What is a cryptocurrency

What is a cryptocurrency?

If you are reading this post most likely you’ve heard the term Crypto or Cryptocurrency or Cryptography and probably have an idea what this is.

Crypto is digital money? Yes, but you can’t compare cryptocurrency to PayPal or Skrill or funds on a debit card. Is it a currency? Yes, but cryptocurrency is not regulated by central banks of any county and its exchange rate or value is not dependent on any country’s economy.

Cryptocurrency is a distinctive type of financial asset believed by many to revolutionize the financial sector. On the other hand, many are sure that it’s just another bubble that will burst eventually. Nonetheless, the crypto phenomenon is an integral part financial world and it would be useful to grasp on crypto basics. Also, we will try to evaluate its value and determine the current status of this asset.

Ledger Nano X - The secure hardware wallet

So, what is a cryptocurrency?

Cryptocurrency is a financial asset, or you can think of it as a new type of digital money that is using cryptography technology, or encryption of data in other words. It doesn’t have a physical form and exists electronically only. The main features of crypto are anonymous, decentralized and secure.  It is a very complicated technology that is not easy to understand even if put in simple words, but we will break it into easy to understand pieces.

Circulation of cryptocurrency within the system is occurred directly peer-to-peer (P2P) without intermediary side. Each side is absolutely equal, no one has a privilege for its financial or social status. The foundation of cryptocurrency is decentralization and an open network called blockchain.

Before we go further let’s break down the term {block}{chain}. It is a system in which a number of transactions made in cryptocurrencies are maintained across many computers linked together in a P2P network. If you ever downloaded a file from Torrent tracker it will be easier to understand. Blockchain operates very similarly to that. When a file is downloaded from a torrent tracker, we are not using a central server or database. The file is downloaded directly from a torrent tracker user, just as you are. If there are no users, download is impossible. Same with blockchain, all transactions occur between entities directly because all participants are connected to the same network – Blockchain.

Most cryptocurrencies have a max quantity of coins or emissions that can be “mined”. For example, Bitcoin (BTC) has a max supply of 21 million bitcoins and Ethereum (ETH) network doesn’t have a limit. 

A little bit of history

Now, as we are a little bit more familiar with cryptocurrency let’s go over how it all started. The first question that comes to mind is why somebody would create another currency. There is no clear answer yet, but the characteristics of cryptocurrencies give us an idea. Before cryptocurrencies, we didn’t have a fast and convenient way to make anonymous payments that would be secure on all stages of a transaction. With the invention of Bitcoin and other coins, it became a reality. The official birthdate of crypto is considered 2009 when the Bitcoin network started to operate. The founder and father of Bitcoin & cryptocurrency is Satoshi Nakamoto- a mystical person or persons who developed Bitcoin. A first Bitcoin protocol was announced under this pseudonymous. Also, he is the one who made the first transaction. It is unknown to this day how long it took to plan and develop the Bitcoin protocol. However, the term Cryptocurrency was first mentioned in the Forbes article about Bitcoin in 2011. It became so popular among readers and fans of IT inventions that it started to characterize the whole vertical.

Crypto vs. Fiat Currency 

When we hear the word “currency” we tend to think about banknotes like USD or Euro. Modern world economy is arranged as a fiat monetary system, where standard funds are regulated and centralized by the government. Crypto, on the other hand, is breaking these stereotypes. Here are some points that differentiate these two types of systems.

  • As we mentioned above, cryptocurrency doesn’t have a physical form like fiat money. You may say that fiat money exists electronically as well, but it still has to be backed up by paper money. Even though we know that it’s not the case right, it was meant to be backed up by paper money and paper money were supposed to be backed up by gold reserves. Also, there are no physical banknotes or coins for BTC or any other cryptocurrency. Don’t mistake physical coins with crypto wallets or QR codes, these are to be used for crypto operations only.
  • Cryptocurrency is not issued by central banks and is not tied to any country’s economy. Crypto supply and emissions are not regulated by the government or anyone person or corporation. No one can control or limit its operations except the system protocol itself. The exchange rate or value is dictated by the market only and there is no direct correlation to any country’s economy or overall situation in the world.
  • Cryptocurrency is anonymous. To work with a bank, or payment systems like PayPal or Skrill you have to indicate at least some of your personal data, in crypto, there is no need for that. Each user is anonymous and only information about the user is a record of numeric symbols in the address.
  • Transactions are direct. There are no processing centers, intermediary sides or other third parties between the receiver and sender.

How does cryptocurrency work?

Most of the cryptocurrencies operate and circulate in the blockchain network. If Person A wants to send money to Person B transaction is sent to a network and is organized into “blocks” where each block has its combination number and tag of the previous block. To change the value of one block you would have to hack into each block in the chain, and that is impossible. After “blocks” are created they are sent to all active participants of the network for a check. If there are no errors, each participant is including this particular block into its database. In the next step, this block is added to a blockchain which includes correct information of all previous transactions. When all that is complete money from Person A are delivered to person B. That is why when you look at the transaction process, it’s broken down into several stages.

Prefix crypto stands there because Bitcoin and other cryptocurrencies use cryptography and encryption functions. Therefore, each network participant has its own private and public key. Private key is used to “release” the right of ownership. It’s used in every transaction and that is how crypto coins travel from one wallet to another. A public key is used for verification of other transactions in the blockchain.

How to use cryptocurrency?

To use BTC or any other cryptocurrency you need to have a wallet and purchase a coin in full or a fraction of a coin. The safest way to store your coins is offline, on special devices to secure yourself from hacks and stealing of your coins. For example, one of the best devices is called Ledger Nano S. It is fairly inexpensive and proved to work very well.

Reasons to have a cryptocurrency

Cryptocurrency can be used for a variety of things, from purchase to investments. We will discuss a few of the most common uses of crypto.

  • Payments: Not just some kind of transactions, but anonymous, very fast and secure. They can be done by anyone to purchase goods or services online.
  • Savings: It is very unlikely that someone would be able to steal your coin from an offline wallet, therefore it is a great alternative to save your money. If you don’t want to keep your money in fiat and don’t want to take the risk to store your wealth in fluctuating coins, there are crypto coins that are equivalent to USD.
  • Investments: Bitcoins and other alternative coins are viewed as a great investment asset by many due to its fluctuations and trend. It can be day traded for instant earnings or held as a long-term investment. Due to its rising popularity and wide range of use cryptocurrency has a great potential for huge dividends.
  • Business: More and more companies begin to use cryptocurrency as a payment method. Crypto start-ups are no surprise anymore. If anyone has a brilliant idea on a blockchain or virtual money, they can initiate crowd-funding through ICO.
Ledger Nano X - The secure hardware wallet

Where does cryptocurrency come from?

The most popular way то produces cryptocurrency is through mining. Mining is a process in which various transactions of cryptocurrency are verified and added to the blockchain. Competitive crypto mining uses powerful computer hardware. It requires powerful CPU and GPU processors, or specialized equipment known as ASIC and FPGA. The purpose of mining is to build blocks in the blockchain. Once that is done, the miner is rewarded with a fraction of a bitcoin or other cryptocurrency.

Mining became very popular when Bitcoin prices started to trend north. People produced cryptocurrency through mining and could sell them for fiat or hold as an investment asset.

3 most popular cryptocurrencies

  1. Bitcoin is the first, most expensive and most popular cryptocurrency. It was founded in 2009 and has the unofficial status of Crypto gold. First several years all cryptocurrencies were based on the bitcoin blockchain, in other words, they were “forks” of bitcoin. All other crypto coins except Bitcoin are called altcoins.
  2. Ripple / XRP is the first cryptocurrency with its own blockchain network, not a Bitcoin fork. It was founded in 2011 and currently takes third place by market capitalization.
  3. Ethereum is a new era of the internet for money and payments. Users can own their data in apps that can’t be stolen. Founded in 2015 and takes second place by market capitalization.

Is cryptocurrency backed by anything?

In 2017 on Twitter, American IT billionaire Mark Cuban criticized Bitcoin and cryptocurrency in general by saying it’s a cult and religion, not an actual asset that is useless and is a bubble that will burst. After this tweet, the price dropped, and he added- you know it’s a bubble when the market price is compromised by a regular post. However, later on, Cuban started to invest in crypto ICO and recommends holding at least 10% of your assets in cryptocurrency.

First of all, crypto production requires powerful computer equipment that uses a lot of electricity and loses performance over time. Therefore, it partially amortizes the cost of these coins. Second, blockchain is unique and is not used in other payment systems. It’s unique, secure and most importantly decentralized. It guarantees anonymity and fast transaction speed. It is used in a wide range of verticals from the financial sector to alternative energetics. The value of these virtual funds is dictated by the market. The more demand specific coin has the higher its value. Demand is dependent on the value and uses this coin brings to the world. For example, if any country declares XRP its official payment currency the price will skyrocket as it will become widely used. One of the downsides that cryptocurrency has right now is high fluctuation. Big traders can “dump” or “pump” certain coins and provoke bid spikes in both directions. Sometimes they do that to earn money because of high volatility rate.

Final word

With many advantages of cryptocurrency such as anonymous, fast and secure there are a few disadvantages. Because of high volatility, the exchange rate of almost any coin is unstable. This can be a great earning lever for someone experienced and knowledgeable or an unpredictable investment asset for a beginner. Another big disadvantage is that if you lose a password from your wallet it becomes impossible to recover your cryptocurrency. And there are a lot of stories where someone bought thousands of bitcoins when they were traded for pennies and forgot access keys to a wallet. At the current rate, they could be millionaires or billionaires, but since they don’t remember the password it’s impossible to recover these Bitcoins. Cryptocurrency is an asset and will stay there no doubt. However, no one can tell for sure how it’s going to be used in the future and how much it will be worth.

3 thoughts on “What is a cryptocurrency?”

Leave a Comment