Some people earn money. Some people find money. Some people steal it and some people, like Satoshi Nakamoto, create it out of thin are. Or more precisely, out of computer code. The day was January 3, 2009, when Nakamoto announced to anyone who was listening that he had just invented a new “cryptocurrency" which he named "Bitcoin." This was not your average pocket change, however, because there was nothing to put in your pocket. Just thousands of lines of computer code let loose in cyberspace. Nakamoto was driven by a desire to free money from the claws of governments and central banks who he (and many others) saw as being responsible for the economic meltdown that was still reverberating around the globe in 2009. But what is a cryptocurrency and just how was it possible for this guy to create an entirely new form of money out of nothing but code?
What is the Technology Behind It?
Nakamoto’s new form of money depended on something called a blockchain. A blockchain is a form of distributed database which keeps an up to date list of computer records. These data clusters are also known as "blocks." New blocks enter the system sequentially with each new block containing the entire history of the blocks that preceded it and each block being encrypted (hence the term "crypto"). In this way, a chain of verifiable information is created (hence the term block-chain).
The blockchain ledger system is vital to the creation of a cryptocurrency because without it there would be no way to verify the currency’s value. Besides maintaining a running ledger of transactions this technology also eliminates the central administrator. Goodbye Fed!
The Rise of Bitcoin
Blocks are created, and new currency is released each time someone verifies a new cryptocurrency transaction. This verification process involves enormous amounts of computer power, but that hasn’t stopped legions of aspiring blockchain billionaires from dedicating most of their waking time to the process of “mining” for Bitcoins (or any of the other cryptocurrencies that exist in cyberspace). As a result of all this mining - and especially because some forward-thinking merchants began to accept it as tender - the value of a Bitcoin started to creep upward whereas a single Bitcoin was worth less than one cent when the currency was launched. That value had risen to nearly $30 by 2011. And while Bitcoin has seen some rocky days recently, it's currently valued at more than $10,000 per unit as of this writing. That's a success story of astonishing magnitude.
Enter the Copycats
They say imitation is the sincerest form of flattery and if that's true then you'd have to say the world has beaten a path to Bitcoin's door to shower it with praise. As of this writing, there are nearly 1,400 cryptocurrencies that have been launched in the wake of Bitcoin’s success with some notable ones being Litecoin, Namecoin, Ethereum Classic, and ZenCash. All of these virtual currencies use blockchain technology and all have seen some form of merchant acceptance, although to be sure the number of merchants that accept cryptocurrencies is still small.
How To Transfer it?
To understand a cryptocurrency exchange, you need to realize that there are two primary ways to obtain cryptocurrencies like Bitcoin and that the whole process is somewhat like that surrounding gold. Some obtain gold by mining it. Others buy and sell the gold that has already been mined through commodity exchanges and by doing so drive the value up or down. It’s the same with Bitcoin or any other cryptocurrency. There are “miners” whose efforts release new “coins” into cyberspace and exchanges where that new currency can be bought and sold or exchanged for other crypto or fiat currencies like the US dollar.
All this buying, selling and exchanging of cryptocurrencies cause their value to rise and fall.This all sounds very well and good but wouldn’t you know it there’s a fly, or rather a bunch of flies, in the crypto exchange ointment. Those flies are called "hackers." Computer hackers have found a way to break into numerous crypto exchanges in the past couple of years and make off with hundreds of millions in virtual cash. And while the result has been the implementation of more robust security protocols and methods of tracking stolen Bitcoins and other cryptocurrencies the risk is still very real that your savings could be wiped out by a hacker. So one must be aware when dealing with exchanges.
How Do You Store It?
Cryptocurrencies never actually leave the blockchain. What happens is that when you obtain ownership of a Bitcoin or other currency, you’re issued a private key which matches a public key. The public key is roughly analogous to a bank account to which others can transfer cryptocurrency. The private key is sort of like a pin number. Without the private key, there is no way to access the funds accumulating in the public key (or account). As such you can probably figure out for yourself that keys are pretty essential and you'll want to keep them somewhere safe.
Wallets then are a way for you to safely store your public and private keys so that you can carry on transactions. There are two types of wallets: “hot” wallets and “cold” wallets. Wallets that are connected to the Internet in some fashion are considered “hot” wallets. While being connected to the Internet makes it easier for you to do business with your cryptocurrency, it also opens you up to potential hacks. “Cold” wallets are not connected directly to the Internet. They’re generally considered safer, but they make transactions more laborious affairs.
Cryptocurrencies have come a long way since Satoshi Nakamoto (if that was his real name, no one is sure) launched Bitcoin 9 years ago. Today they're creating wealth at an astonishing rate and are attracting ever-increasing attention from governments who are starting to see them as an existential threat to their monetary systems. Where it will all go from here is anyone’s guess.