What exactly are cryptocurrencies?

January 31, 2018

Bitcoin image
Image source: Reuters

Growing in popularity, the currency innovation known as cryptocurrency can be a bit complicated to explain. In short, it’s a type of electronic money. It is a currency that is totally separate from banks and governments and provides data security and identity protection of its users.

Bitcoin, the most popular cryptocurrency, is created by an action called “mining.”

Essentially, the miner’s computer processes complex equations in exchange for a small amount of crypto – as a kind of transaction fee. What miners do is verify bitcoin transaction information on ‘blockchain’: transactions are recorded and verified on different computers using a public record, allowing for transparency and security.

You can buy any type of cryptocurrency using a credit card or other bank transaction. As of today, one bitcoin is equal to $9,576. However, despite the steep price tag, you can buy fractions of a coin if you don’t have a spare ten grand lying around!

The currency is kept in a digital wallet, with both a public (used to transfer coins in) and private (to access your wallet) password.

Some wallets can be downloaded for free, and some are more complicated to use than others. Coinbase is a user friendly wallet tied to Coinbase’s service for buying bitcoin. Mycelium is a good wallet that’s good for using on the likes of Tor.

If you have a lot of cryptocurrency, you may want to think about using an offline wallet for added security. ‘Cold storage’ options include a USB or on paper, which come with their own risks. ‘Deep cold storage’ means keeping coins offline in a place that’s difficult to reach, such as on an encrypted USB inside a safety deposit box in a bank.

How do you spend it?
Websites that accept cryptocurrencies require you to sign into your wallet and use a QR code to transfer money.

If the payment is to be made to a bitcoin address, users enter that address in their wallet along with the amount to send, and then submit to complete the transactions.

Cryptocurrencies also have special ATMs, although most are for bitcoin. California has 107 bitcoin ATMs, whereas there are only seven ATMs that accept Dash in the world. Many are one way-machines, and can only be used to buy bitcoins. Others are two-way, allowing customers to sell their bitcoins for cash.

Users can transact with cryptocurrencies across a number of different websites. Expedia accepts bitcoin. Gift cards can be purchased for use on Amazon. Some restaurants are even starting to accept the payment type.

In terms of protecting your money, it is totally on you. There is no bank to call up if a transaction goes wrong, or money gets stolen. Once a transaction is made, it can’t be reversed — an attractive trait for scammers. In addition to users’ wallets, thieves have been known to attack exchanges. CNBC reported that over 3 million bitcoins have thought to been lost in recent theft.

Aside from using strong passwords, you should also consider storing your cryptocurrency in an offline wallet, to keep it safe from hackers.

For even more detail, including more layman’s terms around some of the technology, read James Altucher’s blog post on bitcoin.

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