What is Cryptocurrency?
Many turned to Bitcoin as a store of value during the financial uncertainty of the COVID-19 crisis. The sudden growth came as a surprise to many because of Bitcoin's reputation as a volatile and highly speculative asset. Instead, 2020 gave Bitcoin the chance to solidify its position as a safe haven asset and fulfill its role as digital gold.
Now, major corporations, financial institutions, and individuals are adding Bitcoin and other cryptocurrencies to their balance sheets. With all the hype, it is important to understand what cryptocurrencies are and what the future holds.
What is Cryptocurrency?
A cryptocurrency is a form of digital money. Similar to traditional fiat currencies like the US Dollar or Euro, you can exchange cryptocurrency for goods and services wherever they're accepted.
Essentially, cryptocurrencies enable online transactions without the middlemen, like banks, allowing users to make transactions directly with one another - or peer-to-peer. It's designed to work like cash for the Internet, but with the added benefit that they are independent of countries’ monetary policies that can increase inflation or cause depreciation. All day-to-day governance is handled by the algorithm and major decisions are reached through consensus between the computers that run the network.
The "crypto" in cryptocurrency comes from the mathematical field of cryptography, which is used to link transaction blocks to each other so they cannot be counterfeit. Read a more in-depth explanation here.
Blockchain Technology
Cryptocurrencies combine cryptography with a technology called blockchain. There are no central authorities when it comes to cryptocurrencies and blockchains. Instead, a network of computers called nodes monitor all transactions and confirm their validity.
The fact that cryptocurrencies rely on a large network of computers rather than any single institution makes them decentralized.
How Cryptocurrencies are Created
Proof of Work
Bitcoin and the many cryptocurrencies that are based on it mint new coins through a process known as mining. Miners are responsible for grouping transactions into "blocks." As new blocks of transactions are strung together, they create a chain - the blockchain. Other computers, known as validator nodes, double-check the miner's math and if they find it valid they add the block on their copy of the blockchain.
Once a block is added to the chain, it cannot be deleted or changed - blocks are permanent. They cannot be tampered with or erased, and the original order of blocks can never be disrupted. The chain only moves forward in time. This immutability makes cryptocurrencies incredibly secure and nearly impossible to counterfeit.
To add a new block to the chain, miners have to solve a cryptographic puzzle based on the block's transactions and other factors. Depending on the type of cryptocurrency, these puzzles often require specialized computers. Once the puzzle is solved, the miner that got it right broadcasts that they have added the block. Every time a miner adds a new block to the chain, they are rewarded in cryptocurrency. These rewards are how new crypto coins are introduced into the ecosystem. This whole process of mining, checking and adding to the ledger was invented for Bitcoin by its creator, Satoshi Nakamoto, and is known as Proof of Work.
Proof of Stake
There are thousands of different kinds of cryptocurrencies, and many of them work in unique ways. Outside of Bitcoin's Proof of Work mechanism, the other popular method, employed by Ethereum, Solana, and many others, is called Proof of Stake. In this system the protocol has a pre-set number of coins it will release whenever a block gets added to the blockchain. To be eligible to get these coins, you must put up a large amount of crypto as collateral to show you are committed to operating on the network in an honest way. The protocol chooses nodes who have staked this collateral to process blocks and then gives them newly released new coins as a reward. If a staked operator acts dishonestly, they lose their staked coins and whoever discovers their dishonesty is rewarded.
Learn more about Proof of Work and Proof of Stake here.
About Bitcoin
Bitcoin is the world’s first, most popular, and most valuable cryptocurrency. It was launched by an elusive figure known as Satoshi Nakomoto on January 3rd of 2009, and its first transaction occurred on January 12.
The Bitcoin network’s code is designed so that there will only ever be 21 million BTC in existence. Currently, there are about 19 million in circulation and the last bitcoin is expected to be mined in 2140. The fact that there is a limit to the number of bitcoins to exist makes it a scarce resource, but because a single bitcoin can be divided into thousands of smaller denominations - called satoshis or sats - it will continue to be a usable currency even if owning a single bitcoin is prohibitively expensive.
As confidence and trust in Bitcoin grow, demand grows alongside it as more people decide they want to invest. The price of Bitcoin is determined by the economic principles of supply and demand. This means that as demand increases, then the price per BTC is also increases.
Bitcoin is often referred to as digital gold because like gold, it is scarce and needs to be mined - although that mining process does look pretty different.
How to Buy Cryptocurrency
It is essential to research which coins are best suited for your needs before purchasing cryptocurrency. There are thousands of cryptocurrencies available, but the vast majority of them will never be useful or profitable. Fortunately, CoinFlip has whittled down the long list of cryptocurrencies to a handful that we believe offer value and reliability. To learn more about these coins and what makes them useful, click here.
Before purchasing cryptocurrency, you will need to have a crypto wallet. For more information about crypto wallets, check out this article with everything you need to know. You can also get a CoinFlip non-custodial wallet here.
There are numerous ways to purchase cryptocurrency. With CoinFlip, you can buy crypto at one of our Bitcoin ATMs, online with a debit or credit card, or by bank transfer.
Another advantage to buying with CoinFlip is 24/7 support. If you get confused about any aspect of purchasing or selling crypto, give us a call or text.
The Future of Cryptocurrency
Cryptocurrency and blockchain technology have the potential to revolutionize the way we do banking. These new technologies help streamline transactions, reduce the risk of fraud, and create more equitable financial systems.
The peer-to-peer nature of cryptocurrency can drastically reduce the costs associated with traditional financial services, like bank fees, and makes space for the creation of innovative new financial products. However, as a relatively new technology, cryptocurrencies are still just getting started.
While the cryptocurrencies like Bitcoin continue to become more popular, the technology behind them will be developed further for new purposes and applications. Games, social networks, and art are already being developed alongside a suite of decentralized finance applications. What cryptocurrency has already shown is that blockchain has many uses in our digital world, which is likely not going away. New crypto and blockchain companies pop up every day in the financial technology sector. Many believe that cryptocurrency and the technology behind it are some of the most incredible advances in technology to happen in our lifetime and will play a massive role in shaping the future.
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