With cryptocurrencies like Bitcoin, Litecoin and Ethereum becoming more mainstream, some of us are still here wondering how cryptocurrency is earned, saved or spent. More recently, we are left asking if it is destined to fail or the future of our money?
What is cryptocurrency?
Cryptocurrency is a virtual currency which is bought and sold online. There are no bills or coins, it isn’t based on an asset such as gold and does not go through an institution like a bank. Bitcoin, for example, is not maintained or backed by a bank or government, rather it is secured by encryption.
How are cryptocurrency records kept?
To make a transaction, an individual must first log into their wallet with an alphanumeric bitcoin key. One is a public key which all users can see, while the other is a private key, essentially a password.
Transactions are made through blockchain technology and once verified become a matter of public record, for everyone to see. This is further explained below.
How do I earn and spend cryptocurrency?
Every time a transaction is made the network records the sender and receiver’s address as well as the amount transferred.
Instead of the transaction being tracked through a bank, it is shared with the entire network of miners i.e. computers with a special cryptocurrency processor. Every ten minutes the newest block or transaction is added onto the chain of transactions made. To verify the transaction, miners get in line to solve a difficult math problem.
The person who solves the problem not only verifies the transaction, but also earns some currency for themselves. This process is known as mining.
By having each transaction on a blockchain, this ensures the same digital currency is not being spent twice by the same person. As there is an entire network of users racing to verify the block this also ensures that no one person can monopolise the system. By storing data in a blockchain network, it avoids exploitation by hackers or central failure. Once verified, the blocks cannot be changed.
As more people join in to try and solve the puzzle, the harder it becomes. Before the demand to mine skyrocketed, individuals were able to mine on their own. Now ‘mining pools’ have emerged in order to keep up with the rising difficulty of solving these puzzles. In these pools the earnings are split in accordance to how much you contributed to solving the problem.
How is cryptocurrency created?
Cryptocurrency is earned or ‘released’ through a process called ‘mining’. So, not only are ‘coins’ spent verified, but more are released from verification. As mentioned earlier, you must try and solve a complex math puzzle known as a hash. The ‘miners’ who successfully solve the hash, receive a block reward – or a portion of the cryptocurrency they mined.
Bitcoin continues to lead the cryptocurrency community and says the mining will continue until they reach 21 million coins through mining.
What do I need to start mining cryptocurrency?
The basic tools you will need to start mining include:
- Mining hardware: You will need an ASIC chip for your computer which is made specifically to mine cryptocurrency.
- Mining software: You can download free software which comes with easy-to-follow instructions to walk you through how the program works with your ASIC.
- Cryptocurrency wallet: Once you start mining you will need a wallet to store your cryptocurrency. There are a variety of wallets you can choose from.
Is cryptocurrency dead or is it a good investment?
Cryptocurrency is a volatile market and remains a gamble. In a matter of months, days or even hours the exchange rates can unpredictably fluctuate.
While Bitcoin remains the most sought after and valuable currency, there are many more out there equally as uncertain. Taking bitcoin as the example, though, its worth plummeted 99 times in 2018 – which is still less than the 125 times it plummeted in 2017.
Although in the last few months Bitcoins value has been rising, there are hundreds of contrasting predictions on the future of all cryptocurrency.
Words by Michelle Elias
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