Cryptocurrency is a medium of exchange that is digital, encrypted and decentralized. Unlike the U.S. Dollar or the Euro, there is no central authority that manages and maintains the value of a cryptocurrency.
Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
Bitcoin was the first cryptocurrency, first outlined in principle by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described the project as “an electronic payment system based on cryptographic proof instead of trust.”
That cryptographic proof comes in the form of transactions that are verified and recorded in a form of program called a blockchain.
A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world.
Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.
“Imagine a book where you write down everything you spend money on each day,” says Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax.
“Each page is similar to a block, and the entire book, a group of pages, is a blockchain.”
With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record.
Software logs each new transaction as it happens, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.
To prevent fraud, each transaction is checked using one of two main validation techniques: proof of work or proof of stake.
Value of Cryptocurrency
At the root of it all, any type of currency is valuable because it is accepted as a store of value.
The more people accept this, the more valuable the money becomes. Additionally, more acceptance leads to more stability in the value of the money.
Additionally, both fiat money and cryptocurrencies solve the issue of the double coincidence of wants.
Furthermore, cryptocurrency runs on blockchain technology.
This new and ingenious technological concept increases the security of the currency and allows for the verification of transactions in the currency.
Finally, cryptocurrency is infinitely divisible.
Whereas the smallest amount in US Dollars one can receive is a cent – or $0.01 – you can receive 0.00000000000001 Bitcoin if need be.
Examples of Cryptocurrency
How to Invest in Cryptocurrency
Cryptocurrency can be purchased on peer-to-peer networks and cryptocurrency exchanges, such as Coinbase and Bitfinex. Keep an eye out for fees, though, as some of these exchanges charge what can be prohibitively high costs on small crypto purchases. Coinbase, for instance, charges a fee of 0.5% of your purchase plus a flat fee of $0.99 to $2.99 depending on the size of your transaction.
More recently, the investing app Robinhood started offering the ability to buy several of the top cryptocurrencies, including Bitcoin, Ethereum and Dogecoin, without the fees of many of the major exchanges.
How to Mine Cryptocurrency?
Mining is how new units of cryptocurrency are released into the world, generally in exchange for validating transactions.
While it’s theoretically possible for the average person to mine cryptocurrency, it’s increasingly difficult in proof of work systems, like Bitcoin.
“As the Bitcoin network grows, it gets more complicated, and more processing power is required,” says Spencer Montgomery, founder of Uinta Crypto Consulting.
“The average consumer used to be able to do this, but now it’s just too expensive. There are too many people who have optimized their equipment and technology to outcompete.”
And remember: Proof of work cryptocurrencies require huge amounts of energy to mine.
It’s estimated that 0.21% of all of the world’s electricity goes to powering Bitcoin farms. That’s roughly the same amount of power Switzerland uses in a year.
It’s estimated most Bitcoin miners end up using 60% to 80% of what they earn from mining to cover electricity costs.
While it’s impractical for the average person to earn crypto by mining in a proof of work system, the proof of stake model requires less in the way of high-powered computing as validators are chosen at random based on the amount they stake.
It does, however, require that you already own a cryptocurrency to participate. (If you have no crypto, you have nothing to stake.)