You probably have been living under a rock if you don’t realize the importance of bitcoin or other cryptocurrencies or how it is impacting the mainstream financial system. Bitcoin is one of those things that has created a lot of buzz around the world over the past several years. To some people, cryptocurrencies such as bitcoin can be quite confusing and to some extent misleading. In this article, we will explain what cryptocurrencies are, unravel various terms relating to cryptocurrencies, why you may consider investing in cryptocurrencies as well as essential stuff related to Bitcoin.
What Is Cryptocurrency?
Cryptocurrency is a virtual currency that was originally created to be as a medium of exchange for goods and services. Cryptography is used to verify and secure the transactions. The method cryptography is also pretty intelligent which means that there cannot be an infinite unit of a cryptocurrency. This means different cryptocurrencies can only have a maximum unit in circulation. This is completely opposite of conventional currency such as US dollars or euros created by central banks where there is no maximum supply. Central banks can create virtually unlimited dollars or euros.
You’ve probably familiar with bitcoin, most of us don’t know that up until now there are 1,600 different cryptocurrencies in existence! Bitcoin is obviously the most famous of the bunch, but it only actually accounts up to 36% of the entire cryptocurrency market. This implies that most of the cryptocurrency market is comprised of various cryptocurrencies including bitcoin.
Types Of Cryptocurrency
There are two types of cryptocurrencies: transactional cryptocurrencies and utility tokens.
Transactional cryptocurrencies: These cryptocurrencies are used for storing and transferring value. Bitcoin and Litecoin are examples of this type of cryptocurrency. You can earn bitcoins by playing certain games. Known as bitcoin games, these games are becoming popular day by day, at least with cryptocurrency enthusiasts. However, at the moment it is difficult to pay for products or services with bitcoin or any other kind of cryptocurrency because many merchants have not adopted the use of cryptocurrencies as an acceptable mode for payments.
Utility Tokens: Ethereum and EOS are examples of utility tokens. This type of cryptocurrency are projects that are used for creating a product or service. Investors used utility tokens to pay for the project’s products or services. It is similar to Disney dollars that are used to pay for products or services at Disneyland. However, it is worth mentioning that the majority of these cryptocurrency projects that are funded by utility tokens lack a working product or service.
What Is Bitcoin?
Bitcoin is a digital currency that is not regulated by any country or entity. This is entirely contrary to fiat money such as the US Dollar, Euro, and other paper currencies which are regulated and issued by central banks. Cryptocurrencies like Bitcoin and Litecoin can be used by anyone who is connected to the internet and the person owning it can use it to pay for services or products over the internet. Think of it as the official currency of the internet.
What made Bitcoin so popular globally is due to the fact that it is extremely easy to transfer to anyone all over the world at very low rates. For instance, it only takes $2-3 or less to transfer any amount of bitcoin from the United States to Europe. All Bitcoin transactions are anonymous with only the sender and the receiver knowing who is associated with the transaction. As more and more people are taking an interest in cryptocurrencies particularly Bitcoin as well as investing and accepting it as a medium of payments, individuals and businesses are saving money on conducting business globally.
How Do Bitcoins Work?
Most of us store our money in our wallets or deposit it in banks, bitcoins, in a similar fashion are stored in “Bitcoin wallets”. This enables people to buy bitcoin with bank account details of their own, via an account made especially for digital currencies. The transactions are done electronically and no fiat money (US Dollar, Euro, Yen, etc.) are involved.
In order to receive or spend bitcoin, you need to use your bitcoin wallet. Each Bitcoin wallet may have one or multiple “wallet address”. The wallet address is a unique internet address that ensures the anonymity of the transactions which maintains the privacy of the sender and the receiver. Users can use a different wallet address for every transaction. Bitcoin wallets can be installed on a computer or smartphone. Upon installation, the application will generate a unique bitcoin wallet address which can be used for receiving and sending bitcoins from anyone and anywhere.
Now lets us explain in brief how bitcoins actually operate. Bitcoin works on blockchain technology. The blockchain technology is usually a shared public ledger where the whole bitcoin network operates. All confirmed transactions are added into the blockchains including newly added bitcoins. If any user wants to initiate a new bitcoin transaction whether it is sending or receiving bitcoins, the blockchains are used to verifying the transaction.
To make this even simpler, assume the blockchains like the physical ledgers maintained by banks. The major difference is that the blockchains are maintained by the individuals and any person can use and inspect the ledger to match bitcoin transactions.
Bitcoin uses a system called a “public-key” cryptography which uses two pieces of information to authenticate messages. If you’re setting up a Bitcoin wallet for the first time, you’ll be asked to set up a private key also referred to as the “seed”. The seed is the most essential component of Bitcoin security. We recommend that you note down your seed keyword on paper and store it in a secure place.
Is Bitcoin Really Valuable?
We already mentioned that there will be a limited number of bitcoins. In fact, only 21 million bitcoins will ever be produced. At this moment, 17 million bitcoins are in circulation. Bitcoins are created through mining, which involves computers solving complicated mathematical problems. The solutions are rewarded with bitcoins. The puzzles progressively become complicated over time and the rate of newer bitcoin being created or mined is reduced. According to the latest estimates, the last bitcoin will be mined in 2140.
As the supply of bitcoins is capped no government, organization, or an individual has the power create more bitcoins after it hits 21 million. Unlike fiat currencies, where the government or central can create money from thin air, you don’t have any quantitative easing or any other financial manipulation with bitcoins. This preserves the value of bitcoins and the price will increase in the future. Money issued by governments or central banks offer no such guarantees.
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