What is Cryptocurrency? -A Step-By-Step Beginner's Guide

 A cryptocurrency is a digital or virtual currency that uses cryptography for security. A defining feature of most cryptocurrencies is their organic nature; they are usually 'mined' by computers solving complex algorithms.

Cryptography was born out of the need for secure communication in the Second World War. It has evolved in the digital era with elements of mathematical theory and computer science to become a way to secure communications, information and money online.

The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakomoto. As of September 2015, there were over 14.6 million bitcoins in circulation with a total market value of $3.4 billion. Bitcoin's success has spawned a number of competing cryptocurrencies, such as Litecoin, Namecoin and PPCoin.

How do Cryptocurrencies Work?

Cryptocurrency works like traditional money (FIAT Currency)-only better! Transactions take place when a buyer and seller agree to use Bitcoins or any other cryptocurrency. Like other forms of money, cryptocurrencies can be traded for goods or services with one notable difference: All sales are final! This means the risk is on the seller. Once a transaction is complete, it cannot be reversed unless the buyer agrees to refund the purchase.

There are several reasons why these purchases are deemed final. The main reason is that cryptocurrencies are in their infancy. Currently, it's difficult to find reliable information on how many legitimate businesses accept cryptocurrency payments (eBay seems to be leading the pack). Another reason is the irreversibility of transactions which is built into the network. Unlike credit cards or PayPal where chargebacks can occur up to three months after purchase, digital currency transactions cannot be reversed.

How are Cryptocurrencies Valued?

Unlike physical currencies, cryptocurrencies are not regulated by a singular authority. Instead, the price of most cryptocurrencies floats freely on public markets, which is why it can be hard to determine what they are 'worth'. One way for investors to value these new forms of currency is by taking a page from the traditional financial markets and using an investment vehicle called a 'cryptocurrency fund'.

Cryptocurrency funds operate very similarly to mutual funds . The first cryptocurrency fund launched in March 2013. It was quickly followed by a second that raised over $5 million in less than two months, with approximately half of that amount coming from an investment by the founder of Litecoin.

While mutual funds aren't exactly new, cryptocurrency funds are very different from what's currently on offer in the market. For example, they exist exclusively in cyberspace and make investing as easy as clicking a mouse or tapping a screen (depending on which device you prefer). Investors use fiat currencies to buy their shares, which are stored in digital wallets using advanced encryption techniques.

The idea is that as the value of cryptocurrency increases, so will the value of the fund. That's why these funds are ideal for anyone who wants to make money from cryptocurrencies without having to worry about storing them safely or exchanging currencies. Investors can even set up recurring payments to have a set amount of capital deposited into their accounts automatically.

But not all cryptocurrency funds are created equal. For example, some funds buy and sell only a single type of cryptocurrency, while others may invest in emerging alternative coins. Fees also vary widely among these digital investment vehicles, so it's important to do your research before you hand over your hard-earned money.

Cryptocurrency funds are not yet available to the general public, but that could change in the near future. In fact, many experts believe that these types of investment vehicles will become the norm inside the next five years. Once investors get used to paying for goods and services with cryptocurrency, they may decide to invest their savings as well.

Are Cryptocurrencies Secure?

Safety is one of the blockchain's best features because it uses advanced cryptography to create permanent records of transactions that can't be counterfeited or reversed. People who are new to cryptocurrencies will likely be surprised by how much information they reveal about you when you purchase them with traditional currency. If you use a credit or debit card to buy Bitcoin, for example, the merchant will know your name and how much money you spent (plus your purchase history).

With cryptocurrencies like Bitcoin and Monero, on the other hand, only the recipient and sender know who transacted with whom at any given time. This is because all transactions are shielded to everyone except for the involved parties. Even in cases where hackers steal cryptocurrencies from their rightful owners, it's nearly impossible to trace them back to the original users.

Another reason digital currency is so secure is because most blockchains are open source, meaning that anyone with sufficient coding skills can check transactions on these networks whenever they want. This prevents bad actors (like criminals or governments ) from creating fake coins or stealing them wholesale.