This is the second part of our series “Introduction to cryptocurrency”. If you have not read the first installment we highly recommend you start here.
How do US dollars become Bitcoin?
You can buy them. Exchanges allow you to trade one kind of currency for another (AKA a Pairing…Dollar to Bitcoin (USD/BTC), Euro and Bitcoin, Canadian Dollar and Bitcoin, etc).
Some exchanges allow you to deposit your local currency (such as dollars) via credit card, check (a virtual check – called ACH), or bank transfer.
Coinbase in the US is a very popular exchange for USD and BTC pairs. In Europe, Kraken and Cex.io reign. These exchanges are usually in the US or western Europe and require verification and are often subject to regulation (to avoid money laundering, drugs/scams, etc). Exchanges generally charge small fees for transfering any cryptocurrency or Fiat currency from their site.
Ehtereum is considered the largest “alternative” blockchain project to Bitcoin. It was designed to be a decentralized platform for smart contracts. Smart contracts is just computer code that can facilitate the exchange of money, content, property, shares, etc. It also allows developers to build and deploy decentralized apps (Dapp) on ethereum. Think of it this way: Any centralized application can be decentralized on Ethereum. That is powerful.
Many exchanges exist that dont work with real money at all – they simply exchange Bitcoin for other coins, like Ethereum, Litecoin, or alt coins. These exhchanges are sometimes referred to as altcoin exchanges. Bittrex and Binance are popular exchanges for alt coins. At the moment Bittrex has frozen new user registration so you might also want to consider Poloniex.
Altcoins have a multitude of uses and goals. They can span from projects that use the blockchain to enhance identity verification like Civic and uPort. They can also serve as a protocol to audit blockchains like Ethereum. Quantstamp is an example of this. The aopplications are endless with the blockchain and alt coins.
If you have questions about cryptocurrency exchanges check out our guide Crypto Exchanges for beginners here.
What about hackers?
No doubt you’ve heard the news of the Equifax and Yahoo! hacks, which exposed over 1 billion credentials, in the news and thought “How is this still hapenning?”. It seems with every new hack we get renewed calls to do somthing. Anything. But the systems we use, centralized databases and servers, will still likely lead to security breaches.
How does the blockchain fight this? How does decentralization reduce the chances of hacks or breaches? With public blockchain networks, like Bitcoin, hackers would have to hack an ecosystem of computers, nodes and servers. Even if they tried this they would have to access over 50% of the global bitcoin hashrate ( speed at which a compute is completing an operation in the Bitcoin code) which is extremely difficult considering the mining ecosystem Bitcoin and Ethereum have. Hacking so many computers, servers and nodes at once is, at this moment, very damn hard.
But I’ve read about hacks like Mt. Gox, Etherdelta, and Youbit, etc. The difference between a cryptocurrency exchange being hacked, and your wallet or the actual blockchain getting hacked are two entirely different things. The Exchange is a centralized entity that stores your passwords and your cryptocurrency. If the exchange is hacked its likely your account will be affected in some way. Be sure to activate 2FA for your accounts! This is why it is important to have crypto wallets and to understand the differneces between the types (check out our Crypto Wallet guide here). You can store your currency on different wallets for security purposes and reduce your exposure to hacks.
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