You’ve probably heard terms like “Bitcoin”, “blockchain”, and “cryptocurrency” in the news lately—but maybe you don’t know what any of them mean. That’s okay; you aren’t alone. In fact, while many people recognize these terms as being important in the worlds of finance and technology, few are confident that they really understand them. To help you, we’ve put together a brief but comprehensive guide outlining the basics of blockchain and some of the cryptocurrencies that use it. Consider this your introduction to the cryptocurrency world.
What is Blockchain, and Why Does it Matter?
For those of you who are wondering: no, blockchain isn’t a form of cryptocurrency itself. It’s actually the fundamental technology upon which practically all cryptocurrencies are built. Blockchain is a secure, decentralized and anonymous digital ledger. Confused? Okay, think about it like this: blockchain creates a record for all transactions conducted with a given cryptocurrency. Whenever a token—or a single unit of any cryptocurrency—changes hands, that information gets stored as the most recent node (or “block”) in a series (the “chain”).
However, blockchain is more than just an online list of transactions. The real value behind this technology is that it’s almost impossible to hack into or alter illegitimately. That’s because blockchain isn’t stored in a single place. Other digital transaction records typically live on a single hard drive or server bank, but blockchain is different. Each time a block is added to the chain, copies are made and distributed across numerous other devices in a global network. This makes the record impossible to alter—any false transaction would be disproven by thousands and thousands of records.
Using the Blockchain: Bitcoin and Other Cryptos
Bitcoin is a virtual currency that relies upon blockchain technology to verify any transactions made with it. Because Bitcoins exist in data form only, having a reliable digital record of how it is used is the only thing that makes it usable at all. Additionally, Bitcoin and most other cryptos are what is known as floating currencies, meaning that their value is not linked to a tangible asset. Instead, it is determined solely by the existing market for it.
This has made the value of many cryptocurrencies extremely volatile. Other floating currencies exist (including the US dollar), but they are subject to heavy regulation that makes it illegal to manipulate them. No such restrictions apply to cryptocurrencies at this point in time, which allows for them to be artificially inflated. It is common for groups of scam artists to coordinate their efforts and purchase large quantities of a given cryptocurrency all at once, causing its value to rise suddenly. The flurry of activity attracts other investors, but when the original buyers sell off their assets at once, the value of the cryptocurrency in question plummets again. As a result, the new buyers are left with an investment worth much less than what they originally paid for it. This kind of artificial inflation is known as a “pump and dump” scheme.
Pump and dump schemes are most common with small cryptos that have yet to amass a significant following. Larger cryptos are more stable because they have a larger base of users, and are therefore less susceptible to artificial inflation by a relatively small number of them. Currently, the five largest cryptos by market cap are Bitcoin, Ethereum, Ripple, Litecoin, and Dash. It is currently quite easy to invest in any of these cryptos by using an online conversion service. Secure platforms exist where you can transfer money into a virtual wallet (like a Paypal account) and convert it into numerous cryptos at competitive rates.
Understanding the basics of blockchain and cryptocurrencies can help you make sense of new developments in the marketplace, and ultimately ready you to invest in them yourself. Use this guide to stay oriented when you hear or read something about cryptocurrencies, and use the new knowledge you pick up to your advantage.
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