By now, we’ve all heard of cryptocurrencies but, be that as it may, not all of us are familiar with how they’re created. If this is you, we’re here to give you a full explanation of how crypto is created and even a brief guide for creating your own crypto.
Keep reading this article to find out more about cryptocurrencies, their creation, and the different methods used in the process.
What Are Cryptocurrencies?
Cryptocurrencies are digital assets that are completely decentralized and based on blockchain technology. The most famous ones are Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC), but there are many more – over 5,000 digital currencies in circulation worldwide.
You can use cryptocurrencies to buy services and regular goods, but you can also use them as a store of value. They’re a relatively new branch of monetary instruments and they require a fair bit of research and knowledge in order for you to fully grasp how they operate.
In comparison to fiat currencies like the Dollar, or the Euro, which are centralized and government-operated, cryptocurrencies have no central authority; their value and management are dictated exclusively on the internet by their users.
They consistently use two different validation methods to verify transactions: Proof of Work (PoW) or Proof of Stake (PoS).
Proof of Work is a method of verifying transactions on the blockchain where the algorithm presents a mathematical problem that the computers try to solve as quickly as possible. Each computer, or miner, races to solve the mathematical equation that can verify a cluster of transactions, named blocks, and add them to the blockchain.
This problem-solving computer race calls for an immense amount of computer power and electricity. This means that what the crypto miners get as a reward for validating transactions is large, but crypto mining has its own upfront costs and utility costs like creating a mining rig, which can set you back a few thousand dollars, and regular electricity bills since the mining rigs operating on the blockchain consume lots of electricity.
The Proof of Stake method is used when you want to cut down on the resources, since it’s less resource-intensive than regular mining, as you can stake any value you wish to spend. Basically, you’re in charge. With this method, the number of transactions a miner can verify is limited by the amount of currency they stake or put in a neutral communal safe, similar to bank collateral. Everyone is eligible for this, but the more you stake, the higher the chances to be chosen.
What Is Blockchain Technology?
Blockchain technology is the pillar of cryptocurrency. Blockchain’s primary function is that of a publicly distributed ledger that can store any type of data. There are other means of data storage, but the advantage blockchain has is that it’s completely decentralized, meaning that it is completely independent of any central authorities and financial institutions like governments and banks.
Blockchain is not stored at a single location or managed by a single administrator. Instead, identical copies of the blockchain database are spread out on multiple computers across a single network. These computers or electronic devices are called nodes.
The name blockchain is coined from two words: “chain” and “block”. The digital ledger consists of a chain that’s made from individual blocks of data. Every time new data is added, a new block is made and attached to the chain. This makes the nodes update their version of the blockchain so it’s identical with the rest of the network.
The way these new blocks are created is crucial for the safety of the blockchain. Every node has to confirm and verify the legitimacy of the data before the block can be added to the chain and it’s exactly this network verification that prevents scams and double-spending.
Transactions are secured by cryptography, which means that there are complex mathematical equations for the nodes to solve in order to process a transaction. Once they are solved and the miner has the hashing number that solves the problem, the block is added to the chain, and all transactions are recorded on the public ledger.
What Is Bitcoin?
Bitcoin, the non-jingling peer-to-peer network coin that started it all. It can be said with confidence that this is the first cryptocurrency in existence, and to this day, it remains the most popular cryptocurrency in the virtual circulation of coins.
Bitcoin was created in 2009 by a software developer named Satoshi Nakamoto. The rumor about them is that the name is a pseudonym for a team of developers. These rumors are still not verified so we can say that they are only speculations. Bitcoin is not the first idea for an alternative currency but it’s the first one that went beyond the idea stage.
Back in 2009, programming languages were much more limited than today. Bitcoin is an open-source software whose source code was created in C++, with a limited supply of 21 million bitcoins (BTC).
Bitcoins are created in a process called Bitcoin mining, a record-keeping operation executed through the usage of computer processing power. The miners maintain the blockchain network to be consistent, complete, and unalterable by grouping the new transactions into blocks that are later transmitted into the network and confirmed by the recipient nodes. They are rewarded with crypto in return for their mining services.
Why Were Cryptocurrencies Created?
Bitcoin was created in the midst of the 2008 economic crisis, which had a profound impact on many people’s lives and financial status. Many were agitated by banks and the government for a plethora of reasons. One major reason was the trust people had put in banks to keep their hard-earned money, and during the crisis, that trust was betrayed.
This is when cryptocurrencies entered the game. One of the main reasons for the creation of such currencies was having control over your money and investments. Nobody could touch it, take it away, or introduce government-imposed inflation. There is a possibility that your assets can be seized if they are kept in a central bank, whether bankruptcy or account freezing for some bill that you forgot to pay. Cryptocurrencies exist for their users to have complete control over their assets, they can’t be taken away or frozen by a bank. The only thing you need to safely store is your private wallet key and you won’t have a problem.
Bitcoin was envisioned to take on the role of an asset that would remain unalterable and provide a way for people to take part in transactions without any outside interference. A simple peer-to-peer currency, with you, and only you in control.
To this day, cryptocurrencies are under regulatory threat from banks and governments because of the freedom they provide in everyday money transfers.
How Are Cryptocurrencies Created?
Instead of mining, a cryptocurrency network/company may launch tokens as rewards for developers or reward tokens as an interest to token holders. Those tokens may later be spent or kept for future investments in that same company.
Miners create new cryptocurrency through an algorithm that generates the cryptocurrency and then it’s possible to download the blockchain from developer websites, like Github. Everyone is eligible to try their hand at this or to create their own cryptocurrency, but the process is very competitive because the amount of crypto in circulation is sometimes limited. For example, the Bitcoin network limits the production of new coins to 21 million. The limits vary among different cryptocurrencies and depend on the owner of the code. These types of limits are intentionally put inside the network as a way to combat oversaturation on the market and types of inflations. The logic is similar to the logic of halving Bitcoin rewards every 4 years.
Creating new currency requires enormous computer power to resolve the complex mathematical equations that generate units of crypto. It is estimated that there are tens of thousands of computers operating the blockchain software according to an online mining counter created by the Bitcoin developer, Luke Dashjr. The exact number is impossible to estimate because of the private and anonymous nature of crypto mining. The software enables miners to work privately without the need for declaring their presence on the network.
The software distributes the new coins depending on how fast the computer verifies the transactions. You really have to invest in a lot of hardware in order to be among the fastest, otherwise, you might not create as much. Today, the system generates 6.25 bitcoins every 10 minutes.
Where Are Cryptocurrencies Stored?
Before we get to the part of generating your own crypto, first we would like to address where you would keep them. Cryptocurrencies aren’t physically stored somewhere. They’re not even stored on a hard-drive, or in some folder. Instead, your coins are stored оn the blockchain.
The private ledger is updated through the network every time a transaction is made, a new coin is generated, or when someone relocates their crypto. To gain access to your own crypto, you need your own private key or a code-generated password that you get when you buy/download the wallet. This code changes and updates with every transaction.
With Bitcoin, the 256-bit cryptographic password you receive is your own private key, which means there are endless characters and limitless variations ensuring safety. Basically, it means that the safety of your stored crypto is ensured by the always-changing password. Your private key generates a one-of-a-kind signature that enables you to use your crypto and make transactions.
The private keys are stored in unique digital wallets. There are several types of crypto wallets: hardware, software, smartphone wallets, paper, and desktop wallets.
You must be very careful with your wallet password because of its complex encryption. If you lose your password by chance, you will be locked out of your coins. We recommend that you print out a copy of your key and store it in a safe place, preferably a home safe.
Who Can Create Cryptocurrencies?
Everyone can create cryptocurrencies, and although your asset might not be on par with Bitcoin or Ethereum, there’s nothing stopping you from taking a chance in the crypto universe.
If you want to start from scratch, then you need to get a few things straight. Earlier, we explained what cryptocurrencies are, and now we will address the difference between coins and tokens.
So far you’ve learned that a cryptocurrency is by definition a digital currency that relies on cryptography to generate new coins and confirm transactions. It functions like any other currency with the exception that it isn’t issued or controlled by a bank or similar financial authority.
Every crypto coin requires its own blockchain, while tokens operate on existing ones. Tokens are limited to companies who produce them or projects that these companies work on, while coins can be used anywhere. To put it simply, tokens are like arcade tokens – you can use them to play a variety of games and win new tokens but only in the arcade that you got them from. In plain context, company tokens could be spent on company products. Coins, on the other hand, can be used in any “arcade” but require their own blockchain platform.
Where Can You Buy Cryptocurrency?
If you don’t want to go through the hassle of creating your own currency, you can simply buy some on the internet through an exchange. There are various cryptocurrencies, and there are different ways you can buy them. You don’t even have to buy a full coin, cryptocurrency exchanges like Coinbase offer Bitcoin for purchase at 0.002% of a full coin.
If these numbers sound a little low, remember the volatile nature of Bitcoin. You can hold on to your crypto assets and sell them at a higher price or you can exchange them for another crypto if you feel that its value will be greater in the future. There are many cryptocurrency exchanges to buy the crypto of your choosing. Below you can read in detail about some of them.
One of the best beginner exchanges is eToro. It’s a very easy-to-use platform and offers practice accounts for testing cryptocurrencies without having to spend your money. The downside of it is the high spread fee for purchasing Bitcoin. The spread fee is the difference between the selling price and the purchasing price of Bitcoin.
One of the most popular crypto exchanges is Coinbase. It’s one of the largest Bitcoin wallet providers, based in San Francisco. Their services are used by more than 50 million users, and it’s available in over 100 countries.
However, Coinbase has a fixed 0.5% fee per transaction and an extra fee based on your funding method. This fee is not large if you’re planning to buy smaller amounts, but with larger amounts of crypto, it can stack up pretty quickly. (the highest one is 3.99% for card purchases). You can also check out their advanced platform, Coinbase Pro, aimed at more experienced users.
What Are Some Different Types of Cryptocurrencies?
Bitcoin still reigns supreme, but the crypto market offers a variety of altcoins as well. They function similarly but offer various possibilities for crypto. Whether they offer smart contracts, store of value, or just speculative investing, there are many choices, and of course, their values are rather distinct, from a few cents per coin to thousands of dollars.
Ripple (XRP) is a technology that functions both as a cryptocurrency and a network for digital payments. It was created in 2012 and it works similarly to the SWIFT system for international money transfers. Ripple’s token is pre-mined and functions on an open-source, P2P platform that enables consistent money transfers in actual money like dollars, euros, and also cryptocurrencies like Bitcoin, Litecoin, Ethereum, etc. XRP is used for fast conversions between different currencies.
Ethereum is a blockchain platform designed for creating, publishing, and monetizing applications called dApps. It was created in 2015 by a team of blockchain supporters to build smart contracts and dApps that may be used without the risks of fraud, theft, and third-party interference. It has its own currency called Ether (ETH). Ether may be used to purchase and trade goods and services, and it can be bought or mined through the blockchain.
Tether is another altcoin, the third-largest in the world according to Coinmarketcap. It works a bit differently than the other currencies available. Tether is called a stablecoin because it’s connected to real-world currencies like the dollar to maintain its stability. Tether was created to carry the same value as the U.S dollar by design, though it hasn’t always managed to keep that value, causing small panic attacks among investors.
You can trade with Tether if you want a more stable asset compared to the more volatile bitcoin because its value will always be equivalent or near equivalent to one U.S dollar. It might vary 10 to 15 cents below $1 from time to time but repeatedly rises back up to its original value. If you want to play it safe, maybe Tether is the crypto for you.
A Few Words Before You Go…
There are many virtual currencies in the world today. They all came from Bitcoin and while some used the same technology for their creations, others refined and discovered new ways and possibilities for the creation of better, faster cryptocurrencies.
We’ve covered the history, the reasons, and the know-how of the digital phenomenon of crypto, as well as its impact on our society. So we hope that this article brought you one step closer to understanding how it all started.