A simple explanation of Cryptocurrencies

Cryptocurrencies such as Bitcoin or Ethereum gain increasing importance and almost everyone has heard the terms somewhere. Cryptocurrency systems offer the possibility to revolutionize the existing financial systems and create a real value behind a currency again.

Cryptocurrency

A Cryptocurrency is quite simply a digital currency. The word “crypto” refers to the cryptography, the science around the encryption of information. You can make payments with Cryptocurrencies, just like with other currencies. If you want to buy something and the seller accepts those currencies, you can simply transfer the required price to his digital account.

What is the difference to traditional currencies, like Euro?

There is no finacial institutes, no third party who manages our account and then transfers the money. At most cryptocurrencies, we are the “bank”, computers distributed all around the world, calculate our referrals and maintain a persistent list. This list of past referrals, also referred as Blockchain, is the most important innovation in cryptocurrency system.

Bitcoin transactions

Blockchain

The “Blockchain” contains all the transfers ever made, collected in blocks. A block is a collection of transactions. With Bitcoin for example, one block contains 2400 transactions. Every block contains some more information, like the digital and unique “fingerprint” of his predecessor. Once a block is full and once completed, it can never be changed again, because his unique fingerprint would change. This provides the very high security to cryptocurrency transfers.

My account

As explained, Cryptocurrencies do not need a finacial institutes, so you do not need to log in or create an account to an institute for their management. This is the reason why many cryptocurrency transfers are also completely anonymous. What you have to do is just create your own account.

If you want to create a new account, you can easily do this with so-called “wallets”. A wallet is nothing more than a computer program, which gives you access to the selected currency. When you create an account, two keys are created. One of these keys is the public address that can be passed to receive referrals, similar to a conto number. The second key is secret and may never be passed on. It is the key with which you can send referrals yourself. Similar to the PIN of a bank card. The one Who owns this private key is also the owner of the account.

If you want to know how much money you have just available, you simply open your wallet. This program then goes through the entire list and calculates all past referrals and shows me my result.

How is new money generated?

If, for example, Europe wants to produce new Euros, the European Central Bank can set a certain sum and integrate it into the existing financial system without any real equivalent. Even banks have long been no longer with real countervalues. This is different with cryptocurrencies! All money has a direct value, namely the work of a computer. The calculation time of a computer creates a real value to every created unit. New cryptocurrency units are given to anyone who makes their computer available for calculating new blocks. This process is called “mining”.

In addition, a lot of cryptocurrencies are already limited in their maximal circulating amount. For example, there can never be more than 21 Million Bitcoin.

Thus, a rapid depreciation of money within a cryptocurrency is much less possible than with the established financial systems and thus guarantees a high stability.

When can I pay with cryptocurrencies?

The developement of Bitcoin started in 2008 and improved a lot since then. Cryptocurrencies are getting more and more media attention and relevance in the everyday life. Every day there are more online shops accepting the new currencies, but also local stores started to accept them as a payment.

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