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What Are Crypto Currencies And How Do They Work?

Crypto currencies are electronic money that aren’t denominated by any national currency, nor are produced by any government-endorsed central banks.  These currencies are known as “alternative currencies,” and thus are sometimes called “altcoins.”

Many crypto currencies are cryptocurrencies, a type of digital currency that relies on cryptography, as well as a proof-of-work scheme.  Essentially, it involves a mathematical process to create the currency at a reasonable rate so that the currency doesn’t become too numerous, and thus, lose its value.  Bitcoin was the first cryptocurrency, while many others have followed.

The second-most valuable “altcoin” is known as “litecoin.”  It shares many similar features to bitcoin, but it has a shorter block rate (litecoin’s block rate is 2.5 minutes versus bitcoin’s 10 minutes).  This means that the litecoin can be processed and put into people’s digital wallets faster than the bitcoin can.  Even though litecoin is cheaper than bitcoin, it is not as popular as Bitcoin, and thus, litecoin is used in fewer places than bitcoin.

The third-most valuable “altcoin” is known as “peercoin.”  It too is modeled after Bitcoin, but unlike Bitcoin, peercoin has no hard limit on how many peercoins will be mined.  The only certainty is that peercoin is designed to eventually hit a target of one percent inflation.  That could help the peercoin to last long term as a digital currency.

“Namecoin” is the fourth-most valuable “altcoin.”  It is very interesting because it is the first prominent iteration of the Bitcoin model to serve a function beyond payments.  It is designed to manage information access, as it utilizes all of the same Bitcoin principles to serve as a distributed Domain Name System (DNS).  With this unique feature, it may survive on its own even if Bitcoin fails.  There may be further variations of this type of model as well in the future.

“Primecoin” is interesting in its own right because the mining of this digital currency actually contributes to society by implementing scientific proof-of-work.  As a result, new blocks of this digital currency are generated every minute, which results in smoother difficulty adjustments and faster transaction times.

One other interesting “altcoin” that is not like Bitcoin and the other digital currencies is “ripple.”  Ripple has gained much venture capital from Google Ventures, Andreessen Horowitz, Lightspeed Venture, and other venture capitalists.  It acts as a decentralized payment system and exchange to complement other currencies, both virtual and physical.

Crypto currencies work by mining those currencies on one’s computer via a “mining” software that brings about the currency.  This is recorded in the respective network to show such new units of the currency exist.  These coins can go into a person’s digital wallet, then be used to complete transactions. The types of transactions include physical items such as books and video games to digital items such as domain name registration and digital salaries for work performed.

As you can see, there are more crypto currencies out there than just Bitcoin, and it seems to be that there will probably be more in the future, both based on current digital currencies and even brand new ones.

As the world continues to become more “digitized” in terms of the Internet and e-commerce, crypto currencies will continue to gain more prominence and use.  While replacing physical currencies is probably unlikely, especially in the near future, having more sites accepting digital currencies and conducting transactions using crypto currencies is probably likely.

What Are Bitcoins?

Bitcoins are a type of digital currency that can be created via a free software application and transferred across the Internet without the use of financial institutions or clearinghouses.  This means that there is no physical form of this currency; it is not like a U.S. Dollar or a Euro, or even like a piece of gold or silver.  You cannot touch bitcoins and be in physical possession of them like you can those aforementioned physical currencies.

The best way for you to understand digital currency is by thinking of it as a code. The strength of the code makes the currency stronger. Cryptography ensures that the code cannot be accessed without proper authorization. This code has never been broken, though many people have tried!

How can Bitcoins be used then?  A computer, Smartphone, tablet, or any device with Internet access can easily transfer Bitcoins from one person to another, even in transactions between a user and a business website.  The number of bitcoins you have are stored in your “digital wallet,” which is similar to screens you see when you use online banking forms to authorize transactions.

When a Bitcoin transaction occurs, the bitcoin miners communicate over a Web-based network and add the transaction to transaction logs that record all Bitcoin transactions.

Peer-to-peer file-sharing technology allows all transactions to be processed and documented.  An electronic signature is added, allowing the transaction to be stored on the Bitcoin network.  This transaction is free for all to see, though you can use multiple bitcoin accounts and not transfer large amounts of bitcoins to each account in order to help camouflage your activities. This hides your accounts from other Bitcoin users, so they do not know which accounts are yours.

Bitcoin is unlike other currencies because it is decentralized; no one agency (world or national) controls the regulation of it.  You may think because Bitcoins are a digital currency that there would be an unlimited supply of them, much like the space on a digital or virtual server.

However, thanks to a schedule planned by Bitcoin itself, there will be 21 million bitcoins in the year 2140.  This number will be reached by each update being reduced by half every four years until 2140.  At that time, there will be no more Bitcoins mined.

To further ensure that the exact number of 21 million Bitcoins will be in circulation in 2140, each Bitcoin is broken down into eight decimal places, leading to 100 million smaller units being created, known as “satoshis.”  The name is based on the founder of Bitcoin, a software developer named Satoshi Nakamoto. Many people think that this name is a mask and helps to hide the true creator of the software.

When “mining” is mentioned, this means that the free application that creates the Bitcoins is automatically adjusted to ensure that the bitcoins are mined at a predictable and limited rate.  There is a certain amount of processing work done by the bitcoin miner, allowing the network to control the exact number of bitcoins being circulated at any one time.

Bitcoins are being accepted at more and more retailers and other online sites throughout the world, changing the way people do business online.  For instance, domain registrar Namecheap has become the first major domain name registrar to allow the use of bitcoins as payment for domain name registration, Web hosting, SSL certificates, and WhoisGuard on Namecheap.  Coinality.com, a site that launched in September 2013, profiles jobs that pay in digital currencies, including Bitcoins.  Bloomberg TV said that Coinality.com is the “Monster.com for jobs that pay in Bitcoin.”

As you can see, Bitcoin is gaining more influence in our world today.  The creators of Bitcoin believe that as bitcoins become more prominent and more mainstream, a true global economy will start to emerge.

Unlike with physical currencies, Bitcoins and other digital currencies will not be hampered by the limitations and red tape of currencies, exchanges, and regulations.  As mentioned above, the creators of Bitcoin planned on bitcoins becoming a part of our future, as bitcoins are to continue flowing into the world until 2140.

As a result, it’s likely that more and more companies and organizations will start taking Bitcoins and other digital currencies as payment and using them as payment, thus increasing the presence and influence of digital currencies in our physical world as we continue into the 21st century.

How To Access And Use A Bitcoin Account?

With all the current news in regards to finances and the Internet, you are  likely wondering how to get set up and use Bitcoin.  As we mentioned earlier Bitcoin is the network that is using a digital currency to conduct transactions in many places across the Internet.  Unlike a physical currency such as U.S. Dollars and Euros, Bitcoins are “mined” on the Internet, and all transactions take place on the Internet with no physical currency actually changing hands.

So just how do you get access to Bitcoins?

There are two ways in which you can gain bitcoins:

1. You can buy bitcoins from various sources
2. You can mine them yourself

There are two main sources from which you can buy bitcoins: regulated exchanges and from other people who are selling them.  You can pay for bitcoins in a variety of ways; most people will use either hard cash or wire transfers.  It really depends on where you live and who you are buying them from, as different sellers have different requirements for selling bitcoins to others.

Note that it is virtually impossible to purchase bitcoins via such payment methods as credit cards and PayPal. [though this is something that may change in the future]

This is certainly different from most transactions, as most digital items and a great majority of physical items can be paid via either of these two popular payment methods.  The main reason why credit cards and PayPal are not accepted for buying bitcoins is because such transactions using these payment methods can be easily reversed with a call to the credit card company or a press of a button in your PayPal account.

Being that the Bitcoin itself is a transfer of bits, most governments and agencies will not see this as proof of goods changing hands, and consequently, the bitcoin seller will be out of gaining any money for the transaction.  This is why credit cards and PayPal are largely avoided by exchanges and private sellers when offering Bitcoin payment options.

The other main option to gain bitcoins is to mine them yourself.  However, this isn’t as easy an option as it may sound.  For one thing, you need a Field Programmatic Gate Array (FPGA) or an Application Specific Integrated Circuit (ASIC) to really be able to mine Bitcoins on your own. Even a computer with a graphical processing unit (GPU) would not be able to mine for bitcoins nowadays, because the mathematical process of mining them has become too complex.  
You also have to factor in the amount of electricity used for the computer or circuit to mine those Bitcoins, as there will be more electricity used than is used by most of your household appliances and items.

Even if you do get the necessary equipment for mining, you’d still have to join a pool of other miners in order to really obtain bitcoins.  Thus, while mining bitcoins is an option for some, it’s for a relatively small portion of the population and is definitely not for everyone.

When you do get bitcoins via purchasing or mining, you need to have a digital wallet.  This is similar to an online bank account.

You have several options:

1. A software wallet stored on the hard drive of your computer
2. An online Web-based service that acts as a digital wallet
3. A paper wallet
4. A mobile wallet for your Smartphone or other mobile device

When you want to send bitcoins to someone else, the transaction takes place between your digital wallet and the other person’s digital wallet.  When this occurs, everyone on the Bitcoin network knows about the transaction. Plus the history of a transaction can be traced back to the point where the bitcoins were produced. This is thanks to the public ledger where all Bitcoin mining and transaction are recorded.

As you can see, bitcoins can be acquired either via purchasing from a bitcoin seller or from mining the bitcoins yourself, though the latter option is only practical for a small number of people.

You keep the bitcoins in a digital wallet, either on your own computer or via a Web-based service.  When you want to conduct a bitcoin transaction, the transaction takes place between your digital wallet and the digital wallet of the other person. By knowing how a bitcoin account works and how to use it for funding transactions, you now have the opportunity to utilize the first digital currency in the history of humankind when making purchases on the Internet.

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