What is cryptocurrency

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There’s a lot of hype in the world of cryptocurrency right now, and it’s easy to start running before you walk. If you’re a beginner wanting to break into the cryptocurrency game, learning the basics is the best thing you can do if you want to reap the serious and long-term benefits from cryptocurrency. We’ve put together a brief guide to cryptocurrency for beginners, detailing the basics of Bitcoin, blockchain and beyond.

What is cryptocurrency?
Cryptocurrency is essentially a digital form of money. Instead of physical notes and coins, they are data stored through digital code and accessed through various apps and software. Where Government issued currency is backed by the Government and redeemable for things of value (such as gold), cryptocurrencies are not. Because of this, the value is driven purely by economic supply and demand; that is, it is only worth as much as other people are willing to pay you for it.

What is a blockchain?
One of the key features of cryptocurrencies are the blockchains that support them. The blockchain is a digital ledger that records every single transaction that has ever occurred for a coin. The oldest coin is Bitcoin, and the blockchain for it holds every single transaction made with Bitcoin since its inception in 2008.

How do cryptocurrency transactions work?
Cryptocurrencies may seem quite different from currency as we currently know it, but when you look past the technology they are quite similar. Cryptocurrencies work like banks, except they take the control away from the bank by taking the ledger away from one writer (centralised) and replacing it with a blockchain that is written and verified by everyone (decentralised). Because there is no longer one entity in control of writing all the transactions (ie. the bank), it allows for transparency and fairness in the market. It also allows people to interact directly with one another without the need of a bank as an intermediary.

Who writes the transactions?
Enter the miners. Miners are the systems processing and confirming the transactions on each blockchain. Computers use software and processing power to update and maintain the blockchain. Whenever a transaction is made on the blockchain, it’s posted for miners to process. The more miners that process and record that transaction as legitimate, the more ‘confirmations’ that transaction gets, the faster the blockchain is updated and the transaction completed.

What happens if the miners don’t all agree?
As is human nature, we don’t always agree with one another and blockchains are no different.

One of the main points of contention on the blockchain are the rules that govern how transactions should be written onto it. There are several rules that govern the blockchain – how many transactions go into each block of data, how transaction fees are charged, how many times transactions are confirmed etc. If the network can’t agree on all these rules, the opposing parties will often split up and each do their own thing.
It’s not quite as simple as going their own way though. Each opposing party takes a copy of the blockchain that they had all been working on up to date and keeps working on their own copy in their respective groups. This is called a fork.

This newly split chain will create a new coin based on the modified blockchain. It causes disruption to the network, so it isn’t something that happens often, but when it does, it’s a big deal.

Where does Bitcoin fit in?
There are currently over 1000 different cryptocurrencies in existence, but it wasn’t always like this. The inception of cryptocurrency started with the very first coin, Bitcoin (BTC). Bitcoin was created by an unknown person or persons under the pseudonym Satoshi Nakamoto back in 2008. Under this pseudonym Nakamoto posted the original reference implementation and details of the original blockchain database to accompany the coin. Since then hundreds of cryptocurrencies have been created either directly off Bitcoin’s technology or through inspiration from the original cryptocurrency.

Ensuring you understand the basics of cryptocurrencies will give you the best foundation to build your future cryptocurrency investments on.

For more detailed information on the basics of cryptocurrency, through to how to invest like a pro, get your copy of Master of Coin: An Accountant’s Guide to Cryptocurrency Investing now.