What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Understanding Cryptocurrencies
Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Cryptocurrencies can be mined or purchased from cryptocurrency exchanges. Not all ecommerce sites allow purchases using cryptocurrencies. In fact, cryptocurrencies, even popular ones like Bitcoin, are hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments. To a limited extent, they are also used for cross-border transfers.
Blockchain
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, blockchain is essentially a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.
Experts say that blockchain technology can serve multiple industries, such as supply chain, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.
Types of Cryptocurrency
Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the market today.
Each cryptocurrency claims to have a different function and specification. For example, Ethereum's ether markets itself as gas for the underlying smart contract platform. Ripple's XRP is used by banks to facilitate transfers between different geographies.
Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency. As of May 2022, there were over 19 million bitcoins in circulation with a total market cap of around $576 billion. Only 21 million bitcoins will ever exist.
In the wake of Bitcoin's success, many other cryptocurrencies, known as "altcoins," have been launched. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch. They include Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented approximately 41% of that total value.
Types of cryptocurrencies
Bitcoin was the first of the many cryptocurrencies that exist today. Following its introduction in 2009, developers began to create other variants of cryptocurrencies based on the technology powering the Bitcoin network. In most cases, the cryptocurrencies were designed to improve upon the standards set by Bitcoin. That is why other cryptocurrencies that came after bitcoin are collectively called “altcoins” from the phrase “alternatives to bitcoin.” Prominent examples are:
What is the use case of cryptocurrency?
Initially, cryptocurrency was pushed as an alternative to fiat currency based on the premise that it is portable, censorship-resistant, available globally and an affordable means of executing cross-border transactions. But, other than the digital assets pinned to fiat currencies, the value of cryptocurrencies hasn’t been able to replicate the level of stability needed to function effectively as a medium of exchange.
As a result, most crypto holders have shifted their attention to the investment potential of cryptocurrencies, which has since birthed the speculative side of the crypto market. Investors seem to be more concerned about the possibility that the price of a cryptocurrency may rise sometime in the future than whether they can use cryptocurrencies to purchase goods and services, and so crypto is now predominantly viewed as an investment.