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Cryptocurrency is a form of virtual currency, created and stored electronically. It is not centrally controlled, and it is not tangible; instead, cryptocurrency is created by people and businesses through software that solves complicated mathematical problems.
One of cryptocurrencies’ most distinguishing characteristics is that it’s entirely decentralised. This means that its network is not controlled by any one institution. Thus no banks, business owners or third parties can manage it.
Cryptocurrency is protected by cryptography, which makes it incredibly secure and almost impossible to hack or use in fraudulent transactions.
An altcoin is any other cryptocurrency than Bitcoin. It is based on blockchain technology and shares certain similarities to Bitcoin, but it may have different algorithm, purpose, mining process etc.
It is nothing like the physical wallet. Instead, it is a software program that enables users to store digital currency on blockchain technology and claim their ownership of the coins. They allow users to send and receive digital currency, as well as to monitor their balance.
A cryptocurrency exchange is a business which allows customers and holders of a range of digital currencies to trade them for other assets.
The public key provides an address (a long number combination) and is visible to all members of the peer-to-peer network. This is a number that other members will use to send a transaction to and which a user would have to provide if you want to receive a transfer from another user.
The private key is what must be kept secret at all times. The combination of both keys is required as a signature on a message that is attached to a transaction. If a user loses a private key, they will also lose all funds, and they will not be able to get them back! To be able to unlock a transaction, both private and public key have to match each other.
Initial Coin Offering is a newly emerged concept of crowdfunding projects in the cryptocurrency and blockchain-based industries. A company can release its cryptocurrency (usually in a limited amount) and sells to the audience who wants to invest in a particular project. The cryptocurrency is released in the form of tokens, which later can be exchanged for other cryptocoins of fiat money. As a result, the company acquires the capital to fund the project, and it can invest in a further product development. In return, whoever has decided to spend, get the crypto tokens’ share, and they become the complete owners of these tokens.
ICOs are often used to fund the development of new cryptocurrencies or projects that will work with the blockchain technology as a backbone. Though, it doesn’t mean ICOs cannot be used for anything else – the owner of a project can exchange gathered tokens for fiat money and invest in something tangible. ICOs’ tokens can be either purchased directly from the crowdfunding platform or an exchange. Most tokens are available for sale on exchanges and can be traded just like Bitcoin.
A blockchain is a digitised, decentralised, public ledger of all cryptocurrency transactions. Steadily growing as ‘completed’ blocks (the most recent operations) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically.
Originally developed as the accounting method for the virtual currency Bitcoin, blockchains – which use what’s known as distributed ledger technology (DLT) – are appearing in a variety of commercial applications today.
Currently, the technology is primarily used to verify transactions, within digital currencies though it is possible to digitise, code and insert practically any document into the blockchain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralised authority.
Bitcoin is a form of cryptocurrency, created and held electronically. No one controls it. Bitcoins are not printed, like dollars or euros – they are produced by lots of people running computers all around the world, using software that solves mathematical problems. Bitcoin is based on blockchain technology.
Bitcoin transactions occur between electronic Bitcoin wallets and are digitally verified and signed for security. Thanks to the massive public ledger called the blockchain, users are aware of all transactions, and its history and when bitcoins were generated can be tracked.
A transaction has three pieces of information:
- The amount of Bitcoin, a user, wants to send.
- The recipient’s wallet address generated randomly and consisted of a sequence of letters and numbers – this is where funds are sent.
- A private key, which is also a unique sequence of numbers and letters exclusively available to you. This key will allow an access your wallet.
Once a transaction is set up, it makes its way into the Bitcoin network where it awaits verification. Through the process of mining, miners use software to solve mathematical problems. Once completed, the transaction successfully moves into the blockchain.
Bitcoin has a strong track record for security and privacy, thanks to its protocol and cryptography. With private keys, individuals’ wallets are kept secure. The only way this would not be true is if a user loses this information. Thus, the primary party that is responsible for Bitcoin is a user by keeping safe a private key and using a secure wallet.
Bitcoin transactions are not tied to any personal information which allows users to protect their privacy. However, since all Bitcoin transactions are publicly known and permanently stored on the blockchain, other users can see the activity associated with a particular wallet address — hence not being 100% anonymous. It is highly recommended to only use Bitcoin addresses once to avoid an identity being revealed either through a specific purchase or other means.
There are a few options to acquire Bitcoins:
- Online Exchanges and Wallets – There is a variety of exchanges and wallets available online. Many exchanges and wallets will store amounts of digital and/or fiat currency – a lot like a regular bank account. Some of the most popular ones are Coinbase, Bitfinex and BitPanda, where users can buy Bitcoins or any other cryptocurrency, and transfer it to a wallet.
- LocalBitcoins.com – It is a direct seller-to-buyer cryptocurrency exchange, where individuals sell Bitcoin in a local area. It’s easy. Users can enter the amount they wish to acquire, send the trade request and send a payment to the seller.
- Face to Face – There is also an option of getting bitcoins in person. It is one of the most anonymous ways of buying bitcoins, and it avoids banks. Customers can acquire Bitcoin via a face-to-face transaction with a local seller.
- Selling Goods in Exchange for Bitcoin – Similar to barter trade, individuals can exchange goods for Bitcoin.
- Bitcoin ATM – Bitcoin can be withdrawn or deposited using Bitcoin ATMs.
Mining – Individuals also be awarded bitcoins as a miner—once they verify transactions and add them to the public ledger, also known as the blockchain, users will be given bitcoins for their contribution.
Depending on the chosen method of Buying Bitcoin, it can be purchased with cash, bank card, bank wire transfer, Skrill, Neteller or another cryptocurrency. Fees vary depending on a method, with a credit/debit card being usually the most expensive option.
There are three main ways to sell Bitcoin:
- Direct Trade — The first method involves a direct trade with another person, or using an intermediary to enable the transaction, such as LocalBitcoins.com.
- Exchanges — Use an online exchange to trade into their preferred currency, instead of another individual, to sell bitcoins.
Peer-to-Peer Trading— This method allows Bitcoin owners to sell their bitcoins for goods by selling them to individuals who wish to acquire cryptocurrency.
Bitcoin mining primarily involves adding previous Bitcoin transaction records to the blockchain. People involved are called miners; their job is to confirm the transactions to the network by solving a mathematical problem using software, as well as work towards using the blockchain to distinguish legitimate operations and ensure that double spending does not occur. Double spending is when the same Bitcoins have been used twice.
The primary goal of mining is to ensure security within the Bitcoin network. As a secondary goal, mining is also used to introduce Bitcoins into the system. As an incentive, miners get paid in Bitcoin for their services.
To confirm the transaction and enter a block into a blockchain, a miner has to provide an answer, or proof, to a specific challenge – otherwise known as a proof-of-work (PoW). The puzzle is a sophisticated mathematical algorithm which difficulty rises or decreases depending on the solving time. The transaction should be solved within few minutes and miners should never exceed that time frame. The process is completed by a specific software and powerful GPUs or ASICs.
Proof-of-stake is an algorithm but it’s an alternative way to validate transactions – the goal is the same, but the process of getting there is different. Unlike PoW, where solving an algorithm rewards miners with new cryptocoins, PoS chooses a new block creator in a deterministic (pseudo-random) way – depending on its wealth (stake). Because there are no block rewards, miners only take the transaction fees. This is why, PoS system miners are called forgers, instead of miners. Same way, mining is called minting.
Bitcoin has not been made illegal by legislation in most jurisdictions. However, some authorities (such as China and Russia) severely restrict or ban digital currencies. Other jurisdictions (such as Thailand) may limit the licensing of individual entities such as Bitcoin exchanges.
There are many advantages to using Bitcoin, many of which include:
- Quick, Easy and Convenient – sending and receiving bitcoins anywhere in the world at any time in a matter of a few minutes.
- Low Fees – Normally, the fees for Bitcoin transactions are very small. Bitcoin fees can fluctuate due to the volatile market. Also, some wallets also allow paying a fee for a faster confirmation of transactions.
- Secure – When using Bitcoin, users remain in control of their transactions. They are also protected from identity theft since Bitcoin payments can be made without personal information associated with the purchase.
Transparent – All Bitcoin transactions are fully available on the blockchain for anybody to verify and use in real-time.
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