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You’ve heard about them, maybe a few years ago when they were first popping up in popularity, maybe when they hit some of their historic highs… But what do you really know about them?

The world and concept of cryptocurrencies is one which appears complicated to outsiders, and this can act as a major inhibiting factor when it comes to new users. In this article, we will explain a little about cryptocurrencies, where they came from, and what users need to know if they wish to take part in this exciting new area of finance.

One to Rule Them All

The first of what we think of cryptocurrencies is generally thought to have originated sometime in 2009. It was here that the enigmatic individual known as Satoshi Nakamoto had the idea for Bitcoin, a digital asset which uses cryptography as a base to secure financial transactions. It was Nakamoto who generated – or mined – the first million-or-so of these Bitcoins, before handing operational control over to software developer Gavin Anderson. It was Anderson who would go on to become the lead developer of the Bitcoin Foundation, pushing for a decentralised setup which would allow the project to continue should he face any unforeseen accident. In the early days, these mined Bitcoins could be priced at less than £0.10.

As pursued by Anderson, the open nature of the project would go on to inspire many imitators, including Ethereum and Litecoin. However, Bitcoin would remain as the frontrunner. While these imitators followed a similar creation and infrastructure process, they were often informed by very different user desires. Some, like Litecoin, decided to focus on fast transaction times whereas others, like Dash, are more interested in anonymity and lower transaction fees.

Growing Up

Facilitating cryptocurrencies is the backing technology of the blockchain. It Blockchain acts as a distributed database in which storage devices are not connected to a common server. These databases store the records of cryptocurrency transactions and creations through ordered records called blocks. These blocks are organised by time and create links to previous blocks. Through the use of various encryption methods and linking, it became possible for cryptocurrencies to overcome the problem of duplication, meaning that cryptos do not suffer from issues which come from an uncontrolled and uncapped supply.

This also meant that mining these coins would become an increasingly difficult task over time, as with each new generation of coins would come an increased complexity of the cryptographic keys which are, in essence, what is being traded. This is how it was possible for Sakamoto to generate so many coins easily when he first invented the currency, while today an effective major mining effort will require many active computing systems, and a significant time and power investment.

Taking Part

Generally speaking, unless you have access to major computer farms, you will want to avoid mining Bitcoins for yourself. There are many alternatives (altcoins), which have not been mined to this degree, however, so these can be a prime opportunity. It is by trading that the modern Bitcoin market tends to propagate instead. Users can access what is now a wide range of trading posts online to purchase Bitcoins of their own or purchase directly from others if they desire. It can be a good idea for new users to start with some of the more established cryptocurrency exchange websites as, just with any form of currency, safety is key.

Once a user has gotten a hold of the code which represents cryptocurrency, they need to find a way to store it. There are two main ways to go about this. This first is by using a “wallet”: one of the online storage websites which act as a sort of bank. While convenient, they are also prime targets for hackers, so many users prefer keeping their coins a bit closer to their chest. While they can be stored by methods as simple as printed text documents which contain the used keys, there is also a growing market of hardware cryptocurrency wallets which include various security measures to protect their users. They also have the added benefit of existing mostly offline.

Spending

But aren’t cryptos worth very little, you might ask? Not anymore, not by a long shot. While the first coins were worth only cents, the current price of a single Bitcoin sits at around £5,000. Even better, there are now a wide range of businesses where users can spend their digital cash. Far from the early days of limited viability, the major cryptocurrencies today can purchase many of the goods and services accessible through fiat currency. This includes open online marketplaces such as OpenBazaar, places for common household items with Overstock, and even bookable travel through Expedia. There is also an increasing quantity of in-person businesses which accept Bitcoin, and these will only become more common as the infrastructure continues to grow.

Go Forth

Hopefully, we have helped demystify cryptocurrencies a little bit, and maybe even get you a little bit interested. Remember, just as with traditional currency, you need to be patient and cautious. While cryptocurrencies will doubtlessly hold a significant place in the future of online finance, we still have a little while to go before it reaches its full potential. That said, there are many of us who already regret missing out on the early days, so this an opportunity which should be taken very seriously.