Cryptocurrency For Dummies: What is Cryptocurrency & How Does it Work?
There is tremendous interest in the cryptocurrency space right now, and equal parts confusion, uncertainty, and doubt. Bitcoin, cryptocurrencies, blockchain, ICOs. What do these even mean? This guide will be a brief overview of what cryptocurrency is and how it works.
Cryptocurrency is a general name referring to all the encrypted decentralized digital currencies like Bitcoin. The underlying infrastructure that makes these cryptocurrencies what they are is called blockchain. At its simplest, a Blockchain is a shared database (ledger) that everyone can write to and access to verify transactions. It is extremely secure because the transactions are encrypted with 256-bit cryptographic keys. So instead of the record of every transaction that has occured on a server, all the information is kept in the decentralized ledger (the blockchain).
These ledgers are constantly checked against one another automatically to stay up to date with the master. The master is the longest most agreed-upon chain at any given time.
“Anyone (or any program) can check the ledger any time because the ledger is public. But, everything on the ledger is encrypted, so unless you have the key for the ledger slots you’re trying to look at, all you see is nonsense. This is how the system is able to be secure, but also public. Everything is encrypted using an algorithm that is, as of now, unhackable.” – Adam Kerpelman, founder and CEO of Juris – Human-Powered Dispute Resolution for Blockchain Smart Contracts,
When a new coin comes out it usually releases a “white paper” which is like a sales pitch. Initial Coin Offers (ICO’s) are new coins used for crowdfunding. Cryptocurrency is legal and taxable in the US, but it isn’t legal tender and is treated as an investment property. With that said, due to its infancy and history so far, cryptocurrencies should be invested in and used with their historical volatility in mind.
Is Cryptocurrency Safe?
Says Scott Amyx, of Amyx Ventures, “Cryptocurrencies are inherently very safe but the vulnerability of cryptocurrencies lies not with the underlying technology but rather with people and institutions — hackers trick the user into divulging access to the exchange, typically your email address and a password (via phishing) or to the private key in your wallet. Specific to exchanges, the most common way is to hack into your email account and then request a password reset to the exchange.”
To mitigate this risk, Amyx recommends enabling multi-factor authentication.
Where Do You Keep Cryptocurrency?
- A third party exchange such as Upbit and OKEx
- A first party wallet with a public key which allows others to give you cryptocurrency and a private key (to open the wallet for withdrawal)
- In the case of an exchange, investors can buy and store digital currency using their service.
- For a wallet, you are responsible for keeping the private key safe so that no one can hack into your wallet.