What is Cryptocurrency? (A beginners guide to all you need to know)
Cryptocurrency is an online digital currency that is used for the exchange of goods just as fiat/paper currency is used. Cryptocurrency is backed by cryptography, making it impossible for these coins/tokens to be double spent, copied, or faked. In more simpler terms, cryptocurrencies are a finite number of entries on a database, and these entries cannot be changed until certain conditions are met.
Cryptocurrencies are backed by blockchain technology, which is an online public ledger where all transactions related to cryptocurrencies are stored and are completed by a collection of computer networks. People who make these transactions happen are called miners. These miners receive a small amount of cryptocurrency for their services. For example, a bitcoin miner will receive payment in bitcoin, while an ethereum miner will receive payment in ethereum.
Background: (history of digital currency)
You may be surprised to know that bitcoin wasn’t the first digital currency to exist in the world. Back in the ’90s, technological boom companies tried to produce and distribute digital currencies but failed. Digital currency systems such as Flooz, Beenz, and Digi cash stepped up in the market but eventually failed. There were several reasons for the failure of these currencies; some of the most common ones were; frauds committed by companies claiming to be them, lack of resources, and tension between company employees and their bosses.
All of these companies also used a reliable 3rd party approach, which means that companies supporting these currencies were trusted, verified, and facilitated transactions. However, because of the failures of these companies. People just did not trust digital currencies anymore, and this idea was seen as a lost cause for a while.
But, innovation needs only a few or one committed and skilled individual. A man people can get behind and make magic happen. For a digital currency, this man or group (still unknown) went by the alias of Satoshi Nakamoto, who gave the world bitcoin, the very first successful cryptocurrency in the world. Satoshi developed a person to person electronic cash system. A system that is 100% decentralized, which means there is no controlling authority or hidden servers. This currency is for the people, run by the people, and is visible for everyone to see.
How does cryptocurrency work?
A decentralized network such as bitcoin requires each individual to do his/her part to make it work. This is where the term Blockchain comes in. A blockchain is a public ledger of all the transactions that have ever happened on the network and will happen. This ledger is publicly accessible, meaning anyone with a computer and internet connection can get access to it.
Each transaction that occurs is made up of senders and receivers public keys (a combination of random computer-generated numbers & alphabets) and the number of coins transferred. The sender must also sign off the transaction by his generated private key. This process is known as cryptography. Then after a bit of time, this transaction is made public. However, for this transaction to be completed, it first needs to be confirmed.
Now, this is where the cryptocurrency miners come in, and only miners can confirm a transaction. This is done by solving a cryptographic puzzle. The miners make these transactions legitimate and then spread them along with the network. After which this transaction is added to the database. When this transaction has been confirmed, it becomes unchangeable and cannot be reversed no matter what. For doing this, the miner receives a reward and a small transaction fee.
The entire cryptocurrency network is based on trust and the agreement between all parties involved over the legitimacy of all balances and transactions. Each individual acts as a cog in a machine; without one cog, the entire machine breaks down. But there is no reason to worry, as rules are built and programmed into this network, these rules prevent this system from breaking down.
The legal side of cryptocurrencies:
As digital currency is becoming more common around the world, financial institutions of almost all the countries in the world are trying to understand this fairly new concept of money better. These law enforcement agencies, tax collectors, and judicial systems are all finding ways to incorporate these currencies in their economic system.
Ever since the emergence of bitcoin as the first useable and trustable cryptocurrency. There has been a lot of concern over its decentralized nature and the anonymity that comes with its use. Financial institutions around the world are concerned that people will use these digital currencies to obtain illegal services. These institutions are worried that individuals can use this form of currency to do money laundering, tax evasions, and purchase illegal items without any fear of being caught.
There are a few countries in the world that have banned cryptocurrencies in their economy. A few examples are Bangladesh, China, Russia, Vietnam, and Bolivia.
How to store cryptocurrencies?
If you are a user, fan, or just a geek, you must have heard that millions of dollars’ worth of cryptocurrency have been stolen through online frauds and hackers. The digital currency being virtual is stored differently than standard currencies.
Technically, when you store cryptocurrencies, you are actually storing its private keys, these are used to sign off transactions. These keys need to be securely stored. People write these keys on pieces of paper, save them in USBs or files in their computers.
However, the safest way to store cryptocurrencies is through the use of a hardware or cold storage wallets. Hardware wallets have become very popular in recent times, as these wallets are completely offline. Moreover, these hardware wallets are encrypted with passwords and key phrases.
Even though these hardware wallets are safe. Some are safer than others.
How to choose hardware wallets?
Here is a list of things you should look for while choosing a hardware wallet:
⦁ It should have a minimum of EAL6+ security certification for both hardware and software( most only have it for one)
⦁ It should have multiple currencies integrated within it.⦁ It should have a screen size that is easy to use.
⦁ It should have long passphrases and keyphrases for access
⦁ Its mnemonic system must be secure.
These are the basis upon which you should choose your cryptocurrency wallet.