An Ultimate Guide to the Cryptocurrency Market & Investing

 


What is cryptocurrency?

Cryptocurrency is a digital currency that doesn't rely on central banks or trusted third parties to verify transactions and create new currency units. Instead, it uses cryptography to confirm transactions on a publicly distributed ledger called a blockchain

That definition might seem downright cryptic right now. But, by the end of this overview, you won't need a decryption key to understand crypto.

There are thousands of different cryptocurrencies in circulation, each with varying values. The first cryptocurrency, Bitcoin, was developed in 2009 by a programmer using the pseudonym Satoshi Nakamoto.

In a 2008 white paper entitled, "A Peer-to-Peer Electronic Cash System," Nakamoto provides the first description of blockchain. Blockchain is the technology that enables cryptocurrency to work like government-issued (fiat) currencies without the involvement of any central bank or trusted third party.

Specifically, blockchain solves the "double-spending problem" associated with digital cash. Since digital information is easily copied, digital money requires a mechanism that reliably prevents a currency unit from being "duplicated" or otherwise spent more than once.

The global financial system, as a collective entity, has historically been responsible for establishing and ensuring the legitimacy of monetary transactions.

The validity of cryptocurrency is established and maintained without any involvement by the world's central banks. Instead, ledgers of cryptocurrency transactions are publicly maintained. Transactions verified by blockchain technology are immutable, meaning they cannot be changed. That prevents hackers from producing fraudulent transaction records and establishes trust among users.

How many different cryptocurrencies exist?

There are tens of thousands of cryptocurrencies in circulation, and thousands more are no longer in existence. As of the end of 2021, there were 13,669 cryptocurrencies, according to CoinMarketCap. There are continually new tokens entering the market.

It's incredibly simple to create a cryptocurrency, which is why there are so many of them. Users can add code to the Ethereum (CRYPTO:ETH) blockchain, effectively enabling anyone to create a new token that makes use of the Ethereum network. Developers can thus use the existing infrastructure rather than having to construct everything from scratch.

How cryptocurrencies function

You need a wallet for that digital money in order to transact with it. A bitcoin wallet only serves as an address for your funds on the blockchain; it doesn't actually hold any money. Additionally, a bitcoin wallet has private and public keys that help you conduct secure transactions.

Using a cryptocurrency exchange, you can purchase or sell cryptocurrency. To complete cryptocurrency transactions, exchanges, which accept deposits in both fiat and cryptocurrencies, credit and debit the necessary balances of buyers and sellers. Additionally, you can use cryptocurrencies to pay for goods and services.

Every time you buy cryptocurrency or use it to complete a purchase, you authorize the movement of a specified amount of the cryptocurrency from your wallet address to the wallet address of the seller. The cryptocurrency transaction is encrypted with your private key and pushed to the blockchain.

The cryptocurrency network's miners access your public key to confirm that your private key was used to encrypt the transaction. Once the block that includes your transaction is confirmed, the ledger is updated to show the new cryptocurrency balances for both your address and the seller's address. This entire process is conducted by software.

Why is it called a blockchain?

A block is a collection of transaction data on a cryptocurrency network. It basically states that Person A sent this amount of the cryptocurrency to Person B, Person X received this much cryptocurrency from Person Y, and so on.

A block includes a reference to the block that immediately precedes it. The blocks create a chain, linking one to another through references to prior blocks. To change a block in the ledger, a hacker would have to reproduce the entire chain of blocks following it since not doing so would create a chain of invalid references that would not be accepted by the cryptocurrency network.

Blocks include additional information that further enables the cryptocurrency network to verify the validity of the block. The proof of work method of establishing distributed consensus relies on cryptocurrency miners using high computing power to add blocks to the blockchain. The computing power solves complex puzzles such as math problems for which solutions are easily verified as being correct. The miners are typically rewarded with cryptocurrency and transaction fees.

New blocks cannot be added to the blockchain without a miner computing a valid solution to the block's puzzle. With every transaction, the blockchain grows longer and the amount of computing power required to add a new block increases. The blockchain, by design, becomes increasingly tamper-proof; a hacker today would need computing power equivalent to the majority of the computing power on the cryptocurrency network to successfully alter transactions.

Another method of establishing distributed consensus to add to a blockchain is known as proof of stake. Instead of requiring vast amounts of computing power, the proof-of-stake method enables the cryptocurrency holders with the most wealth or the oldest stakes to create blocks by verifying transactions.

Stakeholders are selected semi-randomly. Additional mechanisms are in place to prevent the wealthiest individuals from creating fake transactions or otherwise exerting too much power over the blockchain.

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