What is Cryptocurrency?

What is Cryptocurrency?

Cryptocurrency is a digital asset built with computer code and algorithms that are secured with cryptography/encryption for transaction, creation of new assets, and verification.

Cryptocurrencies are decentralized, meaning that the assets are controlled and created collectively by the system rather than by a centralized government or organization like the Federal Reserve.

Most cryptocurrencies are designed to cap out at certain amount so that there will be a finite number of digital assets in circulation.

What is Bitcoin?

Bitcoin is the first iteration of decentralized, peer-to-peer cryptocurrency. It is currently the most valued and most popular cryptocurrency to date.

Each bitcoin contains 1,000,000 bits and can be divided up to 8 decimals places. Individuals interested in bitcoin can purchase as little as they’d like. In other words, you don’t have to purchase 1 BTC to have BTC.

The simplest definition of cryptocurrency is that it is data contained in a distributed database that cannot be changed unless requirements of the system are met.

Cryptocurrencies are designed so that no single entity can:

  • Spend the same unit of a cryptocurrency in more than one place (double-spending).
  • Create new units of the cryptocurrency.
  • Manipulate transactions of the cryptocurrency after they have occurred.




How Cryptocurrency Works

It’s easy to understand how cryptocurrency works when you first think about how transactions work with your credit or debit card through a bank.

When you use your credit card, you’re specifying to your bank that you wish to send $x amount of money to the account of the business or individual you are transacting with. Your bank receives the data from this transaction and updates the accounts accordingly. It deducts $x amount from your account and credits $x amount to the account of the other entity.

In this example of a standard and simple credit card transaction, the bank, its servers and security systems are at the center of and control the transaction.

On the surface, cryptocurrency transactions occur in the exact same way as a credit card transaction. Person A sends cryptocurrency to Person B, the transaction is confirmed, and x units move from Person A’s account to Person B’s account.

The major difference between cryptocurrency and credit card transaction is what’s at the center.

In a cryptocurrency transaction, the software operates on a distributed, decentralized network of computers and is governed by rules/code that is open source and adopted by consensus. Instead of a bank confirming the transactions, a growing number of disconnected nodes does the validation work, verifies transactions, and adds it to a growing list of transactions.

All of these cryptocurrency transactions are protected, controlled, and validated through basically un-crackable cryptography mathematics that no single entity can mess with.

At any time, anyone is able to see the rules that govern a given cryptocurrency’s transactions and the history of all the transactions that have taken place.




How Cryptocurrency is Different from Traditional Currencies

Cryptocurrency is different in a number of ways from standard forms of currency or fiat money.

One of the biggest differences between cryptocurrencies and fiat money is how they are created.

  • Cryptocurrency is created by computer code. Many cryptocurrencies have a total supply limit, and can no longer be created once those conditions have been met. The supply of a given cryptocurrency cannot be controlled by a single entity, government, or organization after it has been adopted by a decentralized network.
  • Fiat currency is created by and given value through debt and the government that backs it. It has no intrinsic value and the controlling entity is able to control the supply.

Cryptocurrency transactions are irreversible. Once a transaction has been confirmed by the network, there is no way to undo it.

Cryptocurrency accounts are not connect or tied to your personal information. Cryptocurrency wallet addresses consists of random alphanumeric strings. While you can see that transactions are moving from one place to another, you don’t necessarily know who owns the addresses.

Cryptocurrency transactions can be completely globally. There is no need to go through a money transfer institution or pay extra fees to transact across borders.

Cryptocurrency is extremely secure. Accounts and transactions are controlled by your public and private keys. Private keys, which are feasibly impossible to crack, all you to manage and send funds around the world.

Cryptocurrency is open to anybody. All you need to start using a cryptocurrency is to download the proper software.




Cryptocurrency Valuation

Cryptocurrency, like Bitcoin, is created through mathematics. The algorithms result in cryptocurrencies sharing all the necessary characteristics of money.

Just like other forms of currency, cryptocurrencies are:

  • durable: they can withstand physical wear and tear.
  • portable: cryptocurrency can be easily transfers from one person to another.
  • divisible: cryptocurrencies are able to be divided into smaller units, just like dollars and cents.
  • uniform: the value, while highly volatile, is the same for one unit of the same cryptocurrency.
  • scarce: there is a limited supply of most cryptocurrencies.
  • acceptable: cryptocurrency can be used in exchange for goods and services.

Along with those attributes, many cryptocurrencies also continue to gain trust and adoption, the other requirements for a form of money to have value.

The current price of a cryptocurrency is dictated by supply and demand for that currency. As more people demand a certain cryptocurrency, its price will increase.

As of Q4 2017, the total market cap for all cryptocurrencies is over 250 billion USD. See the full cryptocurrency market capitalization chart here.

 

Still have questions? Check our the most comprehensive cryptocurrency FAQ on the web.