What is a Cryptocurrency?

What is a Cryptocurrency?

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What is a Cryptocurrency (or Crypto Currency)?

A cryptocurrency is a decentralized, digital asset that can be used as a medium of exchange. Cryptocurrencies are referred to as coins or tokens and used as a form of money, like traditional currencies, such as dollars, euros or pesos.

What is Blockchain?

Cryptocurrencies exist because of a technology called blockchain.

Indeed, the main difference between dollars, euros and pesos (which are called “fiat currencies“) and cryptocurrencies is blockchain technology.

A blockchain is a decentralized, secure, digital ledger that acts as a record of all cryptocurrency transactions.

There are five main concepts that are important to understanding what makes blockchain special: the digital ledger, decentralization, transparency, security and programmability.

1) Digital Ledger: A blockchain exists as a secure digital ledger that keeps track of all the transactions between parties.

2) Decentralization: The digital ledger is duplicated, distributed and connected. Duplicate copies of the whole ledger are distributed to every node on  a peer to peer network. All the nodes on the network are connected to one another via the Internet and every copy of the blockchain is updated with each new transaction.

3) Transparency: All transactions that take place on the blockchain are recorded and visible to anyone with a copy of the ledger.

4) Security: Transactions on the blockchain are secured using complex mathematical proofs that are virtually impossible to hack. Cryptocurrencies verify transactions between parties using 256 bit cryptography. To get a sense of how difficult it would be to crack 256 bit cryptography, check out this awesome video below (spoiler alert: it would take a LOT more than all the computing power we have on Earth a LOT longer than 37 times the age of the universe):

5) Programmability: Software logic may be built into a blockchain. New cryptocurrency platforms such as Ethereum and Cardano allow contractual agreements (aka “smart contracts”) to be built into blockchain applications in addition to their functions as currencies.

  • The combination of the digital ledger, decentralization, strong security and transparency allows cryptocurrencies to eliminate the need for a trusted third party, or central authority, such as the “Fed” in monetary transactions between parties.

Are Cryptocurrencies Like Money or More Stocks or Gold?

There are over a thousand cryptocurrencies in existence today but the most well known is Bitcoin.1

Bitcoin was created as a cryptocurrency2, but because of its volatility, many people believe that Bitcoin is more akin to an asset (a “digital gold”) than a currency (a “digital dollar”).

Cryptocurrencies are speculated on like stocks. They are also often referred to, and compared to one another, in terms of “market capitalization” or “market cap”, akin to stocks.

While cryptocurrencies have the word “currency” in them, their volatility makes it almost impossible to know what you were paying for anything.

Footnotes

  1. The concept for Bitcoin was announced in a white paper published in 2008 by a pseudonymous person or group called Satoshi Nakamoto.
  2. The first legitimate Bitcoin transaction was on May 22nd, 2010 when Laszlo Hanyecz paid 10,000 Bitcoin for 2 Papa John’s pizzas. Today those “pizzas” would be worth >$100 million.