The term Cryptocurrency was coined to describe virtual currencies, like Bitcoin (BTC), Ethereum (ETH) and Monero (XMR).
Those names may sound like a load of gobbledegook, but they're actually three of the leading Cryptocurrencies — a bit like British Pound Sterling (GBP), Euro (EUR) and United States Dollar (USD).
But how do Bitcoin and Ethereum differ from a more traditional tender, like the Euro and the United States Dollar? Well, before we can answer that question, we must first understand how Cryptocurrencies work.
How do Cryptocurrencies work?
Instead of relying on financial institutions, Cryptocurrencies use a decentralised peer-to-peer network to monitor and verify transactions. It’s called the Blockchain, and at the center of it lies the Distributed Ledger.
The role of the Distributed Ledger is to track all balances and transactions. To do that, it forces those wanting to hold a digital balance to create a Cryptocurrency Wallet, which is made up of a Public Key and Private Key.
Your Public Key is essentially your username — it’s how you’re identified on the Blockchain (since it’s decentralised, all transactions are public), and it’s what people — including exchanges — use to transfer funds to your Wallet.
The Private Key, on the other hand, is the unique address you use to sign into your Wallet. It’s the location all your funds are stored, regardless of the Cryptocurrency being used, so you’ll need to keep it extra safe.
Building on our earlier note, the Blockchain is a public record — meaning the information stored on it is visible to the masses. That said, while transaction amounts are public, the identity of the sender is kept anonymous.
When a transaction is initiated on the Blockchain, it will need to be confirmed at least four times before the funds are made available to the recipient. The process of confirming a transaction is known as Mining.
Just like in the real world, Mining requires Miners — computers dedicated to processing such transactions. They’re tasked with solving a computational process that’s triggered by the transaction to confirm it’s legitimate.
Once solved, the transaction is assigned a confirmation on the Blockchain and the Miner is credited a small transaction fee for their efforts in the same Cryptocurrency that was used to issue the initial payment.
So, now we have a clear understanding of what Cryptocurrencies are and how they work, we can start focusing our attention on how to acquire them (it's not as difficult as you'd have thought) and how they're valued.
How do you acquire Cryptocurrencies?
The most common method of acquiring Cryptocurrencies is purchasing them through an exchange, like Binance, Coinbase, and Poloniex. From there, you can choose to store the funds on either platform, or move them elsewhere.
But there's another way to acquire Cryptocurrency, often for a fraction of their market rate. That's right — using the Mining method we touched on earlier, you can task your computer with solving mathematical issues, in exchange for Crypto.
Once a problem is solved, the transaction is awarded a confirmation on the Blockchain and the Miner is credited a small transaction fee — the more processes solved, the more transaction fees earned.
We ran the numbers and it turns out Mining is the cheapest way to acquire Cryptocurrencies in 2019. In the United States, it costs around $4700 to fund the electricity required to mine a whole Bitcoin, versus its $7800 market value.
If you’re looking to stack up some Cryptocurrency on the cheap, Bitcoin isn’t the way to go. That would be Ethereum, which had a token value of $264 and cost around $152 to mine (again, in the United States) at the time of writing.