What is cryptocurrency?

Cryptocurrency is a type of decentralized digital currency. Cryptocurrencies utilize blockchain ledgers to record and validate transactions. The first cryptocurrency was bitcoin, which debuted in 2009, and nearly 900 cryptocurrencies have been created as of 2017, although very few have seen widespread adoption.

Deeper definition

When cryptocurrency is used to pay for goods or services, each transaction is securely encrypted and recorded in a public ledger called a blockchain. The blockchain ensures a cryptocurrency’s integrity and eliminates the need for a central administrator, such as a treasury or a central bank. Cryptocurrency users connect directly to each other in eer-to-peer transactions, with a degree of anonymity provided by the blockchain ledger. A cryptocurrency wallet is used to store various kinds of cryptocurrency.

Bitcoin was the first cryptocurrency and it remains the most popular, with millions of users trading the 16 million bitcoins currently in electronic circulation. In its wake, many imitators appeared, and virtually all of them replicated bitcoin’s approach while adding unique twists. Some of the first imitators, such as Namecoin and Litecoin, improved upon bitcoin’s security, although none of them have seen mainstream adoption like bitcoin, which as of 2017 is accepted at over 100,000 online retailers.

Other cryptocurrencies, like Nxt, resemble a computing platform more than a currency used for payment purposes. Where bitcoin simply registers ownership of coins, Nxt’s blockchain offers several transaction types, such as data storage or commodities trading, and allows users to build apps that utilize the Nxt blockchain.

Ethereum is a cryptocurrency called ether to power a globally shared computer environment. Ethereum transactions are validated on a blockchain like other protocols, but these transactions don’t simply confirm spent cryptocurrency; rather, whole computations are recorded in each block, and the price of performing the computation, what’s called “gas,” is paid with ether. The processing power necessary for the computation is provided by users called “miners” who keep the ether as a reward.

Not ready to take the cryptocurrency plunge? You can always make online payments with a credit card, and Bankrate has the list of the best cash-back cards.

Cryptocurrency example

One way to understand the difference between bitcoin and ethereum is to think of bitcoin as a currency enabled by a blockchain and ethereum as a blockchain enabled by currency. Whereas bitcoin exists to be spent, ethereum’s purpose is to provide a computing and business ecosystem. You can’t spend ether on Amazon like you can with bitcoin, but you can use it to run an ethereum-based business or app without a middleman like J.P. Morgan or Apple.

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