You’ve heard the term in news reports and you’ve read about Bitcoin online, but what is cryptocurrency exactly?
Well, cryptocurrency refers to a form of digital money that reinvents the system a bit since it goes far beyond mere digital currency by using high-tech encryption techniques to ensure security when money changes hands. Notably, cryptocurrency operates totally independently of any single government or organization. It’s quite literally by the people, for the people, which makes this form of money quite appealing to many.
In fact, many have speculated that cryptocurrency will be the money of the future, which could potentially eliminate the various country-specific currencies. Traditional money would be replaced with a one (or perhaps a small number) of digital cryptocurrencies.
What Was the First Cryptocurrency?
The first mainstream form of cryptocurrency was unveiled by Satoshi Nakamoto in late 2008, when he launched Bitcoin as a “peer-to-peer electronic cash system.”
Bitcoin represented the first successful form of decentralized digital money. Throughout the 1990s, there were several attempts to establish digital currency, but those attempts were all failures.
Nakamoto’s Bitcoin was inspired by peer-to-peer networks used for file sharing. He established a method for mining Bitcoin, with the mature currency graduating into circulation with a payment network that handles accounting, balances and transactions.
How Does Cryptocurrency Work?
Cryptocurrency is transferred digitally and individuals can stow their Bitcoins or other digital money in a digital wallet, like BitWallet or Copay. The process of spending and receiving cryptocurrency is essentially the same process that you’d use for any other digital transaction.
Past attempts at digital money used a centralized model with a single server to record transactions and prevent “double spending.” For obvious reasons, this single server was very vulnerable. But Bitcoin has a decentralized networks, with multiple servers performing the same function as the centralized model’s single server. The result is greater security and less vulnerability.
The cryptocurrency system relies upon speedy confirmation of each transaction. This is where miners come into play, as they confirm transactions, which are then recorded in each node and the transaction becomes part of the larger blockchain.
This mining process is also how new digital money is created, since miners are compensated in Bitcoins.
Following Bitcoin, a number of other digital currencies have emerged such as OneCoin and JetCoin and LiteCoin.
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