What are cryptocurrencies?
A cryptocurrency is a digital or virtual currency. It is a medium of exchange like regular money, but it only exists in the online or virtual environment. Cryptocurrency is like other types of money; cryptocurrency is value that exists when two people agree that it has value.
The word cryptocurrency comes from the science of cryptography. The systematic study of numbers is essential to the creation of a digital currency. The cryptocurrency exists as a discrete and unique set of numbers stored in a database. Ownership requires knowledge of the numbers and a digital key to access it.
As a virtual currency, the value would not exist without a way to prevent double or multiple spending at the same time. The digital currency would have no value without some way to assure that the owner could only spend it once. The answer came in the form of the blockchain. The blockchain worked as a database to hold the virtual asset, and the ledger prevented double spending.
A Short History of Cryptocurrency
Cryptocurrency has existed in some form for many decades. In a sense, airline miles are a cryptocurrency. They primarily exist in a database held by an airline or credit card company. Airline miles have value when applied to air travel, and owners can exchange their miles for other things of value.
An earlier version may have been shopping credits that grocers offered to customers. Grocery stamps or coupons were a virtual type of cash redeemable for future purchases. Again, the essential element is that it is virtual money that exists in a database. The modern cryptocurrency era began with the introduction of Bitcoin and blockchain technology.
Blockchain Technology and Cryptocurrency
Blockchain made it impossible for currency owners to exchange a digital item more than once. Blockchain was open, and secure. The complexity of blockchain created a tamper-proof, decentralized ledger. Once entered, a digital transaction could not be changed.
Mining is the name of the process of entering data into a block . Miners perform their work at considerable costs and effort. The early cryptocurrencies used a mining process based on computation. Each miner would attempt to solve a mathematical equation. The solution required time, effort, and electricity to run computing machines. The winner of the race to solution would win the right to close the transaction. The miner got a fee for the closing. In effect, the mining process creates the Bitcoin or other currency.
Bitcoin Was the Game-Changer
Bitcoin was the first cryptocurrency to establish a wide marketplace of users. In early 2009, a group operating under the name Satoshi Nakamoto introduced Bitcoin. It was an ambitious experiment of a peer-to peer system of electronic money. The advantages of the blockchain added to the appeal of a private type of money. Bitcoin raised public awareness of cryptocurrency as it rose to many times its original value. Bitcoin showed that cryptocurrency had a vast potential for successful investing.
The decentralized ledger offered a unique type of freedom. There was no central authority in control of the system. No one had to rely upon a centralized bank or other type pf credit or finance facility. The movement of wealth was decentralized. The users of Bitcoin were somewhat like the previous generation of file sharers. Their value existed in a virtual network.
Operation of a Blockchain
The basic operation of a blockchain is a series of locations or nodes connected to receive the identical information at the same time. All the locations or nodes must agree on the exact version of the data. When they agree, they select one actor to process the data and place it into a unit of information called a block. The block connects each piece of information in a sequence or chain. To change any item would require changing all of them. Once placed in a block, no one can change the information.
How Does Cryptocurrency Work
Cryptocurrency is an asset, a medium of exchange, and an investment vehicle. The creators or issuers of a currency usually state its purpose when developing it. Some issuers intend to create a currency for everyday use. Many issuers seek to fund specific projects. A typical offering of cryptocurrency includes the operation of a blockchain to create the currency and an organization to oversee policy and governance.
The value of a currency depends on many factors, but the usage is often the most important. The value of a currency tends to rise as it gains wider usage. Financial systems refer to this pattern as liquidity.
Today, people can buy Bitcoin, Ripple, Ethereum and other leading cryptocurrency at currency exchanges, ATMs, and in many of the same ways that they would acquire any financial instrument. For example, they might invest in cryptocurrency at a cryptocurrency financial services business.
The Future of Cryptocurrency
Cryptocurrency is an established part of the global financial industry. Cryptocurrency is a significant source of funding for high tech innovation and start-ups. There are many large cryptocurrency exchanges in operation, and in the US, cryptocurrency is gaining recognition and greater acceptance by mainstream investment firms.
The laws and regulations concerning cryptocurrency are evolving. Some governments seek to regulate it as a security while others treat it as a type of currency. Overall, the movement towards mainstream usage and acceptance of cryptocurrency proceeds. For example, many retailers use cryptocurrency for online purchases, and investment businesses increasingly look to cryptocurrency as investment grade options.