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Cryptocurrency is an encrypted, decentralized digital currency transferred between peers and confirmed in a public ledger via a process known as mining.
Below, we take a simplified look at how cryptocurrencies like bitcoin work. First, lets review the basics and essentials of cryptocurrency, and then we will do an overview of the other properties that have made cryptocurrency what it is today.
TIP: If the page below feels overwhelming, please see: how does cryptocurrency work (for beginners). Meanwhile, if you are mainly interested in trading, investing in, or using cryptocurrency, see how to trade cryptocurrency (for beginners). This page provides an overview of the mechanics behind cryptocurrency.
To understand how cryptocurrency works, youll need to learn a few basic concepts. Specifically:
Public Ledgers: All confirmed transactions from the start of a cryptocurrencys creation are stored in a public ledger. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding digital wallets can calculate an accurate spendable balance. Also, new transactions can be checked to ensure that each transaction uses only coins currently owned by the spender. Bitcoin calls this public ledger a transaction block chain.
Transactions: A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation. Wallets use an encrypted electronic signature when a transaction is made. The signature is an encrypted piece of data called a cryptographic signature and it provides a mathematical proof that the transaction came from the owner of the wallet. The confirmation process takes a bit of time (ten minutes for bitcoin) while miners mine. Mining confirms the transactions and adds them to the public ledger.
Mining:Mining is the process of confirming transactionsand adding them to a public ledger. To add a transaction to the ledger, the miner must solve an increasingly-complex computational problem (like a mathematical puzzle). Mining is open source so that anyone can confirm the transaction. The first miner to solve the puzzle adds a block of transactions to the ledger. The way in which transactions, blocks, and the public blockchain ledger work together ensure that no one individual can easily add or change a block at will. Once a block is added to the ledger, all correlating transactions are permanent, and they add a small transaction fee to the miners wallet (along with newly created coins). The mining process is what gives value to the coins and is known as aproof-of-work system.
Although there can be exceptions to the rule, there are some factors (beyond the basics above) that make cryptocurrency so different from the financial systems of the past:
Adaptive Scaling: Adaptive scaling means that cryptocurrencies are built with measures to ensure that they will work well in both large and small scales.
Adaptive Scaling Example:Bitcoin is programmed to allow for one transaction block to be mined approximately every ten minutes. The algorithm adjusts after every 2016 blocks (theoretically, thats every two weeks) to get easier or harder based on how long it took for those 2016 blocks to be mined. So if it only took 13 days for the network to mine 2016 blocks, that means its too easy to mine, so the difficulty increases. However, if it takes 15 days for the network to mine 2016 blocks, that shows that its too hard to mind, so the difficulty decreases.
Other measures are included in digital coins to allow for adaptive scaling including limiting the supply over time (to create scarcity) and reducing the reward for mining as more total coins are mined.
Cryptographic: Cryptocurrency uses a system of cryptography (AKA encryption) to control the creation of coins and to verify transactions.
Decentralized: Most currencies in circulation are controlled by a centralized government so their creation can be regulated by a third party. Cryptocurrencys creation and transactions are open source, controlled by code, and rely on peer-to-peer networks. There is no single entity that can affect the currency.
Digital: Traditional forms of currency are defined by a physical object (USD existing as paper money and in its early years being backed by gold for example), but cryptocurrency is all digital. Digital coins are stored in digital wallets and transferred digitally to other peoples digital wallets. No physical object ever exists.
Open Source: Cryptocurrencies are typically open source. That means that developers can create APIs without paying a fee and anyone can use or join the network.
Proof-of-work: Most cryptocurrencies use a proof-of-work system. Aproof-of-work schemeuses a hard-to-compute but easy-to-verify computational puzzle to limit exploitation of cryptocurrency mining. Essentially, its similar to a difficult to solve captcha that requires lots of computing power. NOTE: Other systems like proof-of-work (such as proof-of-stake) are also used.
Pseudonymity: Owners of cryptocurrency keep their digital coins in an encrypted digital wallet. A coin-holders identification is stored in an encrypted address that they have control over it is not attached to a persons identity. The connection between you and your coins ispseudonymous rather than anonymousas ledgers are open to the public (and thus, the ledgers could be used to glean information about groups of individuals in the network).
Value: For something to be an effective currency, it has to have value. The US dollar used to represent actual gold. The gold was scarce and required work to mine and refine, so the scarcity and work gave the gold value. This, in turn, gave the US dollar value.
Cryptocurrency works similarly regarding value. In cryptocurrency, coins (which are nothing more than publicly agreed on records of ownership) are generated or produced by miners. These miners are people who run programs on specialized hardware made specifically to solve proof-of-work puzzles. The work behind mining coins gives them value, while the scarcity of coins and demand for them causes their value to fluctuate. The idea of work giving value to currency is called a proof-of-work system. The other method for validating coins is called proof-of-stake. Value is also created when transactions are added to public ledgers as creating a verified transaction block takes work as well. Further, value comes from factors such as utility and supply and demand.
If at this point, you feel a little bit confused,dont worry and dont give up.Understanding the concepts that are fundamental to cryptocurrency is a challenge. One explanation works for some people, and a different explanation works of others. We all learn in different ways.
The trick with cryptocurrency is not getting worried if you dont understand it at first each new video, explanation, or article that you learn from will make your understanding of cryptocurrency clearer until, eventually, it clicks.
To learn more, visit some of the other, more technical pages on our site to dive deeper into the inner-workings of cryptocurrency. You can also watch informational videos about the how cryptocurrency works such as the one below.
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Great introduction to the cryptocurrency world!
I feel much more informed thought it was explained with honesty
Can anybody please Help Me in investing in bitcoin
If you ask a question like that, then your best bet is to stop posting online and go directly to Coinbase. They are a beginner friendly platform. If you go around the internet saying Help Me invest in bitcoin you are very likely to catch some bad advice 🙂
Our site is meant to help answer any questions, type them in the search bar, or do a Google search with our site name, or, like I said, go sign up for Coinbase.
But what is it used for? Can you buy and sell things with these currencies? Can it be used at Walmart? All these simple-minded questions are not explained in the article. We need a crypto currency for dummies approach.
Thanks for the insight. I will write up a page on that and link it above.
Cryptocurrency cant currently be used at Walmart, but we might get there some day (perhaps with Amazon first).
It works a lot like a mix between PayPal and Western Union, in that it is an electronic payment system and a way to transfer money around the globe. Mainly it is used to store wealth, transfer funds, and for peer-to-peer transactions (such as online services) at the moment. That said, Ill create more complete answer in a ultra simple cryptocurrency for beginners guide soon.
Are these wallets transferable money to your bank account or is this something used strictly on buying merchandise?
How do you use a cold wallet? How would u get your coins to be cashed to your bank account?
You need a broker like Coinbase to trade between fiat and cryptocurrency (or you can use an exchange like GDAX). It can differ by country.
Both of those allow you to deposit money from your bank account, trade fiat like the US Dollar (USD) for Bitcoin, trade Bitcoin for other cryptos like Ether, and then trade back to USD, and then to deposit fiat back to your bank account.
Hello, I am an independent physicist living in Mexico. During my investigation into the cosmos and the subatomic world. I have discovered the universal constant it is a previously unknown measure. Within this constant, theres a hidden system of math and code that runs every aspect of the universe including you and me. This system can calculate, process and perform infinite amounts of information in fractions of a second. It is completely Unbreakable and provides its own security. It is the only possible solution to the problem in cryptocurrencies. Only I have this code I discovered it and nobody else knows about it. Im interested obviously in implementing this code into a working solution for the cryptocurrencies. Might you be interested with your contacts to helping me achieve this goal?
That is awesome. If even half of what you say is half true it would be a pleasure to hear your theory.
Really good point. So there are a few online retailers who accept crypto probably being the best example).
However, at the moment it is mostly used for peer-to-peer, value store, big ticket items, etc.
Well need to see more adoption by the general public before we see crypto being common in day-to-day transactions. Likely what will happen is companies like Square and PayPal will continue to integrate crypto payment options (Square is already flirting with this). Then well see more retailers like Overstock (as I said Amazon has potential given their history in adopting innovative tech).
It helps to put aside the volatile of the market and focus on the usefulness of cryptocurrency transactions when trying to envision the future of its use as a supplementary payment system.
The cash value of Bitcoin, like any other asset, is relative to other values.
So I can give you the value in US dollars, it is roughly $8.5k right now. I can give you the value in Gold Bars, it is about 6.5. I can give you the value in Korean Won or Chinese Yuan or whatever. We can talk about the purchasing power of a Bitcoin, or what we can trade it for.
Its fine to feel confused at this point right? Would you mind to explain this to a person living in third World. Tip with third worlders, giving incentives works fastest.
Being confused is normal. It takes a good deal of time and effort to wrap your head around the digital ledger of transactions known as block chain (that digital ledger is the most important aspect to understand).
What is Bitcoin? In simple terms, it is a public digital ledger of transactions secured by cryptography where you store passwords that relate back to Bitcoins accounted for on the ledger. When you want to send or receive bitcoin, you simply add that transaction to the digital ledger. The way the ledger is secured and distributed is a little complex, but in general the answer is via cryptography and by the ledger being distributed to many users. Thus consensus and cryptographic puzzles ensure the system.
There is only one world, first, second, and third ones. 🙂 Cryptocurrency is meant to be a peer-to-peer global currency. It doesnt rank people based on where they live, it is blind to that sort of thing.
There is no such thing as easy money. Averaging into small positions in the top coins, especially when the market is down is the best way to grow your wealth. Dont go chasing too-good-to-be-true pyramid schemes that promise quick returns if you lock your money up. Those scams tend to prey on people from countries where poverty rates are higher. Want to take a good bet, buy Bitcoin low, sell Bitcoin a little higher, on average, over time. In times when the value in your native fiat currency is low, consider holding. One day it could all go away, until then it has a history of recovering to new heights. Dont get overly emotional about the day to day. Dont invest more than you can afford to use.
To become not confused itll take some work. Have fun researching crypto assets and block chain, charts, markets, and investing strategies. The more you know, the better youll be able to navigate the crypto space.
Do your own investing. Never let someone else invest your money for you. Crypto is all about the user being in the drivers seat. Of course people want to hold your Bitcoin for you would you not want to hold someone elses? Dont fall for that. You hold your Bitcoin, you hold your wallet, and never share your private keys!
Im going to work on a super simple guide to crypto assets like Bitcoin next week. Any questions people have just list them below and Ill make sure to cover them.
Is it like investing? Will the value of the Bitcoin grow or can the market crash and you could lose everything?
Is there an app you can recommend for trading?
It is like investing in stocks where the top coins are blue chips and alts are penny stocks. Also a little like Forex (foreign exchange currency trading) where it is a cut throat 24 hour global market.
A normal person would want to dollar cost average into a few top coins like Bitcoin, Ether, Litecoin, Ripple, Dash, Monero (do your own research). Ideally they would wait for retractions and then buy, but thus far there has really been no wrong to average into a long term position.
Someone who wants to take risks would learn to read charts and follow the news and look for good buying opportunities in alts, trading BTC, ETH, and Tether (USDT) for alts on a major exchange.
For trading I would always start with Coinbase/GDAX (if you live in a country where this is an option). If you cant, I think Bittrex, Changelly, Shapeshift, and Binanace are all solid choices for obtaining coins before moving them to a wallet (although there are risks to any exchange that should be researched and considered and there are risks associated with different wallet types). Coinbase/GDAX keeps everything simple, so its a great starting point if you can use it (if not, look for a similar product in your region).
TIP: If you Google cryptocurrency exchange / wallet in X where X is your nation, youll likely get pointed in the right direction reading through the first few listings.
The thing to consider here is that there is a lot of risk and a lack of regulation with trading crypto. So you want to keep most of your coins in cold storage in a wallet (check out Trezor or a paper wallet for example) or, an insured wallet like Coinbase (perhaps even in their vault).
A conservative trader will invest about 1% of their investable income in crypto over time (not all it once) if they want to start their journey (but of course many end up going deeper than that).
Because things are volatile, it makes a lot of sense to average in slowly and cautiously, doing research, and making very small trades at first. Going all-in at the wrong moment can be psychologically difficult. Imagine jumping in right at $5k before Bitcoin fell to $3k, or jumping in at $7.9k before it fell to $5.5k. It isnt like it didnt come back, it is only that a big play for a newcomer can leave them spooked. You dont need to learn lessons the hard way. Average in over a year (or at least a few months) with 1% of your investable funds, learn about stops and trading pairs, and then when you are ready, at that point take the next step.
There is a lot to learn, a lot that can go right, and a lot that can go wrong.
Dont be scared off from crypto and not join the party, but do enter cautiously and conservativly to avoid the pitfalls.
Happy to answer any questions or offer insight.
PS. Yes the market could crash and you could lose a lot. I really dont think the value will ever go to zero on Bitcoin or the other top coins but it could over time on some random alts down the list (by coin market cap make sure to use coin market cap
PPS. Stay away from coins that ask you to lend them money and get referrals in return for increased payouts (the structure that some refer to as a Ponzi scheme; these prey on new users by offering them the moon in exchange for their coins or fiat). I only suggest investing directly in top cryptos like Bitcoin, Ether, Litecoin, etc as a new user, and I always suggest using the top broker / wallet / exchange (so in the, Coinbase/GDAX). Also, while Bitcoin Cash and Bitcoin Gold are valid coins, dont mistake them for being Bitcoin, they are hard forks (they are their own coins). Likewise, although Tether and Bitconnect are top coins, they arent just cryptos so dont treat them as equal types of investments. A little research can pay off a lot, dont impluse buy something you havent researched fully!
There are over 50k ewallet holders in Uganda. Bitcoin is routinely traded via platforms like BitPesa that converts crypto to fiat like Ugx and Kes. Conclusion: someone in the Third World is way ahead in this game already!
Hi! Am from Nigerialets talk about the E-wallet thingdont think we have any here yet thanks
Cryptocurrency wallets are universal. Anyone with an internet connection can download Bitcoin Core or buy a TREZOR wallet for example. Meanwhile, if you want a custodial wallet service, then you have to find one that services your region.
Im still confused,i need to watch it a couple of times before ill grasp it?Maybe?
To say the least. It takes a good deal of thinking and research to fully wrap your head around cryptocurrency. Im going to work on a simpler guide and will post it above.
What if have Bitcoin and want to buy or sell to someone who uses a different crypto currency. is Bitcoin transferable ?
No. You cannot and should not send Bitcoin to any address other than a Bitcoin address (this includes Bitcoin Gold, Bitcoin Cash, i.e. any hard forks). You would have to use Changelly (or ShapeShift) or an exchange to convert it into the other crypto, or they would have to have a Bitcoin address and accept your Bitcoin.
I dont like anything that offers anything that isnt honest pay for a hard days work. So I generally avoid any incentive-based structure without tons of research first. I dont want to comment on a service I havent used. My first sniff test is to see if the domain is blocked by Google. The second is to do tons of research. They pass the first test, I havent done enough research to comment further on this one. 😉
How does cryptocurrency differ from credit cards?
One is bank credit accounted for by the bank, the other is cryptocurrency accounted for on a decentralized, encrypted, public digital ledger.
Fundamentally not so different. Very different in terms of specifics.
Bank credit is ultimately backed by the state, cryptocurrency is backed by an algorithm.
Your credit card charges you interest, but you can spend money you dont have. Your crypto generally goes up in value over time like a volatile stock, but you have to obtain it using your own capital (or trade it for goods and services).
If someone steals your credit card, you call the fraud department and the bank fixes it. If someone steals your crypto, you lose it. This is why I like Coinbase, they are essentially the closest thing you can get to a bank with crypto at the moment.
still does not explain the critical things of how do you buy in and how do you convert currency like dollars out of it when required
We cover that elsewhere on the site, for example here:
Thanks for saying something though, I added that link toward the top of the page for people to check out.
The digital signature accoded to the individual, how is it developed? Is it a system based address like MAC address?
It is sort of like a MAC address. When you generate a wallet you get a public address that coins can be sent to and from and a private key that allows you to access the wallet (which stores your public address and allows you to send/receive a given crypto). You share the public address and transactions that uses it are recorded on the public ledger, but you dont share your private keys.
I still dont understand why a computer generated number is valued so highly.
Its a store of value with a system of encryption and accounting behind it. Its a digital payment system that allows people to transfer large or small amounts of money across the globe using a peer-to-peer payment system. It gives people in any country on the planet a way to obtain and maintain real world value (if they have an internet connection). Someone with no other options can mine or sign up for a faucet site (where you get very small amounts of coins for free). There is work behind it.
The list goes on. That is why it has high value.
Well that and people bid it up on exchanges.
In other words, it has fundamental and intrinsic value, and then it also has the value people are willing to pay for it in the current market based on bidding wars on the exchanges (not just supply and demand, but tactful bidding).
The fundamental value is very exciting in the long term regardless of what happens in the short term, meanwhile the increasing value in the short term is exciting in a different way (but has some inherent risk).
Check out the white paper of this cryptocurrency. I think they may have stolen some of your work.
Yeah I do see that this is the case. I mean as long as they arent using it to rank their website Im not overly upset. Feel like they could have at least offered us some tokens though 😉
I will vet them. As long as they are legit I dont think its a big deal. If they are using it to pull one over on people, then Ill be saying something.
Way over my head but watching this vid 20 times I will get saturation.
That is exactly how I learned about cryptocurrency. Watching videos over and over, reading the same documents over and over, trying to mine, using exchanges, etc. Saturation works. 😉
What do you think about industry specific currencies. I work in healthcare and the idea of a Blockchain based electronic medical record is intriguing to me.
I know we are towing the line between Blockchain and crypto here. But, it does not look like many alt coins are going into the healthcare sector. Thoughts?
Ps thanks for the great explanation and your willingness to interact with so many in the comments. Easily one of the most comprhendable explanations Ive rwad
I think industry specific tech based on crypto tech (like blockchain) is a clear winner. I think related tokens can be hit or miss. If there is a reason to have a token, that is one thing. If a token is just sort of created as an aside but doesnt have any necessary function related to the system, then it is less attractive.
Generally I think there is a ton of potential though.
If it werent for Google translate that would make two of us.
To your point, understanding crypto isnt something that happens over night. It is something you earn over time by putting in some hard work. Its a great hobby, but it takes work to understand how cryptocurrency works 😀
I think it is just a matter of time to its total failure, sorry. I am a computer IT guy, write 4 computer codes and have been involved since 1992, wow. YEAH, well someone will pull the floor out from under us all in time with receivers of all varieties which are particularly sensitive to EMP, as the highly sensitive miniature high frequency transistors and diodes in such equipment are easily destroyed by exposure to high voltage electrical transients. See this article, which pretty much says it all; I wish it wasnt so.
Sure, if that worst of all possible worlds occurs then all digital finance is in a real pickle. But that takes down all the dollars of central banks, the systems that track commodities like gold, etc. Nothing is safe, we are all in deep trouble. So I dont see the problem being unique to crypto.
We can live in fear of the worst cases, or we can not. I say not, but awareness is good. Interesting article either way.
Very well done but I miss the days of the handshake to secure a transaction. My only thought is money laundering and illegal activity, terrorists, cartels, etc, etc. Why give those criminals this solution to do further harm. Who else uses this and for what purpose? Just curious.
The software that handles transactions is better than any handshake. It is a trustless contract that allows any two people to create and execute a transaction with a virtual handshake ensured by the principles of cryptography. Nothing is stopping one from pairing it with a good old physical handshake though.
As for criminals. We cant stop them from forming businesses (unless they have a record), we cant stop them from using dollars, we cant stop them from doing whatever they do (unless the powers that be can use the forces that be to catch them), etc.
Many, but not all, of us would love it if we could create a magical line of code that excluded the worst of criminals from a given digital system. However, this is probably not realistic in any system. It is sort of just a sad aside of any system that there is no perfect solution to. The idea that cryptocurrency should be equated with crime is largely a talking point, criminals can use the internet for crime, they can use a secure phone for crime, they get further in a car than a horse and buggy, they can hurt more people with modern weapons than sabers and muskets still, the rest of us have to evolve, and therefore the worst of us will also have access to the tech. What can one say?
So in 2140 I might be able to buy a GPU for its actual MSRP since mining wont generate profit anymore?
Too confusing and complicated to understandIll stick to the tried and true: greenbacks! and they are accepted all over the world.
Ive spent a lot of time trying to explain cryptocurrency in simple terms and so have other members of our team. It is a little difficult to offer a complete view and a simple view at once.
Cryptocurrency is a bit like email. You send/receive email using addresses and use passwords to access your email. You dont know how it works under the hood, but you dont need to to use email.
Likewise, its like online banking. You send to accounts and use a password to access your account. The bank keeps an electronic digital ledger of your bank credit. You dont know how it all works, but you dont need to to use it.
Want to invest in crypto or use crypto? You dont need to study how it works. Just sign up for coinbase. Want to use it to buy something? Hit the send button. Want to convert it to greenbacks, hit the sell button.
We dont all understand how our trading platform works, but we could figure out how to self manage our 401k in a pinch.
Not everyone knows how PayPal works or Square works, but using the product only takes a little bit of a learning curve.
Cryptocurrency is a new technology, its a bit complex under the hood, but from a user perspective there isnt much more than download the app and hit the buy/sell/send buttons to transfer funds in and out of your account. There was a time when mass adoption of things like the internet, text messages, email, and social media seemed like a pipe dream, but w