is limited to 18 million ether per year, which corresponds to 25% of the initial stock. Therefore, while absolute issuance is fixed, relative inflation decreases year after year. Litecoin
