A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. A cryptocurrency is NOT anonymous by nature, that depends on the currency and the technology behind it.
The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym Satoshi Nakamoto. This was followed by Namecoin, Litecoin and many others. All these coins use a network of computers to check and double check each transaction. So there’s no bank or government checking your payments, but just a network of computers, known as the blockchain.
Cryptocurrencies can be defined as “limited entries in a database no one can change without fulfilling specific conditions”. The blockchain is used as an online ledger of all the transactions that have ever been conducted using coins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running the blockchain software. Many experts see this blockchain as a very useful technology, as it can be used for online voting, crowd funding, cloud services and payment processing. A transfer of coins is all about confirmation. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and thus of the balance of every account. The transaction is known almost immediately by the whole network. But only after a specific amount of time it gets confirmed.
Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain. Miners are solving puzzles. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of coins.
This virtual money has value because there’s a demand for it. When many people want it and buy it, the price will go up. If everybody would stop trading coins, its value would plummet. Cryptocurrencies can be mined – which usually happens in large factories – or can be bought at an exchange. You store your coins in a wallet. This can be a physical wallet, a paper wallet or a web wallet.