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You’ve read about it in the news. You’ve heard your friends talk about it at parties. Heck, you may have muddled your way through a few conversations of your own. But when push comes to shove, what do you really know about cryptocurrency?
If you’re like the rest of us, chances are, not much. And since we’re firm believers that ignorance is not bliss, we’re here to make some much-needed cents (see what we did there?) about this new era of cyber cash.
When it comes to understanding cryptocurrency, where better to start than with the word itself?
“Crypto” stems from the Greek word for “secret” and refers to the practice of cryptography — a method of encrypting transactions by converting data into unreadable code. Combine it with “currency” (aka money, moola, cash, cheddar… this one you know) and you get: cryptocurrency.
In addition to being encrypted, the other big feature of cryptocurrency is that it’s completely decentralized, meaning no middle men (e.g., governments, banks, etc.) have any control over people’s money or their payments. Instead, the system is run by an anonymous web of computers that confirms and tracks every transaction on a public ledger called a blockchain (more on that later).
Last but not least, unlike standard currencies which are tangible and backed by physical assets like gold, cryptocurrencies only exist online.
While it may seem like a new phenomenon, cryptocurrency as we know it can trace its roots back a decade. to a mysterious online mastermind known as Satoshi Nakamoto. In 2008, Nakamoto — whose identity remains anonymous to this day — published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” (Not-so-coincidentally, this came out at the peak of the 2008 financial crisis.)
Nakamoto’s idea was to develop an electronic, pseudonymous, peer-to-peer (P2P) system where people could pay money and receive money without going through any financial or political institution. That idea wasn’t itself revolutionary, but his plan of execution was.
Why? Because Nakamoto’s proposal solved an issue that had befuddled every P2P developer that came before: Double-spending, or the problem of digital dollars being spent in more than one transaction. Until then, the only way to prevent double-spending was to validate payments through trusted third-parties (read: banks). Nakamoto’s approach solved all that and laid the foundation for what are now known as blockchains.
JENNY FROM THE BLOCK(CHAIN)
If blockchains sound more like a ’90s fashion fad than a 21st century tech term, you should probably keep reading.
Blockchains are digital public ledgers that record and track every Bitcoin or other cryptocurrency transaction. Each record is known as a block with each block holding the information of every block that came before it, essentially chaining them together in a chronological database.
Cryptocurrency transactions are entered into the blockchain once they are authenticated by cryptocurrency miners. This painstaking process involves competing with other miners to solve challenging online math puzzles. The first miner to solve the puzzle not only gets to enter the block in the blockchain, they also get a reward in the form of newly-created coins. Once a block is entered into the blockchain, it becomes visible to everyone and is virtually impossible for hackers to alter or destroy.
In short, blockchains are the backbone of the entire digital currency model.
A BIT ON BITCOIN
Now that we have blockchains out of the way, let’s talk Bitcoin — the original, most established and best known of the cryptocurrencies.
This decentralized, digital powerhouse has been grabbing headlines in recent years, not only for its meteoric rise in value (one Bitcoin = more than US $7000) but also because of its insane energy usage and its inherent volatility — an issue due in large part to a global demand for Bitcoin that outpaces its supply. In fact, only 21 million Bitcoins will ever be created (mined) at which point the currency pool will be tapped out.
Other reasons for Bitcoin’s constant flux stem from issues faced by so many tech industries, namely: fears around hacking (cybercriminals frequently target cryptocurrency exchanges) and uncertainty surrounding regulation for this new era of digital cash.
Like standard coins and paper money, Bitcoin currency is stored in virtual “wallets” that allow users to send and receive money. Bitcoin wallets, which can be downloaded onto computers or mobile devices, are made-up of two essential parts: a public address and a private key. The public address (like an email address) is shared openly across the network and can be used to receive Bitcoins from anywhere in the world, while a private key (like an email password) is used to verify the owner of the wallet in order to initiate and complete transactions.
Because of Bitcoin’s pseudonymity, private keys are the only way of validating user identities and accessing bitcoin funds. So, unless you want to lose your money, don’t lose your private key.
HOW DO I GET IT AND HOW DO I SPEND IT?
Getting in the cyber cash game is easier than you may think. The most straightforward way of buying Bitcoin and other cryptocurrencies is the same way you probably by everything else: with a credit or debit card — except in this case, you purchase coins through a dedicated website like this. Other ways of acquiring funds are by accepting them as a payment or transfer, or earning them as a reward through cryptocurrency mining (see above).
At the moment, the list of businesses that accept cryptocurrency is relatively small but its ranks are growing by the day. Popular online companies, from Expedia to Shopify, have jumped on the bandwagon and more and more brick-and-mortar shops are starting to incorporate options for cryptocurrency users.
Unfortunately for you latte lovers out there (and over here), it seems your morning jolt from Starbucks won’t be bought with cryptocurrency anytime soon.