Whether you’re an experienced investor or have just heard about the exciting technology that is cryptocurrency, the fact of the matter is, cryptocurrency is a complicated thing that not everyone fully understands – not even the people with thousands of dollars invested.
This guide has been put together to help clear up some misconceptions and to give a clearer picture about crypto.
What is Cryptocurrency?
Cryptocurrencies are in simple terms digital, encrypted currencies similar to digital cash used on services like PayPal. The difference however is that the currency in this case is kept with the owner, and transactions take place directly between individuals and are resolved much faster than regular transactions.
The verification and validation for transactions over the network is done by users who are paid transaction fees for the use of their resources rather than some central authority handling all transactions. The cryptocurrency units, or coins as they are called, are stored with people in digital wallets and protected by private keys for each wallet. This private key is what’s needed to perform transactions using the funds in the wallet.
So how does all of this work? The underlying technology behind cryptocurrency is a cryptographic invention known as blockchain.
A single block consists of computationally intensive mathematical problems which are solved by processors, and upon completion, the block is considered complete and the next block is created using data from the previous one.
In this way, blocks are connected to another much like links in a chain would be, hence the name blockchain. If a block in the middle of the chain is altered in any way, the links that connect it to the following blocks will be used to restore the original data. In this way, the older a block is, the more secure it will be, because altering it becomes difficult.
The processors used to solve the mathematical problems are employed by people who are referred to as ‘miners’. The specialized equipment used to perform these incredibly complex computations can be quite expensive as well as leading to high amounts of electricity consumption. To compensate miners for their cost, they are given the currency for solving blocks.
Cryptocurrency is by its very nature, a secure way of making payments – as long as a person’s private key is kept secure there is no way for the currency to be stolen.
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