Chances are you've heard of cryptocurrency: Bitcoin, Ethereum, and Dogecoin have all become words we hear in the news or read online. But what exactly is cryptocurrency, and how does it work?
Cryptocurrency vs regular currency
Right now you hopefully have money in your pocket in the form of dollars, euros, or rupees, depending on what your country gives as currency. This money is valued by a delicate system operated in part by governments, as well as by certain market mechanisms too involved to enter here. This article from The balance however serves as a solid primer.
Cryptocurrency is different from that, and drastically. Instead of having a physical presence - the banknotes and coins in your pocket - it exists entirely digitally, without the power of a government to back it up. Rather, it relies on the mechanisms of the free market to determine its value: what people are willing to pay for it determines what it is worth.
Of course, without a central issuing authority, inflation could become a real problem: anyone could pretend at any time that they have a thousand or a million cryptobucks, and there is nothing they can do to stop it. If you create your own US dollars, you will be arrested for counterfeiting. If you create a cryptocurrency from scratch, nothing will happen.
The cryptocurrency blockchain
This problem was one of the biggest issues surrounding cryptocurrencies until Satoshi Nakamoto - likely a pseudonym for a person or group, no one knows for sure except Satoshi - came up with the blockchain. It's pretty complicated technology, but it boils down to being an online ledger that anyone can read, but not everyone can edit.
Much like the ledger that an old-school accountant would keep (this book Ebenezer Scrooge is poring over is a ledger, for example), the blockchain records how much given cryptocurrency there is and who owns and spent. It does this in what are called blocks, hence the name “blockchain”. Below is an example of a ledger in action.
The ledger keeps track of how much was spent on a given cryptocurrency (Bitcoin in the example above), when it was spent and also who spent it. While your identity is protected by a pseudonym (random letters and numbers called a hash) when using most cryptocurrencies, none, with a few exceptions, are truly anonymous. Even Bitcoin is not "anonymous" as many think.
Putting Crypto Into Cryptocurrency
The ledger is only one side of the equation. While it is great to have a record of cryptocurrency inflows or outflows, ledgers can be easily tampered with. It used to be that you used an eraser or a blank to wipe out expenses, now you can do much the same with some advanced tools.
One way to guard against these issues is the openness of blockchain technology: if everyone can see what's going on at all times, it should be easy to quickly know if something weird is going on. The other way is to harness the power of cryptography or encode the input data and then decode it as needed.
In the case of cryptocurrencies, this is usually done by using passwords to ensure that a user is who they claim to be, or rather that their wallet - where cryptocurrencies are stored - is. the one that belongs to him. Since a wallet's username is usually hashed, as we saw earlier, it's important to make sure that users remember their passwords.
There are several examples of people forgetting their passwords and locking themselves on their cryptofortune.
Buy and mine cryptocurrencies
With cryptocurrency theory out of the way, let's take a look at how they work in practice. To get started with cryptocurrencies, you will need to go to an exchange like Coinbase or Kraken to purchase your cryptocurrency of choice using regular money. We have a guide on how to buy Bitcoin if you want to learn more; the guide also applies to other cryptocurrencies.
There are other ways to get your hands on most cryptocurrencies, including through something called mining. However, this has nothing to do with swinging a pickaxe: instead, a computer checks whether new blocks of existing cryptocurrencies are real or fake. Payment for this service is then made in the same currency. This is the only way to release new units of a cryptocurrency and therefore the best way to get more.
However, given the insane amount of computational power required to process the data needed to verify new blocks, there is a chance that your bespoke gaming rig will be smoldering before you mine the equivalent. of a few dollars. There is so much processing power required, in fact, that mining is no longer the domain of enthusiasts, but rather entire companies. Even criminal gangs jump in and make millions.
Store and spend Bitcoin
Assuming you've just purchased the cryptocurrency of your choice, you still need a place to store it: unlike cash, Bitcoin and Ethereum can't be sewn into your mattress. For this you will need a wallet. These come in both software and hardware form and can store your particular blockchain information for you.
A software wallet is often offered by exchanges - although you can subscribe to another, the Bitcoin site has a selection - and is simply an online service where Bitcoin can be stored. Many of them have good security, although they are increasingly falling prey to hackers.
The alternative is a hardware wallet, which is pretty much just a special USB drive that keeps track of the blockchain for you. Examples include Trezor and Ledger. They're pretty neat, but again, if you lose or forget your password, your crypto is gone.
Once you've chosen a wallet, all you need to do is decide what to spend it on. There are many online services that will allow you to pay in cryptocurrency, and it's pretty straightforward: just click the right buttons and you should be fine. Alternatively, you can just let it sit in your wallet and watch its price go higher and higher (or drop completely).
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