Cryptocurrency is a digital asset designed to act as a medium of exchange. It utilizes cryptography to secure and authenticate transactions, as well as to regulate the creation of new units of a particular cryptocurrency. Bitcoin (BTC) is the most popular and widely used cryptocurrency, but there are hundreds of other altcoins that have been developed in recent years. In essence, most cryptocurrencies are variations of Bitcoin, the first widely used cryptocurrency.
Advocates promote cryptocurrencies as potentially lucrative investments, but few serious financial professionals believe that most currencies, apart from Bitcoin and a few others, are suitable for anything other than pure speculation. Bitcoin has a predetermined supply limit of 21 million coins and is increasingly seen as a legitimate medium of exchange. Ethereum makes some noteworthy improvements to Bitcoin's basic architecture, such as the use of “smart contracts” that necessitate the execution of a certain transaction, compel the parties not to breach their agreements and contain reimbursement mechanisms in the event that one of the parties violates the agreement. Litecoin is usually the second or third most popular cryptocurrency by market capitalization, while Ripple is more easily convertible than other cryptocurrencies with an internal currency exchange.
Dogecoin (DOGE) is a variation of Litecoin and stands out as an “inflationary cryptocurrency” experiment. The technical foundations of cryptocurrencies date back to the early 1980s, when an American cryptographer named David Chaum invented a “blinding algorithm” that remains fundamental to modern web-based encryption. In the late 1990s and early 2000s, more conventional digital financial intermediaries emerged, such as PayPal. But a true cryptocurrency didn't emerge until the late 2000s, when Bitcoin came on the scene. The blockchain network is supported by volunteer “miners” who are computer systems offered for use in specific networks that support each cryptocurrency. Miners are rewarded for participating in the verification of transactions with a small portion of coins.
Cryptocurrency wallets can be software (applications) or hardware wallets (USB stick or card). These wallets act like smaller versions of “miners” in the sense that they record and verify transactions. Cryptocurrencies have become increasingly popular over the past decade due to their potential for high returns and their decentralized nature. However, it is important to understand how they work before investing in them. This guide provides an overview of what cryptocurrencies are and how they work.