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How cryptocurrency works

How cryptocurrency works

How cryptocurrency works

Thu Oct 18 2018 07:14:00 GMT+0000 (Coordinated Universal Time)

You’ve almost certainly heard about cryptocurrencies – but do you know how they work? Sure, Bitcoin is a hot topic – but how does someone spend digital money that was created seemingly out of thin air? Here, we break it down for you so that you can understand this trend and start taking advantage of it sooner than later.

What is it?

Bitcoin is generally recognised as the start of cryptocurrencies, with more than 4,000 alternative forms of Bitcoin or cryptocurrencies following it. It was created in 2009 and was the first digital currency produced after years of unsuccessful attempts by many individuals. It was created by an anonymous programmer or group of programmers under the alias Satoshi Nakamoto, who described Bitcoin as a “peer-to-peer electronic cash system” that had no servers or central controlling authority, making it totally decentralised.

How does it work?

The idea of a decentralised system of payment was and is appealing to many because it means that no third party ever has access to individuals’ personal information. Third parties play the role of ensuring that fraudulent double-spending does not occur by overseeing the payment process. To prevent this in the case of using a cryptocurrency such as Bitcoin, each user must be responsible for preventing double-spending. This is accomplished through a blockchain, which is a public financial transaction database.

In the blockchain, every individual’s account balance is visible to everyone else (with individuals identified only by pseudonyms), along with every transaction made. However, transactions only become visible after a special user, called a miner, has confirmed it. Until the transaction is confirmed, it is pending and can be forged. Miners legitimise transactions and render them unforgeable by solving cryptographic puzzles using special software, and a miner is paid in newly “mined” cryptocurrency if they solve it before any others do. Once the transaction has been confirmed, it is spread across the public database, thus adding a “block” to the database. A block generally includes a timestamp, transaction data, and cryptographic data that points to previous blocks. While it may seem as though miners could meddle with the transactions given their role in the process, bad behaviour is restricted by the incentive of reward for honest work, the challenging nature of solving the cryptographic puzzles, and the immense effort required to add incorrect data to the blockchain.

Users’ identities are protected by the “keys” that are connected to their accounts, and those keys are nearly impossible to trace to an individual. Cryptocurrency wallets store the public and private keys that are used to receive or spend the currency. A private key is used to contribute to the public ledger, which effectively spends the currency. A public key makes it possible for others to send currency to an individual’s wallet. Because of how secure the transactions are and how protected the identities of users are, once someone has spent their cryptocurrency on something or sent it to someone, that’s it – it’s gone. No one except the intended recipient can use it. Transactions are irreversible, pseudonymous, fast, secure, and do not require permission from anyone to participate in.

In terms of their monetary properties, cryptocurrencies such as Bitcoin are as real as bricks of gold. Additionally, they are characterised by a controlled supply. Most limit the supply of their currency, such as Bitcoin, where the supply is expected to reach its end sometime in the next 150 years. This also causes mining to become less profitable as it becomes more popular over time, as the number of currency units in circulation is limited and the number of miners increases with the popularity of a currency.

What can you do with cryptocurrency?

It used to be relatively challenging to practically make use of one’s cryptocurrency, but Bitcoin has made strides in this area and is accepted as a form of payment in many online and offline retailers. Businesses such as hotels, airlines and restaurants accept it as payment, and Apple has authorised at least ten cryptocurrencies as forms of payment on its App Store. Bitcasino is the world’s number one licensed Bitcoin casino and makes using your cryptocurrency fun while increasing your chances of earning more. Sign up today to start winning!

Many choose to invest in cryptocurrencies rather than acquire and spend them, and many have seen incredible payoffs by doing so. While the investment is risky due to the inherently unregulated nature of the currencies, policies around them in some areas may cause their value to fluctuate.

As mentioned above, mining is another way that individuals participate in the world of cryptocurrency. If you want to acquire currency, then mining is one way to do this. Mining itself is an investment, particularly with more popular currencies such as Bitcoin that have more individuals attempting to solve the transactional puzzles first. The technology required to effectively mine a cryptocurrency such as this includes an industrial-grade mining hardware. The cost does not end with the purchase of the hardware, but instead continues with electrical bills resulting from its use. However, this degree of investment is the way to achieve profitability in mining through successfully solving the cryptographic puzzles before anyone else and earning more payment in exchange for your services.

Want to get started with cryptocurrency?

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Words: Sean Mcnulty
Images: PA

How cryptocurrency works