What is a Cryptocurrency?

Who could have thought that the first instance of payment in Bitcoin was used to pay for a double pizza order for a staggering amount of 10,000 BTC, which is worth around $70 million at time of writing? Who could have anticipated that Ethereum, barely known by investors just several years ago would surge above 5000% in 2017? We all know that by now but few of us grasp what cryptocurrencies actually are.

Cryptocurrencies, or also known as virtual currencies are means of digital exchange. Created by groups of highly skilled technical specialists, cryptocurrencies sparked interest of millions of people worldwide in recent decade.  Cryptocurrencies are not regulated by governments and central banks and therefore are not prone to inflation. They exist completely beyond the framework of state or global monetary policy. Bitcoin emerged as the world’s first cryptocurrency in 2009 and sparked a real boom in the field, with more than 1300 cryptocurrencies existing and more being issued every month. Many of them prove to be short-lived and fail to gain any solid footing among investors while others, like Antshare or Cardano, register solid gains  and even challenge to outperform Bitcoin in the near future.  Optimists believe cryptocurrencies are breaking new ground for much brighter future with no banks as intermediaries of financial operations which could bring financial spectrum to completely new level, free from  manipulative state policies that create inflation and disrupt people’s savings. On the other hand, others are skeptical about cryptocurrencies and believe them to be an over-inflated bubbles bound to collapse in the near future,  with far more devastating consequences for investors than even the most pessimistic forecasts suggest.

Whether any of the given claims is true remains to be seen, but what remains true is the fact that unprecedented growth of cryptocurrencies in 2017 granted many a status of self-made millionaire.

What’s Cryptocurrency?

what is cryptocurrency

Cryptocurrencies are complex cryptographic protocols which that encrypt specific data transfers securing the unit of exchange. These protocols are developed with some advanced math and computational power that makes them non-susceptible to hacking. This significantly mitigates the risk of counterfeit currency emission and anonymizes its users. Concealment of user’s identity makes it difficult for any part to track the holder of currency and in some cases even payment purpose destination.

Decentralization and exchanges

Cryptocurrencies are fully decentralized. There is no bank or any government-affiliated party that controls its release. Instead, complex algorithms built within the technology control the supply and value of cryptocurrencies. The main party responsible for smooth and stable operation of the technology are miners, but there is hardly any degree of centralization in their activities. They utilize strong computational power to solve complex cryptographic tasks and keep track of all transactions by adding blocks to the blockchain, a technology which all cryptocurrencies are built upon. In return, they receive new units of cryptocurrency and transaction fees paid by other users in the system.

Importantly, cryptocurrencies are exchangeable for fiat currencies in particular online markets, meaning that each has a variable exchange rate with one of the major world currencies (such as the U.S. dollar, European euro, British pound, and Japanese yen). Exchanges provide user-friendly platforms and act as intermediaries between buyers and sellers of cryptocurrency. Exchanges may be slightly vulnerable to hacking, so choose your broker wisely and do not rush to cryptocurrency investment at the first thought that crosses your mind.

Grows up over time

Another good thing about cryptocurrencies is that it’s supply is finite which is implied within their source code. This fully explains why mining is getting harder and harder for miners. For instance, some Bitcoin specialists suggest that at some time in the near future miners will no longer be able to get new units of cryptocurrency, as no computational power will have the capacity to solve new blocks in the chain. Here one can trace some similarities with Gold and Silver, which have limited supply and tend to increase in value over time. This makes them virtually invulnerable to devaluation or any interference from state and banking institutions that implement predatory policies to the detriment of account holders. For example, whereas a government can easily freeze or even seize a bank account that is located in its jurisdiction, such action cannot be taken against the holder of cryptocurrency due to decentralized nature and anonymity of all transactions.

On the other hand, cryptocurrencies have gained a notorious reputation as payment for black market operations and main payment option within the deep and dark web. That is why many people are still treating them with caution. A long debate between opponents and proponents of cryptocurrencies is far from over, but the bare facts of 2017 make it very likely that much more is about to come.