Cryptocurrencies are a multifaceted phenomenon. They are the latest development in financial technology, or FinTech. Many factors are involved in making up the ‘crypto ecosystem’. These factors are:
1 The unit of currency
- A cryptocurrency is a unit of currency that exists on the internet. A ‘digital currency’ if you will. This unit of currency is created, transacted and traded on the internet.
- There are over 700 cryptocurrencies that have been created. Bitcoin is the first one.
- Cryptocurrency can be bought and sold for other cryptocurrencies, as well as for fiat currencies like USD, EUR, GBP on online trading platforms dedicated to trading crypto.
- Fiat currencies can be deposited to and withdrawn from trading platforms through banks and using credit cards.
2 The blockchain
- Cryptocurrency transactions are recorded in a ‘block’.
- Blocks usually have a fixed size.
- New blocks are issued after a fixed specified length of time, i.e.: every 2 mins.
- Every new block that is created is joined to the end of the previous block, thus creating a chain of blocks, or what has now been referred to as being a ‘blockchain’.
- Each cryptocurrency has its own blockchain.
- Miners, also called nodes, are computers that are connected to a cryptocurrency network.
- Miners verify the transactions of each block to make sure that they are valid and are rewarded a fee in that specific cryptocurrency for doing so. This fee payout is how cryptocurrency is created.
- All nodes keep a copy of the blockchain, which is a sort of encrypted ledger of every transacted made in that cryptocurrency.
- All nodes verify all transactions. The first node to verify a transaction sends a confirmation to the rest of the nodes that it is valid, it is awarded a fee, and all nodes then start work on verifying the transactions of the next block.
- Blocks are always encrypted and nodes use lots of computing power to decrypt blocks in order to verify them.
- Trading crypto is very similar to trading fiat currency, except that there are varying levels of liquidity for all the different cryptocoins and more information about the markets are available to traders while trading.
- Crypto can be stored in an exchange: more liquid, risk of exchange being hacked.
- Crypto can be stored in a ‘wallet’ in your computer or phone: risk of computer or phone being hacked. Some cryptocurrencies have their own official wallets, others don’t and rely on wallets provided by independent third parties.
- Crypto can be stored on a dedicated medium such as a USB device: safest, least practical, usually for big amounts.
- Cold storage refers to when a wallet is created by a computer that isn’t connected to the internet, whereas hot storage refers to one where the creation of the wallet occurs while the wallet is connected to the internet. Cold storage sacrifices practicality for safety, it is the safest way to store your coins.
Hopefully this clarifies any missing pieces of the crypto ‘puzzle’. If anything remains unclear, hit us with any questions in the comments section.