So, we should start from the basics and that is defining cryptocurrency –
According to Investopedia – "Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation."
Yes, we know, this does not help you to understand why it is important and how you can benefit from it. That is why we will dedicate the remaining part of this article to explain crypto to you in great detail.
There are thousands of different types of cryptocurrencies available out there. You’ve probably heard of a few – Bitcoin, Ripple, Litecoin, and Ethereum have all been mentioned online and in the news. But what exactly is cryptocurrency?
First thing’s first- let’s break down the word ‘cryptocurrency’. The first part of the word, ‘crypto’, means ‘hidden’ or ‘secret’ to imply the security of the technology used to record who owns what, and for making payments between users.
The second part of the word, ‘currency’ - a type of electronic cash.
But cryptocurrencies aren’t like the cash we carry. They exist electronically and use a peer-to-peer system. More importantly - there is no central bank or government to manage the system or step in if something goes wrong.
Some people find this appealing because they think they have more control over their funds but, there are significant risks. It is important to keep in mind that with no banks or central authority protecting you if your funds are stolen, no one is responsible for helping you get your money back.
As we have already mentioned this currency is decentralized, meaning unlike credit and debit, it’s controlled solely by users and computer algorithms.
Digital coins can be obtained online for dollars, through the exchange of goods and services, or by trading already-obtained cryptocurrencies for other cryptocurrencies. Cryptocurrency transactions are sent using software called cryptocurrency wallets. The person who creates the transaction uses the wallet to transfer balances from one public address to another. Each transaction leads back to a unique set of keystrokes, and whoever owns that passcode owns the amount of cryptocurrency associated with it.
In the simplest terms - a blockchain is a type of database – a collection of electronically stored information or data. Yet a blockchain has many unique features that make it different from a traditional database. It is a blockchain is a series of data ‘blocks’ that are linked together. This chain of blocks creates a shared digital ledger (collection of data) that records the activity and information within the chain. Each blockchain ledger is stored globally across thousands of different servers. This means that anyone on the network can see (and verify) everyone else’s entries. This peer-to-peer and distributed ledger technology, as it’s known, means that it’s nearly impossible to falsify or tamper with data within a block.
Crypto mining is a process in which a machine performs certain tasks to obtain a little bit of cryptocurrency.
Imagine that you have a machine that mines crypto coins. Your PC would perform specific tasks that are required to be able to obtain even the slightest amounts of cryptocurrency. These tasks are called "Proof of Work", and they are designed to create a fair playing field for all the different miners out there.
However, the tasks themselves are math equations. The more miners want to mine one, a specific mining pool - the tougher the equations become. This brings balance to the pool, but it also motivates bigger and stronger machinery usage.
Many more subtle factors come into play while the mining process is happening, but the general idea is that if your device contributes to the “mining”, you’ll get a share of the spoils.
Cloud Mining - a process where you pay someone (most often it’s a big corporation) a specific amount of money and “rent out” their mining machine called a “rig”, and the process of mining itself.
CPU Mining – uses processors to mine cryptocurrencies. It used to be a viable option back in the day, but currently, fewer and fewer people choose this method of how to mine cryptocurrency daily.
GPU Mining – uses graphics cards to mine cryptocurrencies. One standard rig is made out of a processor, a motherboard, cooling, rig frame, and - of course - a few (2 - 8) graphics cards.
ASIC Mining – the best option, but also a controversial one, as it outperforms all others. Application-Specific Integrated Circuits are special devices that are designed explicitly to perform a single task, which in this case is crypto mining.
It actually quite simple - you can use a software-based wallet on your desktop or online wallets that you can access from anywhere. Mobile wallets let you transfer and spend cryptocurrency from your phone. Another option is a hardware wallet, which is a USB device that stores your cryptocurrency keys electronically.
While you probably don’t think your bank account and assets could be frozen, the reality is that this occurs more often than people realize — especially in jurisdictions with dubious rule of law. All it can take is for someone to be accused of financial misconduct or making powerful enemies. When that happens, people can find themselves with little to no access to cash, even if they’ve done nothing wrong.
We hope that this article helps you understand cryptocurrency and how it works a bit better. For types of cryptocurrency and in-depth analysis of how valuable it can be for you make sure you check the EthAnalytics blog.
This is an ever-changing industry that keeps evolving. That is why it is important to keep an eye on all the changes so that you can make the right decisions at the right point in time.