in Geekery

An Introduction to Digital Currency

In 2008, a computer developer known by the pseudonym Satoshi Nakamoto published a paper on the Internet detailing what he called an electronic cash system that could work independent of central authorities on a peer-to-peer basis. After his paper was released, other developers began work on creating Bitcoin clients and promoting the exchange of the new digital currency to consumers worldwide.

Today, individuals in every country can buy bitcoins in order to send them to others or trade them on digital currency exchanges. Some Internet-based employers even offer their employees the option to be paid in this new digital currency. For investors, this decentralized currency is an ideal solution to restrictive government banking regulations. It is essential that investors educate themselves about how digital currency works and how it can be used before purchasing bitcoins.

What is Digital Currency?

As its name suggests, digital currency is a financial instrument, or form of money, that is sent, exchanged and tracked via online, peer-to-peer networks. The most well-known form of digital currency is the Bitcoin. It is considered acryptocurrency, or a type of money that uses sophisticated cryptography instead of banks and regulatory agencies to create and control money. The Bitcoin system features extremely strong security protocols, allowing consumers to send, trade and exchange bitcoins without fear that their transactions will be hacked or lost.

Much like any other currency, digital currency can be changed into other denominations. However, this can only be done on online trading sites. There aren’t physical money exchange offices that allow individuals to cash in bitcoins for dollars because bitcoins cannot be physically given to another person. Because this new form of currency isn’t created or controlled by a government, it can be used in any country by individuals who want to buy, sell or trade in bitcoins instead of standard currency.

Bitcoins are created by specialized computer programs running algorithms that uncover blocks. In order to uncover blocks and create new bitcoins, consumers must have an application-specific integrated circuit (ASIC). An ASIC is a computer chip designed for a specialized purpose. In general, these chips can only be used for the purpose for which they were designed. Chips that control video or audio recording on smartphones are another example of an ASIC.

How is Digital Currency Used?

In order to use digital currency instruments such as the Bitcoin, consumers must first have a digital wallet. This special wallet is used to store, send and exchange bitcoins with other individuals. Each digital wallet has an identifyingaddress that is protected by a password. Individuals are currently allowed to own as many digital wallets as they would like.

A great number of the individuals currently using bitcoins have advanced technological knowledge and can take care of storing, securing and sending bitcoins using sophisticated computer programs. However, consumers without a lot of tech knowledge are also able to use bitcoins by downloading free, online wallet programs that have built-in security features. Those who plan on downloading free programs should be aware that they don’t offer guarantees if money is lost or stolen, so it’s necessary to exercise caution when using these wallets.

Why Use Digital Currency?

Despite its growing popularity, many individuals still find themselves wondering why digital currency should be used. After all, it might seem like it is inconvenient to invest in digital currency when you can’t withdraw the balance of your digital wallet from a regular bank or use your money at the grocery store. However, there are actually many benefits to using this new type of currency. The following are some of the most important benefits of bitcoins:

  • Bitcoins can be exchanged consumer-to-consumer without the interference of banks, meaning that individuals don’t have to put up with long bank wait times or pay fees for sending money.
  • The value of bitcoins can increase significantly over a short period of time, meaning that this form of money can make a good investment.
  • International buyers and sellers don’t have to worry about currency conversion when using bitcoins.
  • New bitcoins are made by transferring currency from one account to another, meaning that investors can build wealth quickly and with minimal effort.
  • Bitcoins cannot be lost, torn, destroyed or stolen.
  • Consumers can remain completely anonymous when sending bitcoins.
  • Bitcoin transactions are irreversible, so merchants can avoid fraudulent chargebacks by accepting bitcoins instead of credit or debit cards.

Understanding Digital Currency Options

When it comes to digital currency options, one clear leader has emerged: Bitcoin. However, bitcoins aren’t the only choice investors and consumers have when it comes to digital currency. Litecoin also offers a cryptocurrency option to those who want to securely send money via a peer-to-peer network. While the Litecoin system is based on the Bitcoin system, this newer type of currency does have some advantages for users who aren’t tech savvy.

Bitcoin

The Bitcoin is the original form of digital currency. Bitcoins have come a long way since they were first talked about in theory by Satoshi Nakamoto. According to data from the end of 2012, more than 4,500 businesses currently accept bitcoins as a form of payment. Bitcoins are created when a computer processor completes a complex algorithm, creating something known as a block. Every time a block is found by the computer program, 25 new bitcoins are created. The early developers behind Bitcoin estimate that new bitcoins will stop being created around 2140 because the number of coins generated each time a block is found is halved over set periods of time.

Litecoin

Based on the original Bitcoin model, the Litecoin is designed to offer a user-friendly digital currency option to those individuals who don’t have the computer equipment or know-how to fully participate in the bitcoin market. Litecoin transactions tend to be processed faster than transactions with bitcoins because the algorithms for finding litecoins is different. Users don’t need the specialized ASICs that are used to mine bitcoins; they can generally complete all litecoin transactions with the help of free software.

Sending Money and Building Wealth with Digital Currency

One of the chief advantages of using digital currencies such as Bitcoin and Litecoin is the ability to send money without hassles. Users can easily buy products, send gifts to friends and participate in a currency exchange without giving away any of their personal information or relying on a third-party such as a bank to process the transaction. In addition to these basic advantages, many consumers also choose digital currency because they believe that bitcoins offer an excellent means of accumulating wealth.

Block Chains

In essence, the block chain is the ledger of every bitcoin transaction ever completed. The chain begins with the first bitcoin discovered, known as the Genesis Block. Every time an individual completes a bitcoin transaction, that transaction is added to the block chain. Each transaction creates a block. It takes bitcoin transactions 10 minutes to be verified, so there is a 10 minute space between each block on the block chain.

Every block contains a special set of characters, or a hash, that refers to the block that came before it in the chain. A wealth of information about the value belonging to each digital wallet address at any given point in time can be found by looking at the block chain. The block chain database is stored for only those nodes that are on the same system, meaning that individuals on different systems will see and use different block chains.

Bitcoin Mining

Just as the word suggests, mining is the process that individuals who use specialized hardware go through in order to discover new bitcoins. The Bitcoin system is designed to ensure that a new block, which represents one bitcoin, will be found every 10 minutes. This system is designed to ensure fair distribution of bitcoins without flooding the market with too much digital currency.

In order to discover newly minted bitcoins, users must either input an algorithm known as a hash or use a computer program that will input hashes for them. Bitcoins are difficult for individuals to find because each hash begins with a set number of zeroes followed by a numeric sequence, but the number of zeroes needed for the hash is automatically changed every 2,016 blocks.

Consumers who want to participate in bitcoin mining but don’t have advanced math or programming knowledge must rely on computer programs to take care of mining for them. These programs work by creating a constant stream of hashes and checking them again blockchains to gain new bitcoins.