Cryptocurrency or crypto is a form of digital currency that can act as a medium of exchange through a computer network without the need of any central authority like a government or banks to maintain it. Cryptocurrency can only be stored in a digital wallet and any payment made using crypto exists purely as a digital entry on an online database.
Bitcoin and most cryptocurrencies work on the technology called blockchain. This technology maintains a database of all transactions and is designed in a way that it is tamper-resistant. Most blockchains are decentralized, which means that they are not governed by any central authority whatsoever.
Also called e-wallets, these are software-based systems to store a users payment information and passwords in a secure way. Cryptocurrencies rely only on digital wallets for balance maintenance and to manage transactions.
Why are they called cryptocurrency?
A very common question is why is it called a cryptocurrency, this is because this digital currency is developed using specific cryptographic processes in order to protect it from fraud. Added to that, they use encryption to verify transactions. This helps to prevent the currency from being copied or spent twice.
How are cryptocurrencies created?
Since cryptocurrencies work on blockchain technology, units of cryptocurrencies called coins or tokens have to be mined. Mining is the process of creating these units using computer software to solve complex mathematical problems This is done to verify the authenticity of a transaction on the network. If the transaction is verified a coin is created, and the miner is rewarded for the same.
Once created, these coins can be bought, stored, or spent. Bitcoin, one of the most popular cryptocurrencies, also relies on mining for the creation of new coins. However, mining is an energy-intensive process that has an adverse impact on the environment, Hence, latest cryptocurrencies are working to use different but environment-friendly methods to create tokens.
How do they work?
Since cryptocurrency is intangible, owning crypto is a little different from owning a physical currency. So, if you buy a coin from any crypto what you actually get is a key, which allows you to move/transfer the coin whenever you want to wherever you want (provided they have a digital wallet of their own), without needing a bank or government for the same.
What is bitcoin?
Bitcoin is one of the most popular cryptocurrencies in the world. Think of it like clothes, Bitcoin is the most popular brand of clothes at present. You must be wondering what makes it special?
History of bitcoin
The reason for bitcoins popularity is that it was the first cryptocurrency ever built. It was developed in 2008 by Satoshi Nakamoto (often considered to be a pseudonym), and began use in 2009. It was also the worlds first decentralized blockchain. On 3Jan, 2009 the genesis block (or the first block/block0) was mined.
The most unbelievable thing is the creator of bitcoin (and probably all of blockchain technology) is Satoshi Nakamoto, and nobody actually knows who that is. It is weirdly assumed to be a pseudonym for a person or a group of people who together published the Bitcoin whitepaper in 2008 and worked on building the bitcoin software in 2009.
Bitcoin as a form of payment
Even though governments worldwide are quite critical of cryptocurrency and the regulations regarding this currency are quite unclear, bitcoin can be accepted as a mode of payment for products or services. In Fact popular companies like Tesla started the trend in the first place. The transactions are carried out by obtaining the wallet address through QR codes and touchscreen apps.
An online business can easily accept Bitcoin by adding this payment option to its other online payment options: credit cards, PayPal, etc. El Salvador became the first country to officially adopt Bitcoin as legal tender in June 2021.
Key terms in bitcoin
Have a look at some of the most crucial terms related to bitcoin:
The Blockchain is a shared ledger on which the whole network relies. All the transactions that are confirmed are included in the blockchain. in this way Bitcoin, the amount that is spendable and the new transaction can be verified.
Bitcoin wallets store a private key or seed. This key is used to sign exchanges, giving a numerical verification that they have originated from the proprietor of the wallet. The mark additionally keeps the exchange from being modified by anyone once it becomes an issue.
Mining is the process of creating new blocks in a blockchain. Bitcoin processing involves mining new coins by solving complex mathematics using specialised computer softwares. Mining isi vital to maintain and update the distributed ledger over the bitcoin network.
Peer to peer network
This refers to the active network of nodes involved in a bitcoin network that is responsible for authorizing any decision with respect to the coin. This system promotes transparency, and through this, every action or decision in the database can be checked, viewed, and tracked.
Bitcoin mining is the process by which Bitcoin is released into circulation. Generally, mining requires solving computationally difficult puzzles to discover a new block, which is added to the blockchain. Once the equation is solved and verified by the peer-to-peer network, a new coin is added in circulation.
As of right now, with about 19 million bitcoins in circulation, the total market capital of bitcoin is 802.559B USD.
Is bitcoin a scam?
Cryptocurrencies in general are a subject to a lot of speculation presently due to being an intangible and entirely digital asset. That being said, they are also subject to a lot of frenzy with people buying as much as they can without actually understanding it entirely. This customer behavior makes bitcoin and other cryptos prone to cyber-attacks. So, no bitcoin is not a scam. But, there are a lot of scams happening presently in the name of bitcoin.
How many bitcoins are in existence?
There are currently 18,925,137 bitcoins in existence. Hence, about 19 million bitcoins have been mined. However, Satoshi Nakamoto set a hard limit of exactly 20,999,999.9769 bitcoins that could be in the world. This was done by putting a cap in the algorithm, meaning computers will no longer be able to solve the equation (mine Bitcoin) once 20,999,999.9769 are mined
Where can I buy bitcoin?
You can buy/sell/invest/trade in bitcoin using any bitcoin exchange of your choice that offers benefits and features that are suitable for you at the lowest feasible fee. Coinbase is a very popular crypto exchange where you can buy not just bitcoin, but also other cryptocurrencies as well. These days there are some brokerages that offer cryptocurrency investment/trading options as well.
How do bitcoin transactions work?
Any transaction requires an input and an output. Here, inputs are the bitcoins that are alwatchy owned by a user. The bitcoin wallet (digital wallet specifically to send and receive bitcoins) keeps track of that. Output refers to the funds that are to be received at the end of the transaction.
Once the inputs are gathered, proof of ownership has to be presented in order to unlock the funds using a digital signature. Proof of ownership shows that you have the key needed to access these bitcoins. Then, outputs are generated to transfer the funds and pay for the transaction fee.
The validated inputs are attached to the new owners address, and the new owner has to produce a digital signature that matches the address in order to spend the transacted amount. This process is done to create a chain of transactions that records the history of exchange of every bitcoin.
Understanding bitcoin transactions using an example
Imagine you want to buy a house from your friend, your friend says that he has legal documents to prove that he owns the house but what if he is lying?
So, you and your friend go to your nearest government office. There, the officer demands to see your friends documents (something like the proof of ownership) and verifies that it is indeed original. Now, it is proved that your friend owns the house. You show that you have the money, and so the transaction now proceeds. The seller makes sure that it is fair.
Now, the officer enters your name as the owner of the house and gives this transaction an ID and tells you to note it down, so that in the future you want to sell the house you can show how you bought it. Hence, updating a chain of transactions relating to the house that can be easily accessed.
At present more than 17,000 cryptocurrencies are being traded publicly (according to coinmarketcap.com ). The top 10 cryptocurrencies according to their market capitalization :
5. USD Coin
Advantages of Bitcoin Investing
1. The lack of involvement of central banks or any single authority makes it more appealing to the public because unlike banks, a peer-to-peer network would not tend to reduce the value of crypto via inflation
2. The decentralized processing and transparent recording systems make it more reliable and secure.
3. Cryptocurrencies are a new concept and attract a lot of investors, as a result of which they are also a means of easy money at the moment
4. Some cryptos also offer owners the opportunity to verify transactions, this is called crypto staking. Even though staking is risky, it can also serve as a means of passive income.
Risks of Bitcoin Investing
1. Blockchain technology and cryptocurrencies are a relatively novice concept and people are investing in them without fully understanding them. If cryptos fail to live up to its commitments, people are bound to lose money.
2. Most cryptocurrencies are very volatile right now, which means that some short term investors might make money overnight, but others might lose them overnight too.
3. Since these are intangible, people have a hard time trusting what they cannot see.
4. Crypto mining has a high carbon footprint and is detrimental for the environment.
5. Governments at present are not appropriately prepared to handle cryptocurrency, the lack of regulations and/or crackdowns can affect the market unpredictably.
Splits in the Cryptocurrency Community
Not a lot of people completely understand and/or agree with the idea and working of cryptocurrency. There have been numerous instances in the past in which disagreements between factions of miners and developers led to large-scale splits of the cryptocurrency community. In some of these cases, groups of Bitcoin users and miners have changed the protocol of the Bitcoin network itself.
This process is known as “forking,” and it usually results in the creation of a new type of Bitcoin with a new name. This split can be a “hard fork” in which an entirely new coin shares transaction history with Bitcoin up until a split point, at which point a new token is created. Or it could be a “soft fork“, this is a change to the protocol that is compatible with the previous system rules.
Applications beyond cryptocurrencies
Blockchain technology offers a variety of applications beyond cryptocurrencies like bitcoin. Not just in the finance, but also in the automotive, business, healthcare, and government sectors. Blockchain is a form of collaborative technology and comes lush with hopes for the future and its principles of decentralization can very easily change our way of decision making. Needless to say, the future is filled with some amazing blockchain-oriented applications.
In this Video, we have learnt what cryptocurrency is, how they are created, stored, and transacted. We also learned a little about bitcoin and why it is so famous. After reviewing the top 10 largest cryptocurrencies we also discussed the advantages and risks of investing in cryptocurrencies. We also discussed how blockchain technology also has a lot of applications aside from cryptocurrencies. Hope you enjoyed learning!