Cryptocurrencies are a digital asset that are designed to function as a medium of exchange, using cryptography to protect the transactions. Essentially, cryptocurrencies can be classified as subsets of digital currencies, virtual currencies and alternative currencies. You’ve probably already heard of Bitcoin. It was the very first decentralised cryptocurrency and was designed by Satoshi Nakomoto in 2009. Since Bitcoin's inception, more than 900 cryptocurrencies have been created.
So how do these cryptocurrencies work?
Cryptocurrencies make use of decentralised technology, which lets users store money as well as make secure payments. The best part about this is that users neither need to use their names nor go through a bank.
Cryptocurrencies run on blockchain. It is a distributed public ledger where a record of all the currency holders and their updated transactions are held. Each unit of cryptocurrency is created through something called mining. This particular process involves using the power of the computer to solve complex maths problems. This is what generates the coins.
Users also have the option to buy these currencies from various brokers. They can store them and spend them using their cryptographic wallets.
What happens when you create a new wallet?
If you haven’t bought cryptocurrencies before, then you’ll need to create a wallet first. When you do that, you’ll create a cryptographic key pair – a public and a private key. The public key functions like your address, like a bank account number where people can then send money to. On the other hand, the private key is a password. It is used to prove that you’re the owner of the address.
Most of the cryptocurrencies are highly divisible. They can be broken into very small units. So even if you own a single unit, let’s say 1 Bitcoin (BTC), you can break it down further and use the smaller units. 1 BTC can be broken down and spent in units as small as 100 millionth of a single coin.
Where to buy cryptocurrencies?
As mentioned earlier, you can buy cryptocurrencies online from brokers. Most of these brokers have multiple cryptocurrencies like BTC, Litecoin, Ethereum, Ripple and Dash, just to name a few. You need to look at their selling rates to determine how much each cryptocurrency will cost you. Since they are brokers, they will charge a fee. So you can compare a couple of brokers before you buy.
Buying and selling cryptocurrencies is much like trading in the stock market. You need to research about each one in detail before you decide to start investing in them.
They have become very popular because they are secure and also offer a level of anonymity. Cryptocurrency transactions can neither be faked nor reversed. The fees associated with transacting via cryptocurrencies are also quite low. Hence, they have proven to be more reliable than conventional currency. Due to its decentralised nature, these currencies are available to everyone.
Since cryptocurrencies are a new form of cash, the cryptocurrency markets have taken off over night. A small investment can become a huge sum. But this market is volatile. So it works the other way as well.