Cryptocurrency is a type of digital currency, the issuing and accounting of which are based on cryptographic methods such as Proof-of-work – which assures that coins are mined only by users putting computing power to work in solving complicated mathematical problems – and asymmetric or public key encryption – which assures that the network that the currency runs on remains safe, by making transaction requests secret, verifying and protecting identities, and making double-spending virtually impossible. The system functions in a decentralized fashion on a distributed computer network.
In case of cryptocurrency it is impossible to cancel or return the funds sent to the recipient. Nevertheless, there are opportunities for transactions involving the intermediary, when the consent of all three or any two parties is required to complete or cancel the transaction. The funds cannot be forcibly frozen or recovered without access to the owner’s private key, although the parties of the transaction may volunteer to temporarily block their funds as collateral.
As a rule, there is an upper limit to the total volume of coins to be issued. However, some cryptocurrencies do not have such fixed upper limit for the total volume of coins to be issued. They are emitted in function of the available savings and demissioned by mandatory destruction of a small fixed amount in each transaction.
All currently existing cryptocurrencies are used pseudonymously – all transactions are public, but there is no default binding to a particular person, although the user’s identity can be established if the necessary additional information is known. All big cryptocurrency exchange houses ask for some sort of identification. Documents that such exchange houses usually ask are: ID, a banking statement, proof of residency, and/or a picture showing the user’s face.
Cryptography for the purpose of confidential payments began to be used since 1990, in the DigiCash system of David Chom, whose company went bankrupt in 1998. However, his payment system was centralized, and the term “crypto-currency” was used for the first time after the appearance of the Bitcoin payment system, which was developed in 2009 by a person or a group of individuals under the pseudonym of Satoshi Nakamoto. Bitcoin uses SHA-256 hashing under a Proof-of-work system.
Later, other Bitcoin-based cryptocurrencies (called forks) appeared. Some relevant examples are:
- Namecoin (decentralized DNS using a cryptocurrency of the same name for registering internal .bit domains)
- Litecoin (uses Scrypt hashing, the upper limit of total issuing is increased, time for confirmation of transaction is reduced)
- PPCoin (uses a hybrid proof-of-work/proof-of-stake mechanism, does not have an upper limit for the total volume of issuing)
- Novacoin (similar to PPCoin, but uses scrypt and the emission-related factors are reduced).
How to buy a cryptocurrency
Before buying a cryptocurrency, a wallet must be created. Users have an array of wallets from where they can choose one, some of them may even store more than one type of cryptocurrency. They can be downloaded on the appropriate sites, bought to store the coins in a hardware device, stored online, amongst other methods. Wallets that users may acquire can be found on (amongst other sites):
Some of the wallets found here are suitable for storing several coins, called “multi-wallets” . Some others, do not allow for exchange with other cryptocurrencies, which may cause users to have to acquire another one that supports his needs. For a newcomer, the best way is to go through an online cryptocurrency exchange house.
On such sites it is possible to buy, sell or exchange a currency conveniently. Wallets on this sites are more often used by people who just want to buy some coins, make purchases on the Internet, gamble or invest in crypto.
- The developer of the Bitcoin client, Gavin Andrisen expressed concern about the fact that some cryptocurrencies may be fraudulent. This is mainly because a lot of them are being used to create Ponzi schemes and because they are not backed up by a company or a sustainable product
- The Central Bank of Russia warned citizens not to use the Bitcoin cryptocurrency.
- Some economists predict that the bitcoin and cryptocurrencies in general are part of a financial bubble, that may burst at any time.