A booming financial phenomenon is known by many but understood by a select few. The noise about Bitcoin and cryptocurrency trading is hard to ignore, and the craze for investing exceeds any form of investment ever to have happened. It’s the money of the future, which borrows slightly from the soft forms of investments, but rather considered safer than the rest. While the concept remains hidden for the masses, governments, banks and the leading companies understand its significance.
Cryptocurrency is a side product of a previous invention by Satoshi Nakamoto, who invented the Bitcoin in the year 2008. The intention was not to develop a currency by creating a model that operates like a peer to peer digital cash system. He wanted to a fill an existing gap that many people failed to do, by providing a safe digital cash system. He managed to develop a decentralized electronic cash system after many centralized systems failed. Eventually, the invention gave birth to cryptocurrency which now seems to control online investments.
The concept of digital currency
While many people are keen to realize the benefits, a large chunk does not have an idea of what the concept entails. To make it easy: you need a payment method with transactions and balances. In a centralized system, the payment network ought to prevent the possibility of an entity spending twice for the same amount. Ideally, that happens with the presence of a digital central server that records the balances real time. On the other hand, a decentralized system lacks the server, hence the interconnection between all entities, where each maintains a list to evaluate the validity of future transactions, therefore, avoid double spends.
If the peer networks differ on a single balance, irrespective of the size, the entire system collapses, hence the need for the absolute consensus. Satoshi’s invention was geared towards achieving the consensus without a central authority, which is what Cryptocurrencies provide.
A vast majority of those that use the cash system cannot explain how it works, but most a basic understanding of the credit card system; which is all you need to operate. If you need to delve further, you probably need to understand the concept of the blockchain, cryptography and perhaps the digital currency. By definition, Cryptocurrency is electronic money that records transactions in an automated ledger known as blockchain, and where encryption secures every process along the transaction.
In basic view, it works more like a bank credit on a debit card, as it entails a complex system which issues currency, records transactions as well as balancing works in the background so that users can receive or send cash electronically. However, it differs from the bank credit in that the government provides currency and maintains ledgers in bank-related systems while an algorithm does that for the digital cash system.
The mode of operation
Unlike the conventional cash transfers, Cryptocurrency is a mode of digital currency; that exists in a network of computers. The transfers occur within peers with no middle entity regulating the transactions, and the blockchain retains the record of transactions. Both the ledger and the transactions are secured through encryption called cryptography. The system is not centralized hence controlled by a computer algorithm. Other than Bitcoin, you may opt to invest through other digital currencies such as Ether, Ripple, and Litecoin among others.
The entities that run the software and machines meant to confirm the transactions to the electronic ledger as known as the Cryptocurrency miners. The process of sorting cryptographic queries to include more dealings to the digital ledger, and in the hope of getting coins is known as cryptocurrency mining. Like many cash related transactions, it comes with tax implications which would offset your hope if you did not know.