Fri 22 Aug 2014
What is a cryptocurrency?
A cryptocurrency is a digital medium of exchange that uses encrypted software to operate a market for transactions. That market is overseen by those using the network, based on rules coded in to algorithms. It’s a transparent, peer-to-peer operation, similar to the file-sharing protocol BitTorrent which is widely used for the illegal sharing of movies, TV shows and music.
How are cryptocurrencies propagated?
Crytocurrencies are created, or mined, based on a mathematical formula. In the mining process, computers are tasked to solve complex mathematical problems and rewarded with virtual coinage. Over time, the equations become progressively more difficult to solve, slowing down the supply of new cryptocurrency units.
Can anyone become a miner?
Theoretically it is possible to start mining at home. But as the mathematical challenge becomes harder, more computational grunt is required. For this reason, miners often pool resources to buy access to supercomputers or server farms (networked arrays of smaller computers).
How many cryptocurrencies are there?
The market for such payment instruments is dominated by bitcoin, but there are scores of other currencies including litecoin, dogecoin, megacoin and there is even a sexcoin.
What are they worth?
Values fluctuate based on supply and demand (and market sentiment). At the time of writing, one bitcoin is worth $US490. But the price topped $US1000 in early December. On the other hand, one litecoin is worth just $US4.30.
How do you buy and sell it?
A transaction is similar to a direct transfer between bank accounts. Algorithmic verification ensures that the same unit of currency can’t be owned by more than one person at the same time. In most cryptocurrencies, accounts known as wallets are stored either on hard drives or remotely in the cloud. Every transaction is recorded in a ledger called the blockchain that is accessible by every currency owner.
What can you buy with it?
Because of its widespread adoption, bitcoin is the most liquid of the alternative currencies and can be readily exchanged into US dollars. In additon to being used to pay for goods and services on a person-to-person level, a number of larger enterprises have begun accepting bitcoin as payment.
Is it safe?
The infrastructure around cryptocurrency markets is vulnerable and has attracted the attention of thieves, hackers and fraudsters.