How Cryptocurrencies Work

Comments Off on How Cryptocurrencies Work



The technology and sheer amount of coding necessary to support and secure cryptocurrencies is quite complex. However, even those who are uninitiated can understand the basics concepts and accumulate knowledge necessary for proper understanding. Many of you may have heard about Bitcoin and know about it’s staggering 1500% price increase in 2017. Many even rushed to invest into Bitcoin. Unfortunately, an overwhelming majority of individuals have come to this decision without exploring the concept sufficiently to become successful investor in this field.

Most cryptocurrencies essentially utilize the concepts popularized by Bitcoin – the world’s first cryptocurrency. Much in the same was as traditional currencies, most cryptocurrencies express their value in units. Several concepts govern cryptocurrencies’ values, integrity, and security.

What is Block Chain Technology

Blockchain technology is generally a digitally stored ledger that keeps record of all transactions. Blockchain provides infinite possibilities for secure transactions and significantly reduces risk of fraud by running an immediate background check on any member of the system. Hence, it validates ownership of all currency units and makes transaction processing instantaneous. Running on a network of decentralized servers operated by highly skilled tech individuals called minters, they maintain the ledger’s security and integrity of the ledger by recording and authenticating all transactions.

Once added to the blockchain, transaction is finalized and cannot be reversed. In contrast to traditional payment processors like Skrill or Paypal, cryptocurrency transaction processing systems are not unitizing charge-back or refund options, which might sound scary, but on the other hand the time gap between finalization and initiation of transaction keeps the units of digital currency hidden from both parties which fully eliminates the risk of any manipulation with the system. As such, blockchain is the most reliable and secure transaction processing technology.

Private Keys

Every cryptocurrency owner is provided with unique private key. It serves the purpose of verifying the identity of currency holder and makers transactions possible. Users are free to make their own keys or use password generation tools to make reliable choices. Without key, users can not buy, sell and convert their tokens. As such, it is highly advisable to have a backup copy of the key and store it on external drive. Without key, your cryptocurrency holdings are of no value until the former is recovered.

Individual Wallets

Cryptocurrency users create wallets to store their digital tokens. Wallets provide ultimate storage for your precious units of cryptocurrency and minimize the risk of loss. Wallets provide users with substantial degree of anonymity and use advanced protection protocols to minimize the risk of theft. Some instances of wallet hacking have occurred recently including hacking of Japan-based BTC exchange Mt. Gox. Every digital system has security vulnerabilities and we recommends having at least one backup copy of your wallet stored on cloud or external drive.

How does a cryptocurrency mining work

Cryptocurrency miners are individuals or closely-affiliated groups who maintain the completeness and accuracy of blockchain functionality and “regulate the supply of cryptocurrencies. As such, mining serves 2 purposes – adding transactions to the blockchain and releasing new units of currency. In case of the latter, miners use powerful computers or ASIC devices and dedicate its computational power to solve complex mathematical tasks. When new block with transaction data is added to the chain, miners try to “crack” it by using sophisticated cryptographic hash functions. Once the block is solved, whoever contributed more hash rate (the Hash Rate is the speed at which a computer is completing an operation in the Bitcoin code) will get a higher reward.

This might be difficult to digest first but look at this from different angle. Imagine a Gold Rush seeker in 1849 who comes to the stream. Gold seekers used simple techniques to retrieve gold from streams and riverbeds. The resulting supply of gold mined using those techniques was small and could hardly provide enough money for those who utilized simple tools. Suddenly, some individual came with much more sophisticated gold recovery technology and retrieved much more. The individual’s profit was higher than of those who used simple padding tools. The relevance of this example here lies in the fact that there is apparent similarity between both processes, with blockchain being the stream and hardware taking seeker’s place. A miner equipped with powerful hardware solves blocks faster and gets bigger rewards.

Miners create wealth in the form of new cryptocurrency units. Moreover, the monetary reward for every newly-created block chain copy comes in 2 parts ; newly generated units and a fixed number of units coming in the form of transaction fee that’s paid by the buyer. Without a shadow of a doubt this can be a very profitable business if you have the funds to invest in extremely expensive and sophisticated hardware required for efficient mining operations. And if until recently mining tasks could be easily handled by a stack of 2 powerful GPU’s inside your home PC ( and off course shocking numbers in electricity bills) , significant surge of cryptocurrency demand in 2017 rendered such relatively cheap solutions completely worthless. Hence follows that cryptocurrency exchanges and brokers provide the most comfortable environment for those willing to capitalize on this new investment opportunity.