We are going to explain to you exactly what cryptocurrencies are so that if you have heard of them in general or of a specific one like Bitcoin, you will know exactly what they are. It is a type of digital medium of exchange that has been with us for more than a decade, but it has been in recent years when it has been increasing its fame.
In addition to explaining what they are, we are also going to try to explain briefly and simply how they work internally, as well as mentioning some of the others that currently exist and are being heard about.
What is a cryptocurrency?
Cryptocurrencies, also called crypto assets, are a digital medium of exchange. It fulfills the function of a currency, hence the name cryptocurrency. However, it is entirely digital, using cryptographic methods to secure its financial transactions, control the creation of new units and verify the transfer of assets.
Therefore, we can consider them as a decentralized alternative to digital currencies. By “decentralized” we mean that these currencies are not controlled by a single service or company. The same happens with conventional currencies, which are centralized and organized by entities and banks, so they are an opposite method to both.
The first cryptocurrency was the Bitcoin created by “Satoshi Nakamoto”, a pseudonym that corresponds to a person that nobody knows exactly who he is. This person published in 2009, an article describing a P2P payment system which he called Bitcoin. After a few months, he published the first version of the software for managing the currency network and began to interact in forums with the first interested parties.
It is still not known who this person is, but it is known that he has become one of the 20 richest people in the world. Bitcoin and its technology have had such an impact that over the years more and more alternatives have been arriving, new alternative cryptocurrencies that have been increasing their value with more or less luck. Since then, as we will see a little later, a large number of different cryptocurrencies have been created.
Another thing you should know is that the value of each cryptocurrency is variable and that in recent times there is speculation similar to stock market assets. Therefore, many people are creating wallets in services where they can buy cryptocurrencies, and try to buy them to sell them later and thus earn money.
It is not advisable to get involved in this if you do not know, because there can also be abrupt drops in the value of cryptocurrencies and end up losing money. However, in the case that you have cryptocurrencies, it is also important to know this, because if you are going to operate with them to make payments you should know that you can encounter variable prices for this reason. There are several alternatives to see the heat of cryptocurrencies.
How cryptocurrencies work
To understand how cryptocurrencies work you must also understand several basic concepts. The first is that it is based on a decentralized computer network, which means nodes spread around the world with copies of all transactions that have been made. The second concept is that of miners, people who are part of the nodes, and who have the incentive that every time new Bitcoins are generated they are distributed among those who are part of these nodes.
Another important concept is that of exchanges, which are companies that allow you to exchange currencies such as euros or dollars for Bitcoins and get into the world more easily. When you get them, they are stored in ‘Wallets’, which are applications that allow you to store or exchange them.
Each cryptocurrency has its algorithm, which manages the number of new units issued each year. For example, we have Bitcoin, which every four years is reduced by two the amount produced, and only a total of 21 million Bitcoins will be issued. This is a fundamental difference with conventional currencies since banks modify their value at their free will. This gives it more capacity to generate value as opposed to currencies that can be devalued whenever the banks say so.
And since the algorithms of the different cryptocurrencies are different, the maximum number of units of each cryptocurrency also varies. This can also affect their value and performance, although it is not something that basic users need to worry about.
This decentralized computer network with different nodes is known as the blockchain. Its blocks or nodes are linked and secured using cryptography. Each block links to a previous block, as well as a date and transaction data, and by design, they are resistant to data modification.
Therefore, it is as if this network or blockchain is open and public free where all transactions made by two users are recorded. When you make a transaction, the transaction data is recorded in a block, and it is automatically replicated in the rest. This means that the data cannot be modified or manipulated without modifying the rest of the blocks, something extremely complicated.
What other cryptocurrencies exist
As we have said before, Bitcoin began to take its first steps in 2009. Since then, more and more new cryptocurrencies have arrived over time. Some have been positioning themselves as robust and popular alternatives for years, such as Ethereum, Litecoin, and the like. Ethereum even has a new version called Ethereum 2.
But there are also some new surprises like the recently arrived Dogecoin, a cryptocurrency created for fun and based on a meme. But since Elon Musk talked about it assuring that it is the people’s cryptocurrency, its value has not stopped growing.
And like these, there are many alternatives with rising values, and new ones are emerging. Some names among the most valued ones are Binance Coin, XRP, Cardano, Tether, Polkador, Uniswap, Chainlink, or Bitcoin Cash. However, most of them remain with a value that is far from that of the big three, which are Bitcoin, Ethereum, and Ethereum 2.
There are some companies and services that have also tried to create their cryptocurrencies, but so far they do not seem to be achieving good results. Facebook changed the course of Libra, which will become an alternative to PayPal instead of a cryptocurrency, and Telegram also abandoned its project to create a cryptocurrency called Gram. However, it is to be expected that new alternatives will continue to emerge over time.
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