A Complete Guide to Cryptocurrency-What Is Cryptocurrency?

 Cryptocurrency, or crypto, is a digital currency designed to work as a medium of exchange for purchasing goods and services.

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 (CRYPTO:BTC), 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 cryptocurrencies are there?

There are thousands of cryptocurrencies available, and thousands more that are now defunct. According to CoinMarketCap, there were 13,669 cryptocurrencies as of late 2021. New tokens are constantly coming to market.

The reason there are so many cryptocurrencies is because it's extremely easy to create one. Ethereum's (CRYPTO:ETH) blockchain allows users to write bits of code to the blockchain, essentially letting anyone launch a new token that uses the Ethereum network. So instead of having to build the whole thing from scratch, developers can just use the pre-existing infrastructure.

How cryptocurrency works

To make a cryptocurrency transaction, you need a wallet for that digital currency. A cryptocurrency wallet doesn't actually hold any currency; it merely provides an address for your funds on the blockchain. A cryptocurrency wallet also includes private and public keys that enable you to complete secure transactions.

You can buy or sell cryptocurrency using a cryptocurrency exchange. Exchanges, which can hold deposits in both fiat and cryptocurrencies, credit and debit the appropriate balances of buyers and sellers in order to complete cryptocurrency transactions. You can also use cryptocurrency to buy something such as a product or service.

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.

Why is crypto so popular?

Increasing utility. New uses for cryptocurrency and blockchain technology are developing all the time. From new decentralized finance (or DeFi) apps to blockchain games to non-fungible tokens (NFTs), the industry is constantly evolving. Additionally, more retailers and service providers are accepting cryptocurrency as payment.

Attractive investment. The value of cryptocurrency as an asset class has skyrocketed over the past five years. In that time, it's shifted from a niche topic to receiving lots of buzz in the mainstream media. Many people see it as an attractive asset class to invest in to produce outsized returns.

Futurism. Many people believe cryptocurrency is the future of money. Indeed, many businesses across various industries are developing ways to use blockchain technology to improve operations. We could still be in the very early days of cryptocurrency.

Best cryptocurrencies

Bitcoin and Ether stand out among all the others. Buying Bitcoin is an obvious choice for anyone interested in cryptocurrency. It's widely supported, and a well-established ecosystem of software is available to facilitate transactions.

Ether is attractive because of the value of the Ethereum blockchain in establishing new tokens, DeFi services, NFTs, and other blockchain applications.

How to mine cryptocurrency

Mining cryptocurrency is the process of using your computing power to verify transactions on the blockchain. When you verify a block, you receive a reward and collect some fees from the transacting parties.

In order to get started mining cryptocurrency, you'll need to have a computer you can dedicate to the process. You'll need a computer with energy-efficient processors in order to make sure you don't spend more on electricity than you earn from mining.

There are really only two viable processor options to mine most cryptocurrencies: GPUs or ASICs. A GPU is a graphics processing unit typically found in gaming PCs or high-end PCs used for graphics rendering. ASIC stands for application-specific integrated circuit. It's a chip designed specifically for one task -- mining a certain cryptocurrency.

The advantage of ASICs is that they're far more efficient. The disadvantage is that they're much less flexible at what you can mine using them, and they're more expensive than GPUs.

Once you have the hardware, it's just a matter of setting up a cryptocurrency wallet and some mining software. Be sure to store your mining computer in a cool and well-ventilated part of your house since it will generate a lot of heat. And make sure you keep it connected to the internet in order to mine all day.

Once everything is set up, it's a pretty hands-off process. However, you need to keep an eye on the cryptocurrencies you mine. A sharp drop in price could make the operation unprofitable.