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Bitcoin has several important features that set it apart from government-backed currencies.

The bitcoin network isn’t controlled by one central authority. Every machine that mines bitcoin and processes transactions makes up a part of the network, and the machines work together. That means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown – or simply decide to take people’s bitcoins away from them, as the Central European Bank decided to do in Cyprus in early 2013. And if some part of the network goes offline for some reason, the money keeps on flowing. Conventional banks make you jump through hoops simply to open a bank account. Setting up merchant accounts for payment is another Kafkaesque task, beset by bureaucracy. However, you can set up a bitcoin address in seconds, no questions asked, and with no fees payable. Well, kind of. Users can hold multiple bitcoin addresses, and they aren’t linked to names, addresses, or other personally identifying information. However… …bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. The blockchain tells all. If you have a publicly used bitcoin address, anyone can tell how many bitcoins are stored at that address. They just don’t know that it’s yours. There are measures that people can take to make their activities more opaque on the bitcoin network, though, such as not using the same bitcoin addresses consistently, and not transferring lots of bitcoin to a single address. Your bank may charge you a £10 fee for international transfers. Bitcoin doesn’t. You can send money anywhere and it will arrive minutes later, as soon as the bitcoin network processes the payment. When your bitcoins are sent, there’s no getting them back, unless the recipient returns them to you. They’re gone forever. So, bitcoin has a lot going for it, in theory. But how does it work, in practice? Read more to find out how bitcoins are mined, what happens when a bitcoin transaction occurs, and how the network keeps track of everything. Cryptocurrency is a decentralized digital currency that uses encryption to generate money and to verify transactions. In simpler terms, it’s an alternative to traditional currencies, which are backed by a centralized government like the US Dollar (USD). Cryptocurrency may seem like a daunting subject at first, but the core concepts surrounding cryptocurrency are pretty straightforward. Below, we will breakdown the cryptocurrency basics to explain cryptocurrency in a simplified way. See our how cryptocurrency works page for a breakdown of how things like transactions and mining work.

Understanding Cryptocurrency: An Analogy

Imagine a world where, instead of money, we used giant carved stones as our currency. Further, because these stones are so large, we kept them in a public place where everyone could see them and anyone could check who owned which stone. When you wanted to buy something, you would simply tell everyone that you were transferring ownership of one of your rocks to someone else. Then, everyone would know that you no longer owned that rock, and you couldn’t spend it again. Further, if anyone ever wanted to make a new stone, all they had to do is spend time carving it so that people recognized that is was the same kind of valuable stone as all of the other ones. The time spent carving the stone makes it valuable and worth something to other people in the rock-spending community.

A General Description of Cryptocurrency

Cryptocurrency is a lot like the theoretical rock currency described above: Every cryptocurrency has a public ledger that contains the past and present ownership of each coin. If you want to make transaction, you simply broadcast to the cryptocurrency’s network that you’re transferring ownership of some cryptocurrency of yours to someone else. The network then spends computational power on both verifying your transaction (that you do own the cryptocurrency your spending and that you haven’t spent it before), and adding it to the ledger. In the process, this computational time and effort creates new cryptocurrency as a reward to the community members who helped make the transaction possible.

Cryptocurrency Today

There are many specific cryptocurrencies currently becoming popular and widely-used as currencies, commodities, and electronic payment systems. The most commonly-used cryptocurrency is, by far, Bitcoin. However, other cryptocurrencies (especially Litecoin) are growing in both public acceptance and value.