The bitcoin has crossed a record-breaking value of $17000.
This was one of the most surprising as well as impactful news of 2k17. The news of the value of the bitcoin and other cryptocurrencies soaring was widespread at the end of 2k17.
So one of the common questions in people’s minds was “Should I invest in cryptocurrency?” Before answering that question you need to know what a cryptocurrency is. That’s what is discussed in this post.
I hope that you know about the currency we are using today. If not don’t worry. Please refer my other post Our Current Monetary System.
Cryptocurrency
(Crypto – encrypted Currency – money Thus cryptocurrency = encrypted money)
Cryptocurrency is a digital asset. The asset is protected by certain cryptographic techniques. To give you an intuition about this concept, compare it with the virtual tokens you get in several video games. You can purchase anything you want in the game with the help of these tokens. Similarly, cryptocurrency can be used to buy anything in the real world.
Bitcoin
The Bitcoin was created by Satoshi Nakamoto in 2008. It was the first cryptocurrency which came into existence.
The transactions take place through the blockchain. Bitcoins are also mined. It has been programmed that the total number of bitcoins that can be minted is 21 million. So you might ask a question, the population of the world as of now is 7 billion. Then how can 21 million bitcoins sustain the world economy? Unlike our conventional currency which can be reduced to up to 2 decimal places, the bitcoin can be reduced up to 8 decimal place. The value of 0.00000001 BTC is one Satoshi, named after the founder. A new block of transactions is created every 10 minutes. (which is a bit slow)
The value of the bitcoin (as of when the post was written) was $16436.01. But the price of the Bitcoin has been fluctuating wildly during the past few months.
Litecoin
The litecoin is another cryptocurrency which was created in 2011 inspired by the bitcoin. It is also a decentralized peer-to-peer transaction system. Several people compare bitcoin 
to gold and litecoin to silver. One of the main differences between bitcoin and litecoin is the block generation time. For litecoin, it is just 2.5 minutes. This allows for faster transactions to take place. It also has scrypt in its proof of work concept. There are 84 million litecoins compared to the 21 million bitcoins.
The value of the litecoin(when the post was published) was $305.03.
How does a transaction take place?
(Disclaimer: I have used the word bitcoin because it is the current most popular cryptocurrency. But the fundamental concept is similar for the other cryptocurrencies but their methods might slightly vary.)
The transaction of bitcoins is a complicated process. But one does not need to worry about it because the bitcoin framework is designed in such a way that it manages the transactions by itself. And it is quite confusing. So I will try my level best to put it into simple words. Let’s see one now.
An imaginary bitcoin trading company named TP.Trade is used here.
So now let us actually see what happens during the transaction.
Before this, I need to introduce a few terms which you will be coming across in the following passage.
Block: A block is a set of bitcoin transactions or any other set of transactions. In general, a block is a collection of a certain amount of data.
Hash: To put it in simple terms, the hash is a math problem. It consists of 2^40 possible solutions. The “miners” work hard to solve this problem. The miner who solves it gets to add the next ‘block’ of transactions to the blockchain.
Reward: The reward (of 12.5BTC now) that the miner gets is for the entire block of transacts and not for a single transaction.
Salient Features of this system of transactions:
- The cryptocurrencies come into existence only when the miner solves a hash and places the next block of transactions in the blockchain.
- There is no central authority which maintains these transactions. The miners from the various “nodes” (in simple words, from different computers) take care of this.
- The difficulty of hash is adjusted in such a way that it takes a minimum of 10 minutes to solve it. (which explains the transaction time of 10 minutes for BTC)
- The reward for every block gets halved for every 210,000 blocks. So currently it is 12.5BTC.
So after reading this, you are thinking, “Hmm..!! Let me take my laptop and solve some hash puzzles to earn some bitcoins and become rich!!”
Well not so fast…..
The hash puzzle requires you to guess a 32-bit long value. And it takes approximately 200.5 quintillion guesses to reach the correct answer. And there is no possible way to reverse generate the value.. i.e guessing the actual value of the SHA-256 value.
Also modifying even a single character will generate a totally different signature.
I would welcome you to try it out for yourself on this website SHA-256 calculator.
So it is a pretty difficult, time-consuming and not-so-rewarding job.
Advantages of the cryptocurrency:
The use of cryptocurrency in place of our regular fiat money gives us a lot of advantages.
- The first one is that the cryptocurrency is universal.
- Next is the fact that cryptocurrency is that it is decentralized. It is not maintained by any particular bank or any particular country. When I say decentralized, the first question that arises is, then how do the transactions take place and who maintains it? The answer is we, the common man maintains it. It is maintained by every node which is a part of the blockchain. These nodes authorize the transactions. I will be explaining about the blockchain in the next post.
- There are only a finite number of these tokens out there (i.e.) they cannot be produced like fiat money as much as we want. These tokens have to be mined just like the precious metals like gold, silver.
- Finally, the main factor which drives this bitcoin frenzy is the privacy it offers. It protects the details of the individual and also provides anonymity which is not possible with the current monetary system. It is almost impossible to reverse generate the signature associated with each transaction and hence the system cannot be tampered.
So in this post, we discussed the bitcoin and litecoin. We also saw how a transaction is made. The cryptocurrency is now making headlines, but it is no stranger to popularity.
In the next post, we will be discussing its shortcomings.
Thank you for reading and hope to see you soon with my next post.
Tech Wizard 