What is a cryptocurrency?
In a nutshell, according to Wikipedia, a cryptocurrency is “a digital asset designed to work as a medium of exchange”. Cryptocurrency uses cryptography to secure transactions and control the creation of any additional units. Cryptocurrencies are a type of digital currency, and are also known as alternative currencies, or virtual currencies. They are designed to be secure, and usually anonymous.
Cryptocurrencies are associated with, and traded across the internet. They are a decentralised currency which means they are not controlled by any bank or organisation. On the dark side of cryptocurrency, the lack of official control, and anonymity, means they are used on the “dark web” for transactions on illegal websites.
Though sometimes with bad press, and yet to be recognised as units of currency, or indeed allowed in certain countries. Cryptocurrencies are gaining in popularity, credibility, and use around the globe.
Cryptocurrency trading is quickly becoming as attractive to some investors as stock market trading.
Where did cryptocurrencies come from?
Cryptography itself is not a new concept, it was evolved during the Second World War, and refers to the encryption of information into a code. Only the senders and recipients of an encrypted message have the decoding technique to translate the code. Unless, of course, the code is broken or hacked. Cryptography today uses mathematical theory and computer science for encryption via powerful algorithms. Cryptocurrency is created through these powerful protocols, which are a solution to security and control issues that have historically prevented the creation of a purely digital currency.
The first cryptocurrency was Bitcoin. Created in 2009 by Satoshi Nakamoto, who indeed may not even be a single person. The name Satoshi Nakamoto could be a person, or persons who were active in the development of Bitcoin until December 2010. It has been claimed Satoshi Nakamoto is a Japanese man born in 1975, however speculation leans towards the likelihood of it being a cryptography, or computer science expert, from either the USA or Europe.
Satoshi Nakamoto is also credited with devising the blockchain database – a cryptographically secured database, or growing list of records. For cryptocurrency a blockchain is an open, distributed ledger, that records transactions in order to make them verifiable and permanent. The cryptocurrency blockchain is a record of all transactions and cryptocurrency owners, and is updated and held by currency holders and miners.
In April 2011, Namecoin the first altcoin, or alternative to Bitcoin was created. It was followed by Litecoin in 2011, then Ripplecoin. There are now over 900 cryptocurrencies available, all of which can vary in their method of creation and technology. The most common cryptocurrencies today are Bitcoin, Ethereum, Ripple and Litecoin
Are cryptocurrencies commodities or currencies?
Though classed as a digital currency, cryptocurrencies have similarities with commodities such as oil or gold. Unlike currencies, which can devalue as more become available, cryptocurrencies are like gold. There is a cap on how much of a cryptocurrency is available, meaning as less of a cryptocurrency available to reach the market, the higher the value climbs. There is no fixed value to cryptocurrency, its led by supply and demand, the market, and the value placed on it by buyers and sellers.
How are units of cryptocurrency created
Cryptocurrencies are actually “mined” rather than created, or printed, like money. Cryptocurrency miners are individuals who are setup to participate in the validation and processing of transactions. In essence miners are rewarded for their participation through the discovery of units of currency. They use computer systems and software which updates, secures and verifies the block chain. These systems also solve mathematical problems, competing with other miners, to release payments, or new units.
The growing competition in what is becoming a lucrative market means those who can afford to, invest in premises and equipment in an endeavour to make money from mining. Individuals who are struggling to compete with those who can invest in larger and fast computer systems are beginning to form mining pools to remain competitive. With a few additions to a standard PC system, anyone can mine cryptocurrency, but the rewards are low. Investing a few thousand in better equipment would see more noticeable gain, but potentially not yet a return on their investment.
How are cryptocurrencies used
Mining can generate some income, but the real chance of making money in cryptocurrency, like stocks and shares, is in the accumulation of value, or trading to accumulate wealth. It’s also a good chance of losing money, so care should be taken as the risk is also great. For most individuals’ cryptocurrency is just that, a currency for the purchase and sale of goods or services.
Cryptocurrency users fall into three main groups. Firstly, those who are involved in the mining, management, or trading, and hope to profit from cryptocurrencies themselves. Secondly, those who see cryptocurrencies as useful method of digital payment or a potential small investment. Lastly a group of users who see the decentralised control, and anonymity of cryptocurrencies as a way to advent their use of the dark web, or darknets, and other illegal websites and transactions. This last group do give cryptocurrencies a poor image.
Cryptocurrencies can be bought online at an exchange such as the most popular – Coinbase. You can then choose to “store” your cryptocurrencies in a hardware, or software wallet, there are many options available.
What is the future of Cryptocurrency?
The acceptance, trading of and use of cryptocurrencies in normal legal society is growing rapidly. They are legal in the US, Canada and European Union amongst many others. They are however banned in some countries including Bolivia, Ecuador and Bangladesh. Bitcoin itself has grown in value over 900% in the past two years. Many altcoins are also growing rapidly in value, producing an opportunity for savvy investors and traders to risk investment that may well generate an excellent return over the next few years of cryptocurrencies growth.
Cryptocurrencies are becoming more mainstream for individuals and are now accepted by big brands such as overstock.com, surprising cryptocurrency advocates Microsoft, and in fact PayPal. Though for PayPal the relationship is complicated and via its integration with Braintree.
Though the legitimacy of cryptocurrencies is growing, businesses are hesitant as prices and value can fall quickly. The lack of backing and regulation by governments also make businesses hesitant, but does serve to attract investors.
Cryptocurrency could be subject to regulations as its use and popularity grows, particularly to curtail its use for illegal purchases.