Cryptocurrency has been a popular topic of discussion for several years. However, at the end of 2017, with bitcoin futures trading beginning on the Chicago Board Options Exchange and Chicago Mercantile Exchange, the conversation has seemed to reach a fever pitch. But what is cryptocurrency? And whats behind its meteoric rise?

Like money, a cryptocurrency is a medium of exchange. However, the cryptocurrency is virtual or digital, meaning that there is no physical coin or bill that owners of the currency possess. The crypto- part of its name comes from the fact that it uses cryptography to secure and verify transactions. Additionally, a common characteristic of many cryptocurrencies is their decentralized nature: Whereas typical currencies are issued from a central bank, cryptocurrencies cut out the middlemen as a peer-to-peer system. This decentralization is touted as one its principal benefits, as it might increase transaction speed and let users avoid fees charged by banks and other more traditional financial institutions.

There are multiple cryptocurrencies that are widely used. Among the biggest are Ripple, LiteCoin, and Ethererum. However, its Bitcoin that remains the largest and most talked about cryptocurrency.

Bitcoin, which was created in 2009, is credited as the first decentralized cryptocurrency. Its also the first cryptocurrency to have its futures traded on a major exchange. Holders of Bitcoin are able to use it just like any other currency at thousands of vendors, including Overstock and Subway.

Bitcoin, though, has garnered widespread attention not only for its increase in popularity as a digital currency, but also for what is perhaps its biggest innovation: blockchain.

In the most basic terms, blockchain is a type of digitized and public ledger. Bicoin uses blockchain technology to maintain information on how much Bitcoin is owned and who owns it. Rather than possessing physical currency, or even a digital file thats representative of the currency, individuals have a claim to a piece of information contained in the blockchain ledger.

So when a Bitcoin transaction is made, the currency is transferred between parties as a block of information that gets added to the historical chain of transaction data. This ledger is a public fileanyone can download a copy of it. Individuals identities are encrypted, however, and this feature of the technology is among the many reasons it is so highly touted.

Just as Bitcoin and cryptocurrencies are gaining in stature, blockchain is expected emerge as an important technology with a wide array of potential applications, too. Blockchain could be used in everything from expedited transfer of title in real estate sales to international transactionsnot to mention those that havent even been thought of yet.

So while the outlook for both cryptocurrencies and blockchain arent entirely well defined and the concepts may initially be difficult to grasp, one thing is likely: consumers of all stripes can be sure that these technologies will likely impact the financial futures of consumers of all stripes in the years to come.

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What Is Cryptocurrency? | Discover

Cryptocurrency facts takes a simplified look at digital currencies like Bitcoin to help explain what cryptocurrency is, how it works, and its implications. On this site, we cover everything you need to know about:

TIP: If you are new to cryptocurrency, check out ourguide to cryptocurrency for beginnersfor a crash course on the basics. Or, check out ourcryptocurrency investing starter kit.

As of 2020, cryptocurrency has been used as a decentralized alternative to traditional fiat currencies (which are usually backed by some central government) such as the US dollar (USD). Meanwhile, cryptocurrency technology, including smart contracts and blockchain technology, have been used for a number of other purposes such as apps, cloud computing, and more.

For theaverage person using cryptocurrency is as easy as:

For advanced users, the possibilities are vast.

How do I get cryptocurrency? If you want to get cryptocurrency you can mine it, trade goods and services for it, or buy it via brokers and exchanges using dollars and other cryptocurrencies. Check out Coinbase for a broker/exchange/wallet solution.

What is a cryptocurrency address?: A public address is a unique string of charactersused to receive cryptocurrency. Each public address has a matching private address that can be used to prove ownership of thepublic address. WithBitcoin the addressis called a Bitcoin address. Think of it like a unique email address that people can send currency to as opposed to emails.

The first decentralized digital cryptocurrency can arguably be traced back to bit gold(not to be confused withBitgold), which was worked on by Nick Szabo between 1998 and 2005 but was never implemented.

Although bit gold is widely considered the first precursor to bitcoin, cryptocurrency pioneer David Chaums company DigiCash (a company founded in1989 which attempted to innovate digital currency),Wei Daisb-money(a conceptual system published in1998 which Satoshi cites it in the Bitcoin white paper), ande-gold (a centralized digital currency that started in 1996) are all notable early mentions.

With that history noted, modern digital currency starts in 2008 whenSatoshi Nakamoto (an anonymousperson and/or group) released theirpaper detailing what would become Bitcoin.

Bitcoin became the first decentralized digital coin when it was created in 2008. Itthen went public in2009.

As of 2020, Bitcoin is the most commonly known and used cryptocurrency. Meanwhile, other coins including Ethereum (ETH), Ripple (XRP), Litecoin (LTC), and more are all notable mentions.

Given thepopularity of Bitcoin as well asits history, the term altcoin is sometimes used to describe alternative cryptocurrenciesto bitcoin (especially coins with small market caps).

As of January 2015, there wereover 500different types of cryptocurrencies or altcoins for trade in online markets. However,only 10 of them had market capitalizations over $10 million.

As of September 2017, there were over 1,100 cryptocurrencies and thetotal market capitalization of all cryptocurrencies reached an all-time high surpassing $60 billion! Then, by December 2017, the total market cap reached $600 billion (a multiple of 10 in only two months).

Since that time the total amount of coins has grown while the market cap has ebbed and flowed.

Although the future is uncertain, cryptocurrency is proving itself to be more than just a fad. Today cryptocurrency is shaping up to be a growing market that (despite the pros and cons) is likely here for the long haul.

On this site, we explore every aspect of cryptocurrency. Simply choose a page from the menu,visitour what is cryptocurrency page for a more detailed explanation of cryptocurrency, or jump right in to the how cryptocurrency works section to start learning about transactions, mining, and public ledgers.

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Introduction to Cryptocurrency - CryptoCurrency Facts

Cryptocurrency Investing on eToro a League of Its Own

Cryptocurrencies represent a distinct asset class in a league of their own. While they have often been associated with extreme volatility since their inception a decade ago, volatility is a double-edged sword. While you can earn a significant amount of money quickly, you can also lose it just as fast. The average annual return of the US stock market since the 1950s is estimated at 7%[1], however, in the cryptocurrency market, prices can move by many percent in a single day (for example, Bitcoin circa 2017).

The fast-paced nature of the cryptocurrency market also manifests itself in a far shorter market cycle than in traditional financial markets. Here are some tips to help you survive a market downturn.

Knowing your investment objectives and your time horizon are two important elements that will dictate your investment decisions. Individuals can be characterised as either short-term traders or long-term investors. Short-term traders thrive in a volatile environment where they tend to make frequent investment decisions in the form of buying and selling in very short time intervals. They can hold on to their investments for days, hours, minutes and even seconds! Short-term trading is highly risky, and is usually reserved for sophisticated and experienced individuals. For normal retail investors, a long-term investing approach is a safer strategy, where investments are held for the long haul. Given the potential and gradual adoption of blockchain technology, cryptocurrencies may skyrocket in value over the long term. With a longer-term horizon, you do not need to be exposed to short-term price variations that can take their toll mentally and emotionally.

You should only acquire cryptocurrencies through reputable and licensed cryptocurrency exchange such as eToro, which offers many popular cryptocurrency and tokens to choose from, and several features to help you get started on your crypto journey, for example, eToros extensive articles that cover basic trading strategies as well as guides to help you navigate the complexities of the market.

Obscure tokens are tokens with low market capitalisation or even coins which have gone through an Initial Coin Offering (ICO), but are not yet listed on any exchange. Usually, these tokens are thinly traded across a small pool of exchanges, probably due to little trading demand or because they are relatively new coins. Obscure tokens are highly risky, because they do not have an established track record and prices could be extremely volatile due to their paltry liquidity. Prices can swing rigorously if a large order is executed on an exchange. Although these tokens could be significantly profitable if prices go on an upward trajectory, you could also stand to lose a big chunk of value if prices move adversely. A market downturn, as witnessed at the start of 2018, could obliterate the value of obscure tokens significantly, and they could possibly lose as much as 70% to 90% of their value. Only when you have considerable experience and knowledge dealing with obscure tokens should you seek to include them in your portfolio. You should always store your coins in a secure digital wallet. eToro offers a secure digital assets Wallet solution that supports over 120 coins and lets you safely store your cryptocurrencies.

In this complex and fast-moving space, research is your best friend. Engage in thorough due diligence before carrying out any investment decisions. If you are thinking about investing in a new coin or token, first evaluate the website, team and most importantly, the projects white paper. Ensure that the project has clearly defined the problems which it is addressing and that the solution has been thoroughly explained. Only when you are clear about the projects direction, its potential and the absence of red flags, should you commit to executing the investment. One easy way to understand sentiments related to any coin is to utilise a crypto social feed, such as eToro, which allows interaction with a vibrant community of like-minded crypto enthusiasts.

When new to the cryptocurrency market and trading in general, it is best to avoid highly leveraged products and strategies in the fast-evolving cryptocurrency space. Products such as cryptocurrency derivatives, options and CFDs should be avoided if you do not fully understand their mechanics. Strategies such as margin trading are also highly risky and should be avoided to reduce your risks. Investing in cryptocurrencies is already risky; trading using leverage could significantly increase your risk exposure, especially in a market downturn where the possibility of margin calls increase exponentially. Acquiring real coins from regulated cryptocurrency platforms such as eToro is a good first step.

Financial wisdom dictates that diversifying is key to managing your investment portfolio. Put simply, a basket of crypto is wiser than investing solely in one coin. Without diversification, your losses will be directly tied to one investment. In a diversified pool of coins, your losses can be mitigated across all coins and could reflect a lower overall loss in a market downturn. The availability of different coins and trading pairs in many cryptocurrency platforms with eToro being one of the most prominent allows you to effectively diversify your portfolio safely and conveniently.

In a market downturn, the focus should be more on accumulating cryptocurrencies due to lower market prices, especially if you are a long-term believer in digital currencies. There are numerous ways to earn free cryptocurrency on the side, including utilizing your computing resources to collectively mine cryptocurrency transactions and earn mining rewards, subscribing to services that provide free coins in exchange for work being done (such as BAT browsers) and exploiting cashback rewards services that provide you cryptocurrency rewards if you shop online.

Fear of missing out (FOMO) is a widely used term in the cryptocurrency space to describe a situation that entails extreme hype which generates investment decisions on a particular coin. Investing in a cryptocurrency purely based on hype and speculation is an irrational move and could result in significant losses for investors. You must do thorough due diligence for every investment decision to ensure that you truly understand the coins proposition and utility, using leading resources such as eToros free market research on prominent coins.

Volatility in the cryptocurrency market can be extreme. It is always a good idea to try not to be overly zealous when looking at price movement, since market volatility can induce a heightened degree of anxiousness and FOMO, both of which could be detrimental to your investment decisions.

Market cycles are a natural part of the free market. The volatile nature of the cryptocurrency market could shorten the market cycles of booms and busts relative to more traditional and mature markets, such as the stock markets. It is important to enter the market with a focused and long-term investment horizon.

[1] Data derived from Investopedia

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8 Ways To Survive A Cryptocurrency Market Downturn ...

On 15 July 2020, Twitter accounts belonging to Bill Gates, Barack Obama, Joe Biden and other public figures were subject to coordinated social engineering attacks. According to Twitter, the attackers successfully targeted some of [the companys] employees with access to internal systems and tools. The compromised accounts swiftly set in motion a large-scale cryptocurrency fraud scheme, inviting Twitter users to send Bitcoins to an unverified wallet, with the promise of a 2:1 return on every transaction. The tweets were prefaced by the message I am giving back to the community, in an apparent attempt to capitalize on the current political momentum in the US.

This was the second large-scale cryptocurrency scam executed on Twitter this year. In January, verified Twitter accounts were taken over by scammers and transformed into identical copies of Elon Musks official account, inviting Twitter users to a crypto party.

While the above incidents may be attributed to security flaws, internal protocol breaches or carelessness in the administration and storage of credentials by individual Twitter account holders, they are largely enabled, inspired, and ultimately prompted by the characteristics of pseudonymity, immutability and decentralization, which lie at the core of blockchain technology. Indeed, these very characteristics have rendered cryptocurrencies increasingly attractive and accessible, thereby broadening the pool of potential targets for online scammers, while enabling the latter to conceal their identities behind cryptocurrency keys.

Systemic and consumer-related risks associated with cryptocurrencies

As cryptocurrencies are seen by an increasing number of international financial actors as the perfect hedge against the recessionary effects of the COVID-19 pandemic, and as their circulation continues to transcend national jurisdictions, there is growing international concern about their systemic and consumer-related risks. In this light, must cryptocurrencies be subject to some form of international regulation, harmonization or coordination? Seeing as their risks are inherently transboundary, the answer should be in the affirmative.

In particular, as regards systemic risks, blockchain pseudonymity has facilitated the use of cryptocurrencies for cross-border money-laundering, tax avoidance and illicit financing. Further, so-called stablecoins, i.e. cryptocurrencies pegged to baskets of safe assets (such as government bonds), are capable of affecting exchange rates and cross-border financial stability.

The transboundary element is also heavy on the consumer risk side. Besides scams, a significant risk of this type pertains to the loss or theft of private wallet keys, resulting in the irretrievability of stored coins due to the immutable nature of blockchain technology. Another consumer risk pertains to the fact that the platforms on which cryptocurrency transactions take place, i.e. exchange websites or apps, may fall prey to hackers, who may be able to extract cryptocurrencies kept therein (and not safely stored in a wallet). Relatedly, users may incur significant capital losses due to limited information about the volatility of their investments. These risks are indeed inherently transboundary, as they revolve around cross-border payments or data transfers and engage the liability of corporations with multinational presence or activities (such as cryptocurrency exchange platforms).

The shortcomings of domestically-oriented regulatory models

Could such risks, notwithstanding their cross-border nature, be mitigated through actions undertaken at the national level alone? Insofar as systemic risks are concerned, national attempts would run into a collective action problem. The spill-over effects of fluctuations in exchange rates and financial instability are, by definition, externally induced, primarily arising as a result of incomplete regulation in foreign jurisdictions. The latter may indeed have a high tolerance for cryptocurrency-related systemic risks, thus being unwilling to impose meaningful regulatory constraints on cryptocurrencies, unless motivated by a certain sense of international consensus. Similar considerations may apply to illicit money flows and tax avoidance, activities which are largely propelled by regulatory mismatches between different jurisdictions.

As it pertains to consumer risks, in an increasingly cashless and fintech-driven global economy, a robust regulatory framework for cryptocurrencies, imposing know-your-customer rules and mandatory permits, inter alia, might discourage inbound investment by (or in) fintech companies. Able to benefit from light regulation in alternative financial markets, such companies may simply find it too inconvenient or unprofitable to pursue activities in risk-averse jurisdictions. The latter may therefore find themselves in a catch-22 scenario, forced to select between a solid regulatory framework that might discourage fintech, or a cryptocurrency-friendly framework providing limited consumer protection. As past experiences from international banking and taxation indicate, in such a scenario, many countries are in fact likely to succumb to a race to the bottom as opposed to improving their regulatory standards.

Regulatory divergence and lack of international consensus

Considering the transboundary nature of the aforesaid risks, international regulation, harmonization or cooperation would appear desirable. Yet, since the launch of Bitcoin in 2008/2009, there have been few significant developments in that direction. There appears to be no critical mass of like-minded countries, capable of instilling some sense of international consensus that would trigger a harmonization or cooperation (let alone regulation) process. By way of illustration, China has introduced an umbrella ban on private cryptocurrencies, aiming to develop its own, state-backed coin. South Korea recently adopted a comprehensive, cryptocurrency-specific law linking wallets to real-world bank accounts and requiring the registration of wallets under their users actual names. The European Banking Authority and the European Securities and Markets Authority have highlighted the need for a cryptocurrency-specific approach that would evaluate the use of each cryptocurrency individually, whereas in the US no cryptocurrency-specific laws have been formally contemplated, with most types of transactions being currently subject to the supervision of the Securities and Exchange Commission and the Commodity Futures Trading Commission. These variations reflect fundamental differences in understanding as regards the legal nature, risks and benefits of cryptocurrencies.

Recent developments and future prospects for international governance

Notwithstanding the above, there appears to be an end in sight for the current governance standstill. Recently, the Financial Action Task Force (FATF) issued Guidance for a Risk-based Approach to Virtual Assets and Virtual Asset Service Providers, clarifying how its International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation apply to virtual assets, virtual asset activities and virtual asset providers. Moreover, the Financial Stability Board (FSB) issued a list of high-level recommendations for stablecoins; notably, according to recommendation 5, [a]uthorities should ensure that GSC [global stablecoin] arrangements have effective risk management frameworks in place especially with regard to reserve management, operational resiliency, cyber security safeguards and AML/CFT measures, as well as fit and proper requirements. Lastly, the International Organization of Securities Commissions (IOSCO) published a report setting out a range of key considerations for regulating cryptocurrency exchange platforms. Among else, the report urges domestic authorities to review the arrangements in place to compensate participants in the event of a loss of assets, including, for example, insurance policies, compensation funds or other contingency measures. In view of the institutional backing of the FATF, FSB and IOSCO, these initiatives are likely to bring about some degree of concerted regulatory activity.

Critically, in past cases marked by limited appetite for international dialogue, the solution has been prompted by compelling political developments. Indeed, in both international taxation and finance, it took the shock of the Global Financial Crisis for governments to converge on the need to limit transfer pricing and base erosion (see the OECDs BEPS project), decrease banking leverage and strengthen capital requirements (see the Basel III Accord). This time around, the negative publicity generated by recent scams and Facebooks Libra project, coupled with the COVID-induced recession, will likely serve to facilitate global consensus, hopefully toward a balance between fintech innovation and risk mitigation.

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Cryptocurrency theft, scam and other misadventures: what ...

BTC whales have been moving large stacks of Bitcoins lately, triggered by the recent bullish momentum in the BTC market.

According to data obtained from BTCBlockbot, a crypto analytic tracker, an unknown whale moved 15,022 BTC in block 641,074, estimated to be roughly worth about $162 million, about 10 hours ago.

READ MORE: Over 900,000active Bitcoinwallets pushtransactions to3-yearhigh

It should be noted that Bitcoin is not really anonymous, because all BTC transactions are kept permanently and publicly on the blockchain or ledger system. This makes it very easy for anyone to see the transactions and balances of any BTC address.

According to data obtained from Coinmarketcap, Bitcoin traded at $11,000 with a market capitalization of $202 billion, at the time this report was drafted.

READ ALSO: Tether whales move USDT 110,000,000 in 1 hour

Quick fact: At the BTC market, investors or traders who own large amounts of cryptocurrency are typically called BTC whales. This means that a BTC whale would be an individual or business entity (with a single Bitcoin address) owning around 1000 BTCs or more.

As BTC whales accumulate BTCs, the circulating supply reduces, and this can weaken any bearish trend Bitcoin finds itself in. What this means in essence is that over time, as BTC approaches its fixed supply of 21 million, its possible that the price of BTC will go up, with BTCs present demand factored in.

READ ALSO: Bitcoin thieves move 3,897 BTC worth $42 million in 1 hour

Although it is difficult to predict market movements, Bitcoin whales have shown historically that they often determine Bitcoinstrend.

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There are now 18000 Bitcoin millionaires - Nairametrics

By Peter Kent, Tyler Bain

Cryptocurrency mining involves the addition of transactions to a blockchain by a crypto miner. But, its a bit more complicated than that. Take a look at decentralization and discover the role of the crypto miner.

Cryptocurrencies are decentralized that is, no central bank, no central database, and no single, central authority manages the currency network. The United States, for example, has the Federal Reserve in Washington, the organization that manages the U.S. dollar, and European Central Bank in Frankfurt manages the euro, and all other fiat currencies also have centralized oversight bodies.

However, cryptocurrencies dont have a central authority; rather, the cryptocurrency community and, in particular, cryptocurrency miners and network nodes manage them. For this reason, cryptocurrencies are often referred to as trustless. Because no single party or entity controls how a cryptocurrency is issued, spent, or balanced; you dont have to put your trust in a single authority.

Trustless is a bit of a misnomer. Trust is baked into the system. You dont have to trust a single authority, but your trust in the system and fully auditable codebase is still essential. In fact no form of currency can work without some form of trust or belief. (If nobody trusts the currency, then nobody will accept it or work to maintain it!)

In the trustless cryptocurrency world, you can still trust the cryptocurrency community and its mechanisms to ensure that the blockchain contains an accurate and immutable unchangeable record of cryptocurrency transactions. Cryptocurrencies are established using a set of software rules that ensure that the system can be trusted, and the mining process is part of this system that allows everyone to trust the blockchain.

Cryptocurrencies have no central bank printing new money. Instead, miners dig up new currency according to a preset coin-issue schedule and release it into circulation in a process called mining.

When you compare cryptocurrency mining to gold mining, why the process is referred to as mining becomes clear. In both forms of mining, the miners put in work and are rewarded with an uncirculated asset. In gold mining, naturally occurring gold that was outside the economy is dug up and becomes part of the gold circulating within the economy.

In cryptocurrency mining, work is performed, and the process ends with new cryptocurrency being created and added to the blockchain ledger. In both cases, miners, after receiving their reward the mined gold or the newly created cryptocurrency usually sell it to the public to recoup their operating costs and get their profit, placing the new currency into circulation.

The cryptocurrency miners work is different from that of a gold miner, of course, but the result is much the same: Both make money. For cryptocurrency mining, all of the work happens on a mining computer or rig connected to the cryptocurrency network no burro riding or gap-toothed gold panners required!

Cryptocurrency miners add transactions to the blockchain, but different cryptocurrencies use different mining methods, if the cryptocurrency uses mining at all. (Most cryptocurrencies dont use mining.) Different mining and consensus methods are used to determine who creates new blocks of data and how exactly the blocks are added to the blockchain.

How you mine a particular cryptocurrency varies slightly depending on the type of cryptocurrency being mined, but the basics are still the same: Mining creates a system to build trust between parties without needing a single authority and ensures that everyones cryptocurrency balances are up-to-date and correct in the blockchain ledger.

The work performed by miners consists of a few main actions:

The preceding cryptocurrency mining process is essential work, needed for the continued propagation of the blockchain and its associated transactions. Without it, the blockchain wont function. But why would someone do this work? What are the incentives for the miner?

The bitcoin miner actually has a couple of incentives (other cryptocurrencies may work in a different manner):

Combined, the fees and subsidy are known as the block reward. In Bitcoin, the block subsidy began at 50 BTC. (BTC is the ticker symbol for bitcoin.) The block subsidy at the time of writing is currently 12.5 BTC. The block subsidy is halved every 210,000 blocks, or roughly every four years; sometime around May 2020 it will halve again to 6.25 BTC per block.

The image below, from the BlockChain.com blockchain explorer, shows a block subsidy being paid to an address that is owned by the miner who added the block to the blockchain. Near the top you can see that 12.5 BTC is being paid as the subsidy; the actual sum received by the miner (the full reward, 13.24251028 BTC) is larger, because it also includes the transaction fees for all the transactions in the block.

For a cryptocurrency to function, several conditions must be met by the protocol. Jan Lanksys 6-factor list is particularly helpful. (Jan is a cryptocurrency academic teaching at a university in the Czech Republic). As can be seen, below, mining (in the mineable cryptocurrencies, non-mineable currencies have different mechanisms) is an integral part of making sure these conditions are met.

If even one of these six conditions arent met, a cryptocurrency will fail because it cant build enough trust for people to reliably use it. The process of mining solidifies and satisfies every single one of these conditions.

Theres a mind exercise known as the Byzantine Generals Problem (or the Byzantine Fault, the error avalanche, and various other things) that illustrates the problem that cryptocurrency consensus algorithms seek to solve.

The overall problem? Youre trying to reach consensus; in cryptocurrency, youre trying to reach agreement over the history of currency transactions. But in a cryptocurrency network, a distributed computer system of equals, you have thousands, maybe tens of thousands of computers (nodes); in the Bitcoin network you currently have 80,000 to 100,000 nodes.

But out of those tens of thousands of systems, some are going to have technical problems; hardware faults, misconfiguration, out-of-date software, misfunctioning routers, and so on. Others are going to be untrustworthy; theyre going to be seeking to exploit weaknesses for the financial gain of the people running the node (they are run by traitors). The problem is that for various reasons, some nodes may send conflicting and faulty information.

So someone came up with a sort of parable or metaphor, the Byzantine Generals Problem. (A guy named Leslie Lamport Shostak first told this story back in 1980, in a paper related to general issues of reliability in distributed computer systems.)

Originally named the Albanian Generals Problem, it was renamed after a long-defunct empire so not to offend any Albanians! (Though in this interconnected world of constant social media offense, there must be at least some offended residents of Istanbul.)

Apparently distributed-computing academics like to sit around and devise these little metaphors; theres the dining philosophers problem, the readers/writers problem, and so on. In fact the Byzantine Generals Problem was derived from the Chinese Generals Problem.

Anyway, the idea is this, as described in the original paper:

We imagine that several divisions of the Byzantine army are camped outside an enemy city, each division commanded by its own general. The generals can communicate with one another only by messenger. After observing the enemy, they must decide upon a common plan of action. However, some of the generals may be traitors, trying to prevent the loyal generals from reaching agreement. The generals must have an algorithm to guarantee that A. All loyal generals decide upon the same plan of action.[and] B. A small number of traitors cannot cause the loyal generals to adopt a bad plan.

(Search online for byzantine generals problem leslie lamport robert shostak marshall pease if youre interested in seeing the original paper.)

Thats the problem that cryptocurrency consensus algorithms, as theyre known, are trying to solve. How do the generals (the computer nodes) come up with consensus (all agree on the same plan of actionor transaction ledger), and avoid being led astray by a small number of traitors (faulty equipment and hackers)?

To have a chance at the mining reward, crypto miners must set up their mining rigs (the computer equipment) and run that cryptocurrencys associated mining software.

Depending on how many resources the crypto miner is committing, he or she will have a proportional chance to be the lucky miner who gets to create and chain the latest block; the more resources employed, the higher the chance of winning the reward. Each block has a predetermined amount of payment, which is rewarded to the victorious miner for their hard work to spend as they wish.

So how is the winning miner chosen? That depends. In most cases, one of two basic two methods are used:

When Bitcoin first started, anyone with a simple desktop computer was able to mine. The would-be miner simply downloaded the Bitcoin mining software, installed it, and let the BTC roll in! As time went on, though, competition increased.

Faster and more powerful computers were built and used for mining. Eventually, specialized processing chips called Application Specific Integrated Circuits (ASICs) were developed. An ASIC, as the name implies, is a computer chip designed for a specific purpose, such displaying high-resolution graphics quickly, running a smartphone, or carrying out a particular form of computation.

Specific ASICs have been designed to be highly efficient at the forms of computation required for cryptocurrency mining for example, for Bitcoin mining. Such a chip can be 1,000 times more efficient at Bitcoin mining than the chip in your PC, so in todays Bitcoin mining environment, its go ASIC or go home!

For high-difficulty cryptocurrencies, such as Bitcoin, the ideal mining environment is one with:

Fear not, though! With many different copies and mimicry of Bitcoin running rampant, Bitcoin is no longer the only game in town, and you can find lots of alternative mining choices, with varying levels of required computing power. Today, some of the most profitable cryptocurrencies to mine are lesser known and can be mined using off-the-shelf computer hardware due to less stringent difficulty levels that are associated with lower popularity and adoption.

Currently, a large portion of the global cryptocurrency mining takes place in China, at perhaps three times the rate of the next closest nation (the United States). A combination of cheap electricity and easy access to cheap computer components for building mining rigs gives China an edge that Chinese miners have leveraged and so far, maintained, even with their governments apparent disapproval of cryptocurrencies.

This is a testament to how resilient and difficult to shut down distributed cryptocurrency systems such as Bitcoin are.

A cryptocurrency has value because a large number of people collectively believe that it does. But why do they believe cryptocurrency has value? The answer is trust.

A holder of Bitcoin can trust that their Bitcoin will be in their wallet a day from now or 10 years from now. If they want to research how the system works, they can audit the code base to understand the system on a deeper level to see how trust is maintained.

However, if they do not have the skillset or the computer science knowledge to audit code, they can choose to trust that other people, more knowledgeable than them, understand and monitor the system; they can trust the overall blockchain community that is managing the particular cryptocurrency.

Without the mining functionality underpinning the distributed peer-to-peer cryptocurrency system, this collective trust (based on the proof of collective work towards the chain) would not exist.

Cryptocurrency mining makes sure that your balances wont change without your authorization. It incentivizes everyone to behave correctly and punishes those who dont. It creates a digital form of value transfer that can be trusted by each individual user as an equal peer in the network because every part of the system is aligned for one purpose: providing a secure way to create, verify, and transfer ownership of digitally scarce cryptographic units.

Peter Kent is a longtime technology author who also created the online course Crypto Clear: Bitcoin & Cryptocurrency Made Simple. Tyler Bain is a professional engineer who specializes on the electrical grid. He is also a Certified Bitcoin Professional who focuses on system resiliency and mining mechanics.

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What is Cryptocurrency Mining? - dummies