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Cryptocurrencies – what digital money really means?

Cryptocurrencies, sometimes called virtual currencies, digital money/cash, or tokens, are not really like U.S. dollars or Saudi Riyal. They live online and are not backed by a government. They’re backed by their respective networks. Technically speaking, cryptocurrencies are entries in a database.

As the name suggests, the term cryptocurrency is a combination of the words 'crypto' and 'currency'. The word crypto comes from the fact that most of the cryptocurrencies use cryptography principles for generation, transfers etc. Cryptography is a branch of computer science that deals with encryption, decryption, passwords, and all that secret and safety stuff.

Most of Cryptocurrencies have the same basic underpinnings: they use a “blockchain”, a shared public record of transactions, to create and track a new type of digital token – one that can only be made and shared according to the agreed-upon rules of the network, whatever they may be.

A cryptocurrency doesn’t really exist as a concrete physical – or even digital – object. If I have 0.5 bitcoins, sitting in my digital wallet, that doesn’t mean there is a corresponding other half sitting somewhere else. For example, what you really have when you own a bitcoin, the largest cryptocurrency, is the collective agreement of every other computer on the bitcoing network that your bitcoin was legitimately created by a bitcoin “miner”, and then passed on to you through a series of legitimate transactions.

If you want to actually own some bitcoin, there are exactly two options: either become a miner (which involves investing a lot of money in computers and electricity bills – probably more than the value of the bitcoin you’ll actually make, unless you’re very smart), or simply buy some bitcoin from someone else using conventional money, typically through a bitcoin exchange such as Coinbase or Bitfinex.

What can I actually do with cryptocurrencies?

Using cryptocurrencies isn’t like using a regular currency. You can’t hold cryptocurrency in your hand and you can’t open a cryptocurrency account. Cryptocurrency only exists on the blockchain. Users access their cryptocurrency using codes called public and private keys.

It’s a bit like sending emails. If you want someone to send you an email, you tell them your email address. Well, if you want someone to send you cryptocurrency, you tell them your public key. If you want to read your emails or send an email, you need to enter your email password. This is how private keys work. Private keys are like passwords for cryptocurrency. Public keys can be seen by anyone, but private keys should only be seen by you.

Private and public keys are kept in wallets. Crypto wallets can be online, offline, software, hardware or even paper. Some can be downloaded for free or are hosted by websites. Others are more expensive. For example, hardware wallets can cost around a hundred US Dollars. You should use several different kinds of wallets when you use cryptocurrency because whoever has the private and public keys owns the cryptocurrency. There is no way to prove you own cryptocurrency unless you have the keys to it. The advantages of Cryptocurrency can be explained in the following graph: