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What’s Bitcoin, Then?
Bitcoin was the first decentralised digital currency to be introduced, and remains the most popular – but it’s far from the only one available.
The other cryptocurrencies to have emerged in recent years – often referred to as ‘altcoins,’ which basically means ‘alternative coins’ – range from Ether, Dash, and Litecoin to Ripple, Tether, and Dogecoin.
They naturally have their various strengths and weaknesses, and with more than 800 different cryptocurrencies available on the market as of late 2018, it’s important to do some research into which ones may be the most suitable for you.
But Why Do We Need ‘Decentralised’ Currency Anyway?
You don’t need to spend much time reading about cryptocurrencies to learn that they are ‘decentralised.’ You may be wondering what this means, why it is the case and what makes centralisation such a big problem regardless.
Cryptocurrencies being ‘decentralised’ basically means that they work without a single bank or administrator. The only place they actually exist is the blockchain, which we explain in more detail below.
If you think about today’s world and all of the information (data) out there about you – including who you are, what you do and what you like, then you’ll soon realise that there are a small number of large public, private, and government organisations that hold it all.
All of that valuable information needs to be stored at least somewhere – namely servers in a central location. We’re talking here about all of that data about stuff like every transaction you’ve ever been involved in, your bank balance, loans, emails, Facebook messages and ‘likes’ and so on.
Now, just imagine if a malicious hacker – otherwise known as a cracker – hacked into your bank’s servers and reduced your account balance to zero. It’s a nightmare-ish scenario, given that you wouldn’t be able to prove that you didn’t just withdraw all of your money, and your bank wouldn’t be able to verify that you were genuinely hacked.
You can probably begin to appreciate just why some worried folks began to be attracted to the idea of decentralised currencies.
Introducing A Little Something Called: Blockchain
The concept of a digital database known as a ‘blockchain’ is something that it is crucial for you to grasp if you truly want to understand cryptocurrencies and Bitcoin.
Using a cryptocurrency also grants you access to a copy of everyone’s transaction history. Yes, that’s the entire history of all of the transactions ever made by users of that cryptocurrency.
This is what the ‘blockchain’ is, and it means that if, for example, a cracker reduced a given user’s wallet value from 1,000 BTC (Bitcoins) to 1 BTC, the user would be able to object to this transaction.
In the event of such a disagreement, consensus must be reached by at least 51% of that cryptocurrency’s users, with this 51% then deciding on the correct amount.
Such an automatic consensus is precisely why a decentralised system appeals to so many people. With no single server for any crackers to attack, and every user having a copy of the blockchain, any such malicious individual would need to convince 51% of all users for the disputed transaction to stand.
What About Mining?
You may recall us mentioning the ‘mining’ process earlier, and we aren’t talking about pick-axes here. What we’re referring to, instead, is the essential task of maintaining the blockchain, verifying transactions and adding new blocks to it.
The ‘miners’ do this by using specialised mining software on very powerful computers, examining unverified blocks and the transactions on them while seeking to solve a mathematically complicated cryptographic puzzle that involves everything on the block.
Miners are rewarded for this crucial work by being paid in the cryptocurrency that they have just mined. With some cryptocurrencies, that’ll mean they receive a portion of the transaction fees on the block just mined. But other cryptocurrencies – such as Bitcoin – generate new coins that are then given to the miner.
So, How Can You Get Involved In Cryptocurrencies?
There are a lot of things that you can do with cryptocurrencies like Bitcoin and Ether. Of course, you could use them to buy products or services as if they were regular currencies, and it’s true that more and more merchants these days are starting to accept cryptocurrencies.
However, you can also use them as a means of transferring money and tipping – such as if you owe money to a friend or fancy rewarding someone for an entertaining or useful social media post. You can also get paid in cryptocurrency as a digital goods and services provider, or treat it as an investment – although the latter shouldn’t be done lightly, given the notorious volatility of the market.
To do all of that, though, you’ll first need to choose a cryptocurrency – ideally one that best suits your specific needs and intentions – before getting yourself a digital wallet. The latter will serve as your gateway into your cryptocurrency’s blockchain while enabling you to do such things as sending and receiving crypto coins and checking your balance.
Then, it’ll be time to start adding some coins to your wallet. That means you’ll need to buy them from an exchange so that you can convert fiat currency such as GBP into your favoured cryptocurrency. Naturally, not all exchanges are the same, so we would urge you to read reviews and ensure that your chosen one has a good reputation for security and reliability.
Your coins will then be available for transferral to your software wallet, and you’ll be able to get on with using your cryptocurrency in whatever way you wish to use it!
Finally… A Few Words Of Caution
As exciting as cryptocurrencies and Bitcoin can be, as with everything else in life, they do come with certain downsides and risks, and you should take the time to research these getting involved.
It’s important to remember that by their very nature, cryptocurrencies don’t come with a traditional ‘safety net’ – there’s no bank to protect your money, and no police to call if your money is stolen. But on the other hand, they do give you a lot of freedom as to what you do with your money, without the need to even reveal your identity.
So, be sure to follow such ‘common-sense’ tips as double checking a fellow cryptocurrency user’s wallet address before you send crypto coins to them. Ensure you never lose your wallet password, given that if you do, you might be unable to get it back, meaning that all of your crypto coins will be lost.
Good luck with your venture into the fascinating and thrilling – if also often unpredictable – world of cryptocurrencies!
This article originally appeared on our sister website TheMoneyDaily.com
Disclaimer: Our service is not intended to be, nor should it be construed as financial advice. We help our readers make informed decisions via impartial information and guides. Where appropriate, we may introduce partner companies who can provide services relating to financial products.