In 2008, the financial crisis accelerated after the collapse of the major US bank, Lehman Brothers. As a result, people, businesses and governments around the world were at risk of losing their banked property. Shortly afterwards, an unknown person or the alias Satoshi Nakamoto published a document called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Satoshi explains his invention, Bitcoin: a decentralized (P2P) digital network to make payments to each other without the intervention of a third party, such as a bank or government.
At first, Bitcoin was therefore not even intended as a digital currency, but as a watertight system for sending money directly from one party to another without the intervention of a financial institution. We will try to explain how such a decentralised system for digital money (cryptocurrency) works.
How does cryptocurrency work?
In order for a digital system with which value can be transferred to function, at least the following is necessary:
- One account / account
- One balance sheet / balance sheet
Based on this information, a payment system can be set up. What is most important about a payment system, however, is that after each transaction the balance of an account is updated so that the money can only be spent once. All conventional digital payment systems, such as internet banking or PayPal, make use of a central authority that keeps this information up to date. Because there is a central authority (servers / the bank) which has to keep this up to date, you are always dependent on a third party for the storage of assets and the transfer of value in a conventional payment system.
In a decentralised network (cryptocurrency), there is no central authority or third party. This means that each part of the network must independently keep track of all transactions and must be able to verify for each new transaction whether it is a valid transaction and whether the balance is sufficient for the transaction to be carried out.
The payment system only works if all parts of the network have the same information. Normally this is quite simple because this information can be verified at a central authority, but in a decentralised cryptocurrency network this is not the case.
Nobody therefore believed that it would be possible to develop a decentralised digital payment system, but Satoshi Nakamoto proved the opposite. In the blockchain technology based Bitcoin network, all network elements always have exactly the same information, so there is no need to verify this information with a central authority.
Cryptocurrency in practice: What is it?
Just like money in a bank account, digital currency ultimately revolves around a number in a database that represents a certain value. For currencies such as Euros or Dollars on a bank account, as well as cryptocurrencies such as Bitcoin / Ethereum / Litecoin / Monero / Bytecoin, this number in the database can not be adjusted by anyone unless certain conditions are met.
Cryptocurrencies can be used to make payments in the same way as “regular” currencies. Within the network of the relevant cryptocurrency, a payment will have to be confirmed by several parts of the network, after which the transaction will be recorded in a general ledger. This general ledger is called: the blockchain.
Characteristics of digital currency are:
- Cryptocurrency is always useful for everyone. Because there are no third parties involved in transactions, anyone with a digital wallet can manage their own money and make payments with it. There is no bank that can go bankrupt, there is no need for ATMs, there is no government that can intercept or withdraw money, there are no high transaction costs and long waiting times for international transfers.
- Payments are irreversible. Once a transaction has been confirmed, it cannot be reversed. By no one. Once you’ve transferred cryptographed money, no one can change that any more.
- Cryptography ensures security. Funds and transactions are sent and stored in encrypted form. Encryption of this data is done on the basis of encryption with Publick Key Cryptography. Advanced cryptography makes the system unreachable, making your money safe as long as you keep your own wallet.
- Pseudonymous or anonymous payment transactions. Both the account numbers and transactions of blockchain payment systems are not linked to your identity in the real world. What is visible depends on the crypto point. For example: the Bitcoin and Litecoin blockchains show that there has been a transaction, what the value of the transaction was and between which parties the transaction was, while cryptocurrency such as Monero and Bytecoin obfuscate this information.
- Pay quickly and internationally. Making a payment with cryptocurrency is easy and goes very fast. Moreover, transactions are not location dependent: a payment in crypto can be received by your neighbour as quickly as by someone on the other side of the world. This takes a maximum of a few minutes.
How the blockchain changes money and business.
What is the blockchain? We have already written a lot about this on this page and have also published a video about it. In the video below Don Tapscott explains in a fun way what the blockchain is and how this technology can change our view on money and doing business. The video lasts almost 20 minutes, but is definitely worth it!
Getting started with the blockchain: investing in cryptocurrency
At The Good Coin Guide we write information about the most popular and interesting blockchain start-ups and technologies. Almost every blockchain technology does have its own “own” cryptographic token, read: a cryptocurrency. Cryptocurrencies can be acquired by minding, earning or buying them.
For most people who want to make money with blockchain, investing in cryptocurrencies is the most logical step: simply this means buying a cryptocurrency and selling it again after the cryptocurrency has appreciated. To start trading cryptocurrency, take the following steps:
- Step 1: Choose one or more cryptocurrencies you want to invest in. Check out the most popular cryptompoints on our website and do research on the currencies / technologies that interest you.
- Step 2: After deciding which cryptocurrency(s) to invest in, create a cryptocurrency wallet or purchase a hardware wallet for additional security.
- Step 3: You can now purchase the desired cryptocurrencies. The easiest way is to buy Bitcoin first and then (partially) exchange it for altcoins if you want to invest here as well. An alternative is to sign up for a cryptocurrency exchange.
- Step 4: You can now track the course of your favourite cryptocurrencies via our Crypto currencies page. Keep an eye on the market, but don’t let short-term price fluctuations influence you too much: selling in panic is never a good idea and as long as you don’t sell your cryptocurrencies you won’t make a loss.
- Step 5: When your blockchain investments have increased in value and you have achieved a return that satisfies you, you can sell the cryptocurrencies again!
Investing in cryptocurrency
Do you want to start investing in cryptocurrency? Investing in Bitcoin is often a good first step. Other cryptocurrencies are sometimes for sale with euros, but are always for sale with bitcoins via a cryptocurrency exchange. To get a complete overview of the most popular cryptocurrencies and their course, go to our cryptocurrency overview: