What is a Cryptocurrency?
A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online. Cryptocurrencies use cryptography to verify and secure transactions, hence their name. There are currently well over one thousand different cryptocurrencies in the world and many people see them as the lynchpin of a fairer, future economy.
At its simplest a cryptocurrency works by logging transactions into a database to work out how much of that currency each individual, or their address, is holding. In that sense, the system is not so different to how banking currently works. For example, the money you spend online follows similar principles: you send money from your bank account to another account by deducting from a digital figure that you have associated with your account, that being your balance. This is nothing more than information being logged on a database, no physical exchange takes place.
Each cryptocurrency work on the same basis in that it is a large data log of information, namely transactions, that are used to determine how much of a cryptocurrency each address has attributed to it. The difference being that cryptocurrencies are purely digital, there is no option to take out a cryptocurrency in paper or coin form.
The major difference between cryptocurrencies and traditional financial models is in the decentralized nature of cryptocurrencies. What this means is that when you spend a cryptocurrency, the approval of the transaction does not come from one central authority, like a bank or PayPal, but rather from a Peer-to-Peer network of computers, coming to a consensus that your transaction is legitimate. Many people regard this to be one of the most appealing and disruptive aspects of cryptocurrencies, this distribution of authority is ushering in a new age where money is controlled by the people rather than huge corporate organisations like banks. Most cryptocurrencies also offer the guarantee of privacy as the identity of each individual is concealed behind state of the art cryptography, meaning everyone’s privacy remains intact.
Cryptocurrencies function like the fiat currencies that we use today in that they can be used to pay for goods and services. Whereas in the past the amount of businesses that accepted cryptocurrencies was very limited, it is now continuously growing as awareness spreads and becomes more mainstream. The most commonly one is Bitcoin as it was the first one created and as such is the most widely in the world. However, businesses are starting to see the limitations of only accepting Bitcoin and as such are starting to explore other cryptocurrencies too.
- PlayStation Network – Sony’s gaming network allows players to pay for games, subscriptions and add-ons in Bitcoin.
- Expedia – One of the largest online travel agencies in the world accept Bitcoin.
- Wikimedia Foundation – The foundation that owns Wikipedia, the world’s largest online encyclopedia, accept donations in the form of cryptocurrencies.
- Etsy – The e-commerce platform selling vintage or handmade items gives its sellers an option to accept cryptocurrencies.
- OkCupid – The popular dating sight allows users to pay for subscriptions in cryptocurrencies.
- Virgin Galactic – The commercial space line owned by Richard Branson’s Virgin Group have stated that they will accept Bitcoin.
The businesses accepting cryptocurrencies are not limited to large, established companies either with even small pubs in England accepting cryptocurrencies and the list of businesses doing so growing everyday.
Cryptocurrencies can serve many different purposes, more than simply being a means of transacting. For example, a cryptocurrency can have a clear utility, such as the LSK token.
The History of Cryptocurrencies
The first time most people tend hear about cryptocurrencies will be when coming across the first cryptocurrency created, Bitcoin. However, when Bitcoins mysterious founder, Satoshi Nakamoto, created the world’s first viable cryptocurrency, he wasn’t actually aiming to invent a currency at all.
Digital money is a concept that has long existed before Bitcoin. The prime example being a company called DigiCash Inc. founded in 1989 trying to create the world’s first widely used digital currency. DigiCash was an electronic money corporation, creating an anonymous payment protocol built on cryptography. However, after failing to gain mainstream adoption, amongst several other problems, DigiCash was forced to file for bankruptcy in 1998.
Ten years later, possibly as a reaction to the economic crash of 2008, an unknown developer, only known to this day as Satoshi Nakamoto, published a whitepaper about a decentralized, peer-to-peer electronic cash system, which went live as an open-source project (meaning any developer could contribute to it) in 2009. This project was known as Bitcoin and was the first example of a functional cryptocurrency.
Since then thousands more cryptocurrencies and utility tokens have sprouted, ranging from serious projects aiming to change the world by enabling the adoption of blockchain technology, such as Lisk, to currencies created purely as jokes, such as Dogecoin. This has led to a booming industry built on trading this currencies.
How are Cryptocurrencies Valued?
One of the most common questions in our industry is in regard to how cryptocurrencies are valued. The perception is that somehow they have less value because they cannot be held in physical form, despite the fact that cash is slowly becoming obsolete regardless. Or that they are not “backed” by anything despite the fact that fiat currencies are no longer backed by physical commodities either.