When the first cryptocurrency, bitcoin, was introduced, it was a great gamble to see if something without a physical presence that wasn’t backed by any material assets would be accepted as legitimate money. The first bitcoins were valued at 8/1000 of one US cent. As of February 2017, they reached as high as $1250 per bitcoin. Things seem to be working out. To get an idea of how this is possible, consider these basic rules behind cryptocurrency.
Out of Thin Air
The first and most successful cryptocurrency is bitcoin. This virtual money also serves as a blueprint for most of its competitors. Starting with the idea that modern fiat currencies work because people simply accept them as legitimate means of exchange, the creator of bitcoin, Satoshi Nakamoto, a nom de guerre, invented a software algorithm that would generate virtual coins that couldn’t be counterfeited. Use of the software, referred to as mining, first involves gathering all records of existing transactions into a ledger called a blockchain. It then verifies the latest transactions by solving a series of algorithm puzzles. If successful, the person operating the mining software is awarded a set number of bitcoins along with a small transaction fee payment. Originally, 50 bitcoins were given to a miner for a successful solution, but the algorithm is designed to reduce this award to keep the total number of bitcoins at 21 million when the system reaches the end of its production cycle. This design feature prevents currency inflation. Currently, miners are rewarded with 12.5 bitcoins per solution. As a cryptocurrency, each bitcoin consists of a long identification code that the owner stores in their own computer memory or in a third-party storage site.
The success of bitcoin has launched roughly 700 other cryptocurrencies. The vast majority have yet to gain traction, but some, like litecoin, have gained acceptance by offering a unique twist. Litecoin differs from bitcoin by making verification quicker, 2.5 minutes instead of 10 minutes for bitcoin, and by aiming to ultimately supply 84 million coins before production finally ends. This approach has kept litecoin’s value more stable over time.
Another alternative, Ripple, differs by allowing any object of value such as dollars, gold, and even frequent flyer points to be exchanged along with its own cryptocurrency, the XRP. Also, instead of blockchains being verified by miners, everyone in the network is notified of each transaction.
One of the emerging cryptocurrencies is OneCoin. OneCoin helps its users to make payments easier, faster and at a low cost. In addition, OneCoin provides education, thus simplifying and demystifying cryptocurrency.