Cryptocurrency 101 - Part 1/3 - The Basics

What is a Cryptocurrency?

A cryptocurrency is essentially an alternative virtual currency that can be used to buy and sell goods and services in the same way as a traditional “fiat” currency. Transactions are made via a secure encrypted channel to transfer money between virtual “wallets”, without needing to go through a traditional bank or credit card provider.

Cryptocurrencies make it easier to transfer funds between two parties in transactions; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, enabling users to avoid the steep fees charged by most banks and financial institutions for wire transfers.

How it works

Cryptocurrencies are a bit different to traditional currencies. They offer a “decentralized” medium of exchange, which means that they derive their value from their community of users, unlike traditional currencies that are controlled by central banks and government regulation. This means that the value can fluctuate a lot more like a stock or commodity, dependent on the amount of supply and demand for that currency.

What gives them their value?

They have value because they are scarce, fungible (one Bitcoin is as good as another), easily transferred, and easily verified. The only other component they need to have value is a general agreement that they will be used as a medium of exchange or a prevailing belief that they will be in the future. It is the variation in these two factors that accounts for most of the volatility in the value of Bitcoins today.

They aren’t backed by anything because they’re a commodity. What is gold backed by?

Prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another.

Advantages of Cryptocurrency

1. Land of the Free

With cryptocurrency, you can access your money anywhere you go. Since it is a currency that exists online, there isn’t any inflation or deflation to account for in exchange rates across countries. You are free to fly across borders without worrying about bank holidays or extortionate credit card transaction fees.

2. Safe n’ Secure

Your personal information is kept highly secure with cryptocurrencies. Fraud is rendered impossible because of the irreversible nature of crypto payments. This protects you from risks including identity theft and personal information leakage.

History of Cryptocurrency

The first cryptocurrency was Bitcoin. Bitcoin was created in 2009 by a pseudonymous developer named Satoshi Nakamoto. Bitcoin uses SHA-256, which is a set of cryptographic hash functions designed by the U.S National Security Agency. Bitcoin is a cryptocurrency that is based on the proof-of-work system.

Sources

• http://bitcoin.stackexchange.com/q/182/30316
• http://www.investopedia.com/financial-edge/0212/bitcoin-may-be-the-currency-of-the-future.aspx

This article originally appeared on lightrains.com