Blockchain for beginners. How do cryptocurrencies work?

Everyone has heard about cryptocurrencies, but still few people can explain what they really are. In times of volatile financial markets and low rates of some currencies, investors are more interested in cryptocurrencies. If you haven’t learned about cryptography yet, nothing is lost! After reading the article below, cryptocurrencies will no longer be a mystery to you. 

Cryptocurrency – what is it? 

Cryptocurrencies are invariably a controversial topic. Cryptocurrency enthusiasts or people who have made big profits from investing in cryptocurrencies see them as the currency of the future. Skeptics see them as speculation and pyramid schemes. Today, with no shortage of turmoil in the financial markets, many people are showing more interest in the topic of crypto.

Cryptocurrencies can be called digital money because they do not have a physical form and can have a payment function. They have a certain value, so you can use them like virtual money and buy certain goods or services with them. Cryptocurrency is not (as some mistakenly claim) a virtual currency, but only a variation of it. Virtual currencies are also other contractual units that can be exchanged for “regular” money. Although cryptocurrencies can be used like money, they are most often used as an investment as a payment. Buying and selling takes place mainly on the cryptocurrency exchange. 

How was Bitcoin created?

In 2008, under the pseudonym Satoshi Nakamoto, he published a manifesto titled “Bitcoin: A Peer-to-Peer Electronic Money System”. Nakamoto described the principles of operation of bitcoin, a cryptocurrency based on blockchain technology. This is how the Bitcoin (BTC) cryptocurrency was created.

The first bitcoin block “Genesis” was created at the very beginning of 2009, and this year is considered the birth of the blockchain and bitcoin. The highest bitcoin value in history was recorded 10 years later, when bitcoin also became more popular. Today bitcoin and cryptocurrencies are in languages ​​all over the world. 

A few words about blockchain technology

The concept of cryptocurrency and bitcoin is inextricably linked with another, for many, mysterious-sounding concept – blockchain. In a literal translation, which describes the essence of the blockchain very well, it is a blockchain.

So what is blockchain? It is a technology that allows you to securely store information using a cryptography-based chain. Simply put, blockchain is a technology used to collect data. This decentralized database is also known as distributed ledger technology.

Blockchain is an open ledger for everyone. Data is placed in structures called blocks, which is why blockchain technology is called “blockchain”. The chain consists of interconnected blocks, each of which is built on the basis of the previous block and contains information linking it to the next one. Each block contains data.

Data is added to the registry according to certain rules, and each entry is linked to the previous one. A characteristic feature of the blockchain is that once the data has been entered into the chain, it cannot be deleted or changed.

The Bitcoin coin looks cool, but of course it’s just a marketing element.

 How do cryptocurrencies work? 

Cryptocurrencies do not exist physically, only in virtual form. They are an expression of the workings of free market mechanisms, since the price of most cryptocurrencies determines the current supply and demand. What is typical for cryptocurrencies is a decentralized system based on the blockchain. How it works? Virtual transactions are verified and then grouped into blocks and encrypted. Blocks encrypted with cryptography are attached to an already existing chain. Thus, new blocks are formed, and with them new units of cryptocurrency. The process itself is called cryptocurrency mining , and the miners are rewarded with newly created units of cryptocurrency.  

Are cryptocurrency transactions safe? Since the whole process takes place in a decentralized database, there are no intermediaries such as a bank, which prevents the currency from being counterfeited. Funds flow directly between the participants in the transaction, between their virtual wallets. The entire network oversees such transactions as their key data is entered into a public ledger.

Most Popular Cryptocurrencies

The aforementioned bitcoin (BTC) is known to everyone, but 13 years have passed since its inception (!) During this time, many new cryptocurrencies were born and strengthened their positions in the market. Others are still emerging, although not all of them will be able to survive and grow stronger. Each new cryptocurrency stands out in some way. Ethereum (ETH) is currently in a high uptrend and has been rising steadily since its introduction in 2015. Originally used on the Bitcoin network, Liteoin has become independent enough to currently be faster than Bitcoin. Other popular cryptocurrencies at the moment include Ripple XRP, NEO and IOTA.  

What is cryptocurrency mining?

The term “cryptocurrency mining” should not be taken too literally. Physically, digging in the usual sense of the word does not occur. This term is simply an analogy to the original meaning of the word “digging”, associated with the extraction of ores, minerals or other valuable resources. People who mine cryptocurrencies, i.e. miners do it with the help of miners (cryptominers). A cryptocurrency excavator is nothing more than a very efficient computer hardware, a machine with high computing power, thanks to which complex cryptographic (hash) problems can be solved. The computation of the task allows the new block to join the cryptocurrency network on the blockchain. The reward to the miner for joining a new block to the network is a certain number of cryptocurrencies. 

A cryptocurrency excavator consumes a huge amount of electricity during operation, therefore, at high electricity prices, mining cryptocurrencies at home is unprofitable. Today, the mining of cryptocurrencies is mainly carried out by large enterprises that specialize in this.

Invest or not?

The question of whether investing in cryptocurrencies is a good idea can be answered: it depends on the circumstances. It depends on who and what cryptocurrency they want to invest in. Cryptocurrency technology undoubtedly shows great potential for development, and the share of transactions based on blockchain technology in the market is growing. To effectively navigate the crypto market, you need to have some knowledge. To invest, it is worth learning a little in the beginning and thoroughly studying the topic of crypto and investing. The potential profit in the case of crypto is much greater than, for example, with the traditional placement of money in a bank.

There are many types of cryptocurrencies, but not all of them are stable, so it is wise to invest in the strongest and most famous cryptocurrencies in the beginning, such as the most popular Bitcoin or Ethereum. However, investing in cryptocurrencies that are new to the market can be risky. Not every new cryptocurrency will eventually prove strong enough to hold and rise in value. In addition, cryptocurrencies entering the market tend to have a low value.