For any beginner, it’s the golden question. So, what is a cryptocurrency? Well, put both simply and generally, it is a digital, encrypted currency. Although, with over 1,500 different cryptocurrencies currently available, not all are necessarily built to be used as a general currency.
That’s right: some are designed specifically for purposes other than a general means of payment. These purposes include (but are not limited to) representing physical assets, representing debt, and being used to fund certain ecosystems.
Even at their core, this greatly differs them from fiat currencies (USD, EUR etc.) as some are only built to be used in certain ecosystems or for certain services, as oppose to being used for groceries, general bills, and whatever else you may please.
Regardless, cryptocurrencies (and the blockchain technology that underlies the majority of them) are the future. Just like the internet was a revolution back in the 1980s, cryptocurrencies are a revolution of the 2000s. It is transforming the world of finance — giving the power back to the people and minimizing that of the bankers and centralized third parties.
This guide is going to help you understand the emerging notion of cryptocurrencies, the benefits of them, and how they work. In fact, by the end of this guide, you’ll probably be intrigued to know how you can buy some, for which we’ll link you to our purchasing tutorials.
So, let’s get into it, shall we?
The story of cryptocurrencies begins with the big ‘B’ word. Yes, you guessed it — Bitcoin!
Bitcoin, founded in 2009 by the pseudonym Satoshi Nakamoto, was the first cryptocurrency to hit the market. To this day, Bitcoin remains the most popular cryptocurrency and has a current market capitalization of $153 billion!
Bitcoin’s sole purpose is to be used as a means of peer-to-peer payment on the internet. This means it does not require any third parties to confirm or verify transactions, and therefore is decentralized.
It’s hard to express the true significance Bitcoin has as not only a technological innovation but also as a tool for the democratization of money. In the months leading up to the launch of Bitcoin, the global financial sector was in total meltdown due, in large part, to the irresponsible behaviour of centralized banks.
The turmoil that the banking crisis of 2008 wrought upon the world economy was immeasurable and many feel that Bitcoin was invented as a direct consequence. The theory is leant real weight when you consider what Nakamoto choose to inscribe on the first ever Bitcoin transaction;
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
Bitcoin was invented to give people an alternative monetary system to the one that had let them down so badly. Ten years after its development, Bitcoin has yet to replace the legacy financial system but it’s certainly giving it plenty to worry about!
What’s so good about being decentralized…?
Operating in a decentralized manner means that there are no centralized organizations (i.e.) banks to pay fees to, and no centralized organizations (again, i.e. banks) to trust and rely on. This is what Bitcoin enables: cheap, quick, trustless payments.
It’s all possible because of blockchain (the second B word!) technology, which was actually first introduced by Bitcoin! It is a data network that is operated by a multitude of computers (or nodes) typically spread out across the globe, leaving no need for a central authority to operate.
That is an incredibly brief explanation, though, so read our What is Blockchain Technology guide to learn more.
Bitcoin is just one of many cryptocurrencies available on the market today. Each cryptocurrency has its own unique features, however, they all share the same key principles. I’ll touch more on them now.
What is a Cryptocurrency?
All cryptocurrencies run on Distributed Ledger Technology (DLT) — the technology category that blockchain belongs to. This is what allows each of these cryptocurrencies to be transferred on a trustless, decentralized network.
I’ll now explain the key components that make this technology and cryptocurrencies so unique:
Digital: Creating a digital currency is something that has been attempted since the 1990s, with many failed attempts. Unlike traditional fiat currencies, cryptocurrencies do not come in physical form. They are instead stored on a public virtual database (known as a ledger) and encrypted with cryptographic keys, which makes them incredibly secure.
Peer to Peer: There is no trusted third party involved to make a transaction. Transactions are verified and completed using a trustless, decentralized network. This enables cheap, fast, borderless transactions.
Decentralized: Cryptocurrencies are not controlled or managed by a bank. You are in full control of the cryptocurrencies you own. Nobody can gain access to these funds other than yourself. So, instead of your funds sitting on a bank’s centralized server (with one central point of failure), your funds are stored on a secure decentralized network (with a decentralized point of failure, keeping hackers at bay).
To clarify, hackers are kept at bay with decentralized networks as a successful cyber attack would require the occupation of 51% or more of the nodes/computers that run the network. A centralized network/server, on the other hand, requires just one system to be hacked for the attacker to gain access.
Trustless: Transferring cryptocurrencies does not require you to trust anyone. The nodes on the network come to agreements themselves without human interaction — no central authority is needed.
Types of Cryptocurrencies
There are now thousands of different cryptocurrencies on the market, each of them offering something unique. For example, Bitcoin’s purpose is to be used as a payment system, whereas Ethereum’s (the 2nd largest cryptocurrency) purpose is to allow blockchain applications to be built upon its own blockchain.
This might sound confusing, but I’ll break it down for you.
Ethereum introduced a programming language and development platform to blockchain technology, allowing decentralized applications (DApps) to be built upon it. This was pivotal, as it triggered a new wave of cryptocurrencies, known as tokens. These are the currencies of the DApps that are built on Ethereum.
Of course, other blockchains have been created since Ethereum that also come with development platforms. So, there are now tokens that exist on other blockchains too, rather than just on Ethereum.
There are lots of cryptocurrencies on the market that are tokens belonging to DApps built on Ethereum, with each of these cryptocurrencies and DApps aiming to solve a different problem. Here are just a few of the industries that these cryptocurrencies and DApps are already disrupting:
- Cybersecurity: DLTs allow the vulnerability of a network to be spread across thousands of nodes, eliminating single points of failure.
- Banking and payments: Blockchains are an ideal way to store financial records securely and unalterably. They can also facilitate the ultra-fast transfer of funds between users all around the world.
- Insurance: DApps can be used to track and verify claims as well as helping users find the best deals by providing a complete record of their insurance history.
- Supply-chain management: The Ethereum network already boasts numerous supply chain monitoring projects including FarmaTrust, a dApp used to track the provenance of medical supplies.
- Voting systems: Countries like Japan and Estonia have already trialled blockchain voting systems built on Ethereum, bringing additional layers of transparency and accuracy to their democratic processes.
- Ecommerce: Marketplaces for goods and services are springing up all over the Ethereum network offering merchants direct access to customers rather than going through the middlemen at Amazon and eBay.
- Healthcare: Medical records are a thorny topic. Who owns them for a start, you or your doctor? Ethereum healthcare dApps, like Solve.Care or those being developed by Consensys Health, offer patients the chance to take back full control of personal data and even monetize it where appropriate.
- Real estate: The fine folks at Mattereum have developed an Ethereum-based property deed management system which promises to vastly reduce the price of buying a house as well as the amount of time it takes.
For a more in-depth look at the world’s second most popular cryptocurrency, check out our comprehensive Ethereum guide here.
Developed in 2012, Ripple is a next-generation settlement and remittance platform which allows for the tokenized transfer of numerous forms of value including but not limited to air miles, phone minutes, fiat and cryptocurrencies. The platform describes itself as providing, “secure, instantly and nearly free global financial transactions of any size with no chargebacks.”
The platform is built on a distributed open source internet protocol but has private enterprise very much in its sights. Often referred to as a “corporate cryptocurrency”, Ripple offers gross settlement services to central banks and multinational corporations including Santander and the Royal Bank of Canada.
Another one of Ripple’s standout features is that its 100 billion coin supply (known as XRP) is “pre-mined”. This means that, unlike other cryptocurrencies like Bitcoin and Ethereum, the validation of Ripple transactions is carried out by a few core nodes reaching consensus rather than by the whole network. Some feel that this makes Ripple less decentralized than its rivals.
Ripple also counts internet providers, payments companies and the Massachusetts Institute of Technology amongst its network’s validating nodes. This affinity with centralized organisations has lead some critics to accuse Ripple of not being a real cryptocurrency.
Ripple often vies with Ethereum for the number 2 spot on CoinMarketCap’s top 100 coins list in terms of market capitalization. Since its launch, Ripple has proved to be one of the more stable coins on the market, due in large part to the full-time stewardship of the Ripple company and the support a dedicated and professional development community in the form of Ripple Labs.
Ripple, Ethereum and Bitcoin are just the tip of the iceberg though, as there are new cryptocurrencies being developed all the time and many of them are available to buy and trade. Furthermore, there have never been more ways to get involved in cryptocurrency trading.
Let’s look at some of the easiest ways to buy cryptocurrencies…
How to Buy Cryptocurrencies
If you’re buying one of the more popular cryptocurrencies, then the process can be as simple as purchasing a book for your eReader. If, however, it be more exotic fare you seek, then a few additional steps may be necessary.
Here are my top four ways to purchase cryptocurrency;
- Exchanges: Cryptocurrency exchanges have become more and more popular over the past 10 years and some now have trading volumes big enough to rival multinational banks. Online cryptocurrency marketplaces like Bitstamp, Kraken and Binance offer huge selections of coins and tokens for sale and trading.
However, not all crypto exchanges offer fiat trading (ie. trading with national currencies like US dollars or British pounds) which isn’t ideal for first time buyers. This is where cryptocurrency brokers come in handy…
- Brokers: Cryptocurrency brokers like Coinbase (as well exchanges like Bitstamp which explicitly offer fiat trading) allow users to buy selected coins (usually the more popular ones) using certain fiat currencies. Whilst they may charge a premium for the use of such services, brokers are a quick and easy way to join the crypto party.
- In-person: Crypto means hidden which is the way some users of cryptocurrency prefer to remain, so buying coins anonymously with cash is sometimes the best way to go. Whilst only recommended under certain circumstances (ie. in public, with traders you trust and with a friend for back-up!), buying cryptocurrency with cash can be a convenient and social way to get involved.Sites like LocalBitcoins provide reliable introductions to cash traders in your area but buying in-person won’t be to everyone’s taste…
- Bitcoin ATM: As the name suggests, these are only suitable for those of you seeking to buy Bitcoin. Operating at thousands of locations worldwide, Bitcoin ATMs provide simple local access to the world of Bitcoin and function in a very similar way to normal ATMs. Users can deposit, withdraw and transfer funds, however, steep fees often apply.
Go to CoinATMRadar to see if there’s a Bitcoin ATM in your neighborhood!So, now you can answer the question, What is a Cryptocurrency? for yourself, you also know what kinds of coins and tokens are available and some of the best ways to buy them. Before I go though, I’d like to give you a brief overview of the debate surrounding this most controversial of innovations…
What’s Good, and What’s Bad?
Cryptocurrencies have a long way to go before they become adopted on a global scale. Think about how much the internet has changed since the 1990s — it’s baffling. Much like the internet was, DLTs and cryptocurrencies are new technologies that will change the world over the coming years.
Let’s look at some of the advantages and disadvantages of cryptocurrencies:
- Transparency: Cryptocurrencies operate on a public, immutable database. This means that everyone can see the entire history of transactions that take place on a blockchain and they are neither reversible nor editable.
- No Third Parties: By default, users are control of their own cryptocurrency. There is no bank nor other third party in control of your funds.
- Unprecedented Accessibility: As long as you have an internet connection, you are able to access, own and transfer cryptocurrencies to anyone in the world. This is very different to local/fiat currencies, which require you to own a bank account to conveniently make international payments.
- Faster Than Traditional Payments: Cryptocurrencies can be transferred globally at a much quicker time than traditional currencies. There is no central authority that you have to wait/rely on to verify a transaction.
- Security: Cryptocurrencies are very difficult to hack because they do not operate on a central server. Neither do they have a central point of failure, so they are not prone to servers ‘going down’ or ‘going offline’.
- Volatility: The cryptocurrency market is incredibly volatile at the moment. The prices of coins are constantly fluctuating, making it difficult for businesses to accept them as a means of payment.
- Cannot Recover Lost/Stolen Funds: Personal control isn’t always a positive. A lot of people rely on third parties to keep their money safe. With cryptocurrencies, if you lose the private key (the unique passphrase) to your wallet, there is no company to help you regain access to your funds. The same applies if you accidentally send your funds to the wrong place.
- Criminal Activity: Because cryptocurrencies are stored in wallets that have no name attached to them, they appeal to criminals. This could develop a bad name for cryptocurrencies and see them being banned in certain jurisdictions. That being said, there are things being worked on to help prevent cryptocurrencies being used for illicit purposes without actually needing to ban them.
And there you have it! No more needing to ask, “What is a Cryptocurrency?”.
As I have already mentioned, cryptocurrencies have a long way to go before they are used internationally by all major companies. However, what we do know is that cryptocurrencies are here to stay.
As the technology is so young, though, it’s important to be extra safe when dealing with cryptocurrencies. You need to stay up to date with the latest news and security measures.
If you would like to learn how to purchase a cryptocurrency, see our guides on How to Buy Ethereum and How to Buy Bitcoin. Both are easy-to-follow, step-by-step guides to help those who want to get involved.
If you found our What is a Cryptocurrency guide helpful, feel free to share it with your friends! Also, if you have any further questions, please do not hesitate to leave a comment — we’ll always be glad to help.