A beginner’s introduction to cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum are digital currencies that allow people to make anonymous transactions electronically without involving third parties, such as banks, credit cards or companies like PayPal. This is appealing because third-party institutions often charge fees and slow down the transfer process, especially for large, international transfers. Cryptocurrencies eliminate the need for a middleman by using a peer-to-peer network that relies on cryptography — the practice of encrypting information so that only select people can read and process it.

These currencies are not only virtual but also decentralized, meaning that no government or central authority controls how much is in circulation. Instead, circulation is monitored by the user community, and transaction data is stored on computers across the world.

How blockchain works
Rather than using intermediaries, cryptocurrencies use blockchain technology to record and verify transactions. A blockchain is a list of all transactions that occur using a cryptocurrency, with each block representing a specific transaction. It can be accessed by anyone using the currency but is encrypted so your private information stays secure.

When you start using a cryptocurrency, you receive a digital wallet and a public and private key. Your private key is a string of letters and numbers that you use to sign a transfer to confirm that it’s from you. Once entered, it becomes encrypted, but other users can use your public key to check that you’ve signed it with your unique signature.

So, how exactly do transactions get recorded on the blockchain? When you enter your private key to send cryptocurrency, it spurs an encryption process that generates a complex math problem. Blockchain users compete to solve the problem by running high-powered computers that eventually find the solution to the algorithm. Solving the algorithm results in a new block being added to the chain.

The users competing to solve algorithms are called miners because the user who solves the problem first is rewarded in new digital coins. Each time a block is added, more cryptocurrency is generated. Mining cryptocurrency thus verifies transactions while rewarding the people responsible for keeping the blockchain updated.

Investing in cryptocurrencies
Financial experts are divided on whether cryptocurrency is the future of money or just a passing fad. In any case, at the moment cryptocurrency is a high-risk investment. Since digital currencies have no fixed worth or government backing, their value is purely speculative and can fluctuate wildly, even within a few days. If you buy cryptocurrency, spend only what you’re prepared to lose.

Instead of buying cryptocurrencies, some experts recommend investing in companies that are developing blockchain technology. Blockchain has applications beyond cryptocurrency, and many people think that even if cryptocurrency doesn’t last, blockchain could transform how we do business in the years to come. If you’re looking for investment opportunities, consider buying stock in companies that are finding new uses for blockchain.

Did you know?
Microsoft, Subway, Expedia and PayPal are some of the major companies that are now accepting certain cryptocurrencies as payment. Customers can pay for goods and services out of their digital wallets when making online purchases.
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