Cryptocurrencies exist outside of the traditional financial system and inside a computer network. Learn about how they work and their possible risks.
After you’ve watched this video with your students, use this guide to check for comprehension and begin a conversation.
- A cryptocurrency is a digital currency that stores value using cryptography—or codes—to make it secure.
- Cryptocurrency transactions are recorded online in a publicly visible ledger.
- Transactions are verified by a network of users that compete to solve complex puzzles with powerful computers. Verification generates more cryptocurrency.
- Cryptocurrencies attract a lot of interest. But they have many risks associated with the stability of their values and challenges in using them for payment.
Ask the following questions.
What is a cryptocurrency?
A cryptocurrency is a digital currency. Unlike bank notes or traditional electronic transfer systems, cryptocurrencies are decentralized. This means that no central bank or government backs their value. They function within a computer network as a type of asset that can be bought, sold and used as a medium of exchange.
What is a blockchain?
A blockchain is a secure, online ledger that is visible to anyone. Information about a number of transactions or contracts are grouped into a block. That block is secured by being linked to all previous blocks, making an unbreakable chain. The blockchain guarantees that a cryptocurrency unit cannot be spent twice.
Why is there an interest in cryptocurrency?
Some people are interested in a money that is not connected to a banking or government system. Others appreciate the anonymity of cryptocurrency transactions. Most users see it as an investment opportunity, although the value of some cryptocurrencies has been highly volatile with sharp increases and decreases.
What are some of the risks associated with cryptocurrency?
- A cryptocurrency’s value can rise and fall dramatically, making it unsuitable as a currency for day-to-day use.
- Very few people or retailers accept cryptocurrency as payment, which severely limits its use.
- Just like cash, the anonymity of a cryptocurrency increases its potential as a tool for criminals.
- If a cryptocurrency holder loses their encryption passwords, that currency is forever lost to the entire network.
- A digital wallet is not protected like a bank account, which has a savings deposit guarantee if the bank were to fail.
How is a cryptocurrency stored, accessed and spent?
Cryptocurrency only exists on a network. But owners of cryptocurrency do have a digital wallet, a piece of software on a computer or smartphone. It is like a bank statement that records all of the coded information of every transaction the cryptocurrency holder makes.
To access a wallet, each person has a private key or password. The key can be backed up on different electronic devices, although some users keep a written password or a QR code as a physical backup. However, if the key is lost, then so is the cryptocurrency held in that wallet.
The wallet is the access point for all of a holder’s stored cryptocurrency, the platform from which they spend it. The amount, the currency’s origin, the destination and even applicable fees are all sent on the network using this software.
How is new cryptocurrency mined?
Cryptocurrency miners are computers that search the network for new transactions and gather them together into blocks. They verify and secure these transactions, which earns the owners new cryptocurrency.
How does mining verify transactions?
The digital contents of a cryptocurrency block, plus the contents of the previous verified block, are encrypted into a single string of characters. Then the miners compete to solve a cryptographic problem: to add a random character to this string and re-encrypt it to get a result with a certain number of zeroes at its beginning. The process of re-encrypting verifies the block—it is now irreversible.
This process requires many powerful computers consuming enormous amounts of electricity. As technology changes, new verification processes may ease the computing power needed.
Are cryptocurrencies secure?
Inside a cryptocurrency network, the transactions are secure and anonymous.
However, a number of big cryptocurrency thefts have taken place at exchanges. Exchanges act like online banks for large numbers of holders. These exchanges can be hacked into. They are also where identifiable people meet the anonymous world of cryptocurrencies—a starting point for authorities to trace cryptocurrency to criminal use. If you try and turn it into cash, you are no longer anonymous. When you first buy in , and when you try and cash out into a traditional currency, you’re no longer anonymous.