Basic Aspects of Cryptocurrencies

Cryptocurrencies are a new concept in the global economy. They exist only for approximately five years and they already attracted a lot of attention. Especially, since the year 2013 they experience turbulent changes in their exchange rates. The cryptocurrencies belong to the group of virtual currencies. We can consider cryptocurrency as a digital medium of exchange, based on principles of cryptography allowing performance of secure, decentralized and distributed economic transactions [1].

Theoretical foundations of cryptocurrencies were outlined by Chaum [2] for the first time in 1983 already. The cryptocurrencies integrate electronic virtual money with principles of cryptography [2]. The basic principle of cryptocurrency is that no individual (or organization) may accelerate or significantly abuse the production of a given currency. Typically only a certain predefined amount of cryptocurrency is collectively produced by the entire cryptocurrency system. The rate of production is set by a value defined in prior and is publicly known [3]. The cryptocurrencies allows virtually costless transfers of cryptocurrency units (referred as coins) between client applications via computer peer-to-peer network [2].

The most famous cryptocurrency and the first to be introduced was Bitcoin in 2009. It was designed by a person or a group of persons hiding under pseudonym Satoshi Nakamoto [4]. Two types of Bitcoin users exist: ordinary users and so called Bitcoin miners. Ordinary users of Bitcoin use digital wallet similar to electronic banking applications. The wallet is software for a management of Bitcoin cash, thus for sending and receiving payments in bitcoins. Bitcoins exist only as information in files in a computer or a mobile device. Access to these files is restricted to the holder of private key, which is used to secure the money. If file system in the computer is damaged or the wallet file is inadvertently deleted, then the wallet file is lost and the bitcoins it contained are lost forever (in case that the wallet file was not backed up). Although the public address of wallet still exists, it can only be accessed by the private key, which was deleted. Unless one breaks the very secure encryption built into the system, then it would not be possible to recover the lost coins and breaking encryption used by Bitcoin network by a force is virtually impossible in timely manner [3].