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A Simple Guide to Cryptocurrencies

 

June 7, 2021 (Investorideas.com Newswire) We met cryptocurrency 12 years ago. This adventure that started with Bitcoin continues with thousands of "coins" today. We can use them for just about anything: with cryptocurrencies, you can play games on casino online sites, buy an electric vehicle or try your luck at the stock market. So, how does this technology actually work? What does it mean for cryptocurrencies to be "decentralized"? Below, we simply explain how Bitcoin and other cryptocurrencies work.

It All Started with Bitcoin

Bitcoin is the first cryptocurrency invented by Satoshi Nakamoto in 2008. (We still do not know whether this name represents a person or a group.) It has its own manifesto, and when you read it, you understand both its purpose and how it works:

  • Bitcoin emerged as a reaction to traditional currencies (called Fiat currencies) minted by central banks and can be manipulated by the global banking system. Its purpose is to exchange money over a peer-to-peer network: Bitcoin users can send and receive money to each other without using traditional banking infrastructure.
  • This peer-to-peer network is called the "blockchain". You can think of the blockchain as a huge database: it both stores the financial information of Bitcoin users and enables money transfers to take place. When "User A" sends money to "User B", the blockchain encrypts this transaction and verifies it by independent systems called "nodes", ensuring that the transfer takes place. When the blockchain is examined, you can see that the transfer has taken place, but it is not possible to see the credentials of the parties to the transaction.
  • New Bitcoins are obtained by a method called "mining." It is a little difficult to explain this simply, but you can think of it as the decryption of encrypted blocks, using the processing power of computers and the creation of new Bitcoins by adding this data to the blockchain. In other words, Bitcoin is not minted or managed by a central bank: the transactions and minting are handled by the users and the blockchain itself.

And Then, There Were Others

Bitcoin is the first but not the only example of cryptocurrencies. Immediately after achieving relative success, many different cryptocurrencies using blockchain technology began to emerge. These currencies had their own blockchains, and many of them were using slightly modified Bitcoin code. Today, all non-Bitcoin cryptocurrencies are called "alt-coins" (alternative coins). None of these is as successful or common as Bitcoin, but some do manage to make a real difference. For example:

  • It takes about 10 minutes for the Bitcoin blockchain to process a block. Litecoin reduces this time to 2.5 minutes. Therefore, Litecoin transfers are both cheaper and faster to complete.
  • Ethereum offers a feature called "smart contract" on its own blockchain. Thanks to this feature, you can run various applications on the blockchain. These are autonomous applications and can automatically complete a specific action when predetermined conditions are met. In fact, this is a more exciting technology than Bitcoin, as it enables websites and even massive programs to run on the blockchain that is not controlled by a central authority - you can be sure you will see many examples of this in the near future. Ethereum transforms the blockchain from being a digital database used only for financial transfers to a kind of software development platform.

This Is Not the Bitcoin You Are Looking For

Bitcoin was a digital and encrypted currency that emerged as a response to banks and governments, but it is hard to say it is used for this purpose today. As you all know, nowadays, Bitcoin (and all other altcoins) has turned into an "investment tool." Nobody uses them as a currency anymore - they are bought and sold on exchanges and are now considered "assets." In other words, they have turned into something diametrically opposite to their purpose of emergence.

You can be sure that this situation will continue for a long time. The market created by cryptocurrencies is larger than the economies of many countries in the world. People can still become millionaires simply by buying and selling them. Therefore, Bitcoin and other cryptocurrencies will continue to be used as assets for quite a while, we are sure of that. But we are also sure that this "madness" will eventually end. Sooner or later, we will remember the actual purpose of Bitcoin and other cryptocurrencies. When we start using them only as a digital currency, we can truly change the world: we look forward to that day.


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