What Is A Cryptocurrency?

It wasn’t long ago that few people had heard the word “cryptocurrency,” and indeed fewer knew what it meant.

Now however the term is omnipresent; the sudden rise of bitcoin’s price in 2017/18 drove the level of interest and other cryptocurrencies to dazzling heights.

First, let’s review the concept itself. Digital currencies are secured using cryptography and fusing that with their role as a currency gives us the compound word cryptocurrency. To grasp what a cryptocurrency is, as opposed to what the term means, you must consider the essence of currency itself.

Money, like cash, is a token we use to swap for goods and services. There is no intrinsic value in the pieces of paper we have in our wallets. It merely possesses value because we think it does.

In the contemporary age, however, there is no need for that token to be a tangible one. For a long time now, many transactions have not needed the exchange of physical cash.

Even before the digital revolution, signing a check meant giving a bank permission to reduce your balance and increase somebody else’s by revising a ledger, and debit cards for example are a modern variant of that. IE. No cash changes hands in these transactions.

Crypto currencies are just a variant of that, modernized to allow for the widespread adoption of the Internet, but with crucial differences.

How Are Cryptocurrencies Different?

First, they are not circulated by any government; instead, they are designed and regulated by computer programs, or algorithms. Those algorithms set out how transactions are created and registered, and how new coins or tokens are identified and discharged.

People and organizations – identified as miners – keep logs of every transaction and undertake to determine complex computer problems that, when settled, compensate them with new coins as payment.

In effect, it is the users themselves and their enormous combined computing power that record transactions between peers, rather than through banks or other intermediaries. That system is known as a blockchain and the transactions, and even the currencies themselves, are occasionally referred to as “peer-to-peer.”

The second principal distinction and one that must be followed to comprehend the value of cryptos is that, unlike conventional currencies, the overall volume that can ever be in circulation is restricted.

Government-issued currencies such as the British pound are created at the discretion of the central bank. As the economy grows, more pounds are created to allow for that growth. Simple economics tells us that as the supply of something is increased, the value of each unit falls.

Cryptocurrency, by comparison, works on a deflationary model. Because the absolute supply of the currency is prescribed, you do not use more coins to pay for goods and services, but less.

Something that sells for one coin now will cost only a fraction of a coin in the future as the economy – the supply of goods and services -grows, but the number of coins in circulation remains essentially static.

The above concepts are hard for many people to grasp but the other bewildering fact is that there are now over 1,300 cryptocurrencies in existence.

Each has subtle differences, but the largest by market cap and therefore the most frequently used are Bitcoin, Ethereum, Ripple and Litecoin.

Bitcoin is the progenitor of cryptos and the one that most people know. Created in 2009 by the still mysterious and pseudonymous Satoshi Nakamoto.

There are actually now two types of Bitcoin, the original and Bitcoin Cash, which came about as a way of solving the high transaction times on the Bitcoin network.

Ethereum, also known by the name of its token, Ether, is similar because it uses a blockchain but was created more to cater for what is known as “smart contracts,” rather than use by everyday consumers. Smart contracts replace the need for paper contracts between parties to an agreement and remove the need for signing and amending contracts written on paper.

Ripple is aimed at payments made between financial institutions. These payments have until now typically taken days to process and have been expensive, especially when they involve low-value, high volume payments. The blockchain makes those transactions faster and cheaper.

Litecoin is probably the closest to Bitcoin because it is designed as a general use currency. Adherents will tell you that it is an improved version, as it allows for a greater volume of transactions and performs them faster.

As we’ve seen, the price of all cryptocurrencies will fluctuate, often violently. Some will not survive, but with big companies and Wall Street institutions getting involved, cryptos are here to stay.