Chances are you’ve heard about bitcoin or other “cryptocurrencies” (sometimes just called crypto), but understanding exactly what they are, how they work, and whether or not they really are the future requires that some facts be taken into consideration. For example: It’s important to note that cryptocurrencies are entirely digital, but unlike the money in your bank accounts, which can be tracked online, these electronic currencies don’t have the backing of any government. In fact, some banks have already banned bitcoin and other cryptocurrencies entirely, but that doesn’t mean the trend won’t catch on. Here are some basics to help you know whether you should get in on the crypto rush.
Cryptocurrency – This is a form of digital currency that is secured through cryptography, an enciphering and deciphering of messages in code. Unlike traditional currencies, these are not controlled by any central government or authority. The only way to turn that digital money into U.S. dollars (or other official government currency) is through an exchange.
Bitcoin – One of the first digital currencies, and one of the most successful, but there are plenty of other forms of cryptocurrencies out there to pick from. It was “developed” as software more than a decade ago as a peer-to-peer electronic cash system. A Japanese software engineer named Satoshi Nakamoto is credited with creating Bitcoin, but in keeping with the cryptic nature of the coin, Nakamoto is believed to be an alias for another person or persons who may have created this technology.
Bitcoin Mining – Bitcoin and other digital currencies are created via a computer technique dubbed “mining,” which takes its name from the concept of digging for precious metals in the real world. Instead of using a pick axe and going into a dark mine like the Seven Dwarves though, to mine cryptocurrency, you instead use a high powered computer to solve complex mathematical equations, or blocks, whereby you “mine” a portion of the 21 million bitcoins that can be created. What is important to understand is that this figure represents the absolute maximum limit of how many bitcoins can be mined.
Nodes – Refers to a powerful computer that runs the software that is used for mining. While a recent episode of The Big Bang Theory suggested mining functions can run in the background on a laptop you don’t need to be a genius to understand that a far more powerful computer is required. In fact, multiple computers on a network can be required to conduct mining activities – so much so that some bitcoin speculators have actually created mining centers utilizing racks of computers to help them get to the riches faster.
Hashrate – This is the speed at which a block is discovered as well as the rate at which the related math problem is solved. More powerful computers, as well as some software tools, can increase the hashrate.
Blockchain – This is the data system that allows for the creation of a digital ledger of transactions on a non-centralized network. In other words, instead of having one computer keep track of everyone’s cryptocurrency, a blockchain allows all the computers on the network to work together so that everyone can keep track of all the digital currency and transactions.
Multisig – Also known as “multisignature,” it means that more than one signature is required to approve a cryptocurrency transaction. This is important for companies receiving or sending money to a cryptocurrency wallet, so that one employee doesn’t have sole access to the currency.
Private/Public Key – A private key is a tiny but crucial bit of code that is paired with a public key to set off algorithms for digital encryption and decryption. In other words, a public key is used by any party to encrypt a message, and when another party receives the message (or in digital currency) the private key is used to decode it.
Address – Similar to an email address, this refers to the coin-specific address so that you can receive your digital currency or currencies. While it is common to have multiple email addresses (work, personal, etc.) it is recommended that you generate a completely new address for each digital currency transaction.
Altcoin – A term that is commonly used to describe any cryptocurrency that isn’t bitcoin.
Hodl – This term, which reportedly originated as a drunken misspelling of “hold” by an outspoken forum poster, has become the battle cry for early adopters of digital currency – as in those who hold onto to coins regardless of the volatility in pricing they may experience.
ICO – An Initial Coin Offering or token sale which functions much like an IPO would for stocks. However, an ICO operates as a crowdfunded effort by a company to offer a brand new digital currency in exchange for fiat currency such as U.S. dollars. ICOs are being used by some companies as a way to raise funding for various coins, where cryptocurrency tokens are issued instead of stock in exchange for real-world dollars. The U.S. Securities and Exchange Commission (SEC) has warned about the risk of fraud and manipulation and some governments, including China and South Korea, have even banned ICOs entirely.
Peter Suciu is a freelance reporter who has been covering gadgets, gizmos, consumer products, and everything else in the tech and gear alphabet from AR to Wi-Fi, Blu-ray to Bluetooth, 3D to 4G, HDTV to HTML and more for the past two decades.
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