What Is Cryptocurrency?
What is cryptocurrency? What are differences between cryptocurrencies? Learn more about crypto, altcoins and stablecoins with our guide.
Cryptocurrency exploded in 2017, and the resulting media attention brought both praise and criticism. The resulting crypto speculation frenzy have led some to herald cryptocurrencies as “the Financial Revolution” and others to call it the ultimate bubble.
As with any emerging technology, onlookers are both intrigued, and scared of the vast possibilities that crypto present. This is because cryptocurrencies and blockchain technology provide an alternative solution in some facet, to the everyday problems we all face.
Cryptocurrencies are the foundation and main interest point of blockchain technology. The two are intertwined, with some stark differences. Cryptocurrencies are digital assets that can be exchanged for goods and services in place of tradable currency, like the US dollar, European euro, Japanese yen, and British pound, to name a few. The real power of cryptocurrencies comes with the ability to cut out the middle man. You do not need a central authority in-between you and the person or service you are paying. You host a wallet and have full control over your own funds.
In simple terms, cryptocurrency is just like the money you put in a bank. Although with cash, you take physical coins and notes. However, money is nothing more than limited entries in a physical database of accounts, balances, and transactions, which you can only change if you meet certain conditions. With cryptocurrency, you have money that you can use to purchase items but only in digital form, over the internet or any other peer to peer exchange.
The journey from concept to global phenomenon has been a rocky one. The world’s largest cryptocurrency, Bitcoin, was little known for years with many rises and falls in it’s price. However, in December 2017, Bitcoin skyrocketed to $20,000 per coin. It has seen a long drawback since then. Leaving many uncertain of it’s future in a sea of other rising cryptocurrencies.
While the price of major cryptos changes rapidly, the technology continues to develop at lightning speed. Today, there are many big players still working towards a stable, globally accessible digital currency to form the basis of a new global monetary system.
The cryptocurrency scene never has a dull moment for those involved. The story of Bitcoin’s origin however, is very straightforward. It began only 10 years ago. At the time, certainly no one ever expected it to be the global phenomenon it turned out to be.
The biggest enigma in the crypto field is the question that is still yet to be answered. Who is the creator of Bitcoin, the worlds first and still biggest crypto currency? The figure or group known as Satoshi Nakamoto unleashed Bitcoin in 2009 with the goal of creating an electronic peer-to-peer cash system.
The Exciting and Troubled History of Cryptocurrencies:
2008: The domain name Bitcoin.org was registered on August 18, 2008. On October 31 of the same year, a mysterious being known online as Satoshi Nakomoto published Bitcoin: a peer-to-peer Electronic Cash System. During this time, Bitcoin had a value of a little over a cent per coin.
2009: Nakamoto sent Hal Finney, a computer programmer and friend, 10 Bitcoin (BTC) on January 12, 2009. This was the first ever Bitcoin transaction made. It was also the same year when Bitcoin’s value exploded. It grew quickly to $27 per coin.
2010: On August 15, 2010, the Bitcoin database was hacked, exposing its major flaws. An unusual transaction involving 184 billion BTC was noted by Jeff Garzik, Bitcoin developer. He said, “We’ve had a problem here.”
That same year in what is now a legendary event, the world’s first real world crypto currency transaction took place. A Bitcoin user named Laszlo Hanyecz swapped 10,000 BTC for two pizzas. This was both a ground breaking and ultimately very necessary step in pushing Bitcoin towards real world use cases and acceptance. Many people laugh looking back on how much those same Bitcoin are worth. While being worth only 30$ at the time, 10,000 Bitcoin today is valued at around $65,000,000.
2011: Rivals like Namecoin, Swiftcoin, and Litecoin made their debut in 2011, while bitcoin was accused of being involved in the “dark web,” especially on sites like Silk Road. But since bad publicity is still publicity, bitcoin prices skyrockets during this time before it dove down again.
2012: Bitcoin made a debut in popular consciousness when it was featured in an episode entitled “Bitcoin for Dummies” in the third season of the US drama “The Good Wife.”
2013: The blockchain split in two as bitcoin holders failed to agree on transaction rules. Two networks operated for six hours, leading to a significant drop in value.
In other parts of the world, various countries had different reactions to the use of bitcoin. In Germany, bitcoin was not recognized as an official currency but as a “unit of account,” leading to taxing bitcoin-based transactions in the future. Meanwhile, in Vancouver, Canada, the first ever bitcoin ATM was installed. However, it was banned and considered illegal in China and Thailand.
2014: In one of the most infamous incidents in the history of cryptocurrency, Japanese Bitcoin trading exchange Mt. Gox went offline and filed for bankruptcy protection. Investors at the time lost everything and are still to this day fighting for their claims. There was some new ground gained in adoption however, with Microsoft and others allowing users to buy games using the bitcoins, recognizing the popularity and potential of the cryptocurrency.
2015: Ethereum as well as other cryptocurrency altcoins were introduced during this year. Coinbase, now one of the biggest and most popular exchanges in the west, raised $75 million in funding. This was the largest at the time for a bitcoin company.
It was also during this time when European based bitcoin exchange company Bitstamp was hacked. They resumed days later, assuring their investors that their funds were not affected.
2016: Cryptocurrencies became more popular during this time. In fact, the number of ATM machines grew from 500 at the start of the year to 900 by the end of the year.
It was also in 2016 when Uber Argentina, the Swiss national railway, and Steam, a software company, started to accept bitcoin payments. This marked even more adoption worldwide in what was starting to look like a promising new payment method.
In May of 2016, DAO (Decentralized Autonomous Organization), a stateless venture capital was founded and funded on the Ethereum blockchain. This was the largest crowdfunded project ever in crypto. Unfortunately, it was hacked just a month after it was launched and all their assets were lost. This marked yet another high profile multi million dollar hack in the crypto scene and cast a spotlight on the need for increased security measures.
2017: After much debate from supporters and increased tension, the scaling debate in Bitcoin was in a way temporarily settled by the “Bitcoin cash” hard fork. This caused a split in the Bitcoin community and the miners over which version of Bitcoin to support. Today there is still the main Bitcoin legacy chain coin, and the fork known as Bitcoin Cash.
In groundbreaking international news, Japan announced new laws deeming Bitcoin a legal payment method, while Skandiabanken in Norway accepts bitcoin both as a payment system and an investment asset.
2018: Major electronic manufacturer Samsung confirmed it will start making computer chips specifically to mine coins. Similarly, different European countries passed cryptocurrency regulations while others established partnerships with high profile crypto companies. It was also this year when Ripple launched an app with Santander for international money transfers.
Adam Smith summarized the issue well: “The problem with fiat money is that it rewards the minority that can handle money, but fools the generation that has worked and saved money.”
Former IMF (International Monetary Fund) Chief Economist Kenneth S. Rogoff wrote a book called “The Curse of Cash,” where he suggested governments completely abolish cash notes.
He wrote that cash is taking away money from legitimate free enterprise and putting it into the black market instead. He also accused the central banks around the world of promoting the black market by selling paper bills.
The US dollar was once the gold standard of foreign currency holdings. It held real-world value since it was pegged to actual gold bullion held by the US Treasury. However, in 1971, the relationship between gold and the US dollar was severed.
This means that the entire finance industry runs on the assumptions of price, and supply vs demand, but not of intrinsic value. Thus, when the American government cannot fund their spending on tax revenue, they simply print more money. In doing so, the value of the dollar has plummeted while gold has gone up.
Another fundamental problem of fiat currencies is that it forces people to accept them. In the United States, for example, the use of legal force in 1933 was used to compel the people into accepting irredeemable Federal Reserve Notes replacing gold-back money.
This makes fiat currencies immoral because coercion is used to make them acceptable. Aside from that, schemes that evolve around fiat currencies allow those who control such payment systems to redistribute wealth by altering the quantity, availability, and distribution, which can be considered legalized theft.
A group of people saw the limitations of traditional banking systems. They saw that these could endanger people’s wealth, privacy, and peace of mind. This led the development of cryptocurrency – something that cannot be controlled by a single entity. They created something that will give everyone control over such currency, which will only require internet access, not regulatory entities, geographical borders, or governments.
Although cryptocurrencies may not necessarily usurp the value of traditional banking and fiat currencies, there are certain advantages that are not available to the traditional payment systems.
1. Takes away the middle man: No government or private entity will have control over cryptocurrencies. So, when you buy property or make transactions, you can do it without the need for third parties. This cuts down the time in settling payments and makes fairer transactions. Moreover, cryptocurrencies cannot be devalued or taken away from you by any government.
Accessible to anyone: Not everyone has access to traditional banking systems. But with cryptocurrencies, anyone who has access to the internet can have a crypto wallet. This makes cryptocurrencies useful in underdeveloped countries.
2. Prevents fraud: Because cryptocurrencies are decentralized, this makes them fraud-proof by nature. They cannot be counterfeited unlike paper currency.
Additionally, with cryptocurrencies, exchanges are made using “push transactions,” which means that anyone who makes a transaction only sends the amount of currency they want to make to a vendor and nothing more. But with traditional credit and debit transactions, which are considered “pull transactions,” anyone you send money to will be able to pull not only the payment but also your personal information. This could increase the risk of fraud or identity theft.
3. Quick and easy payments: When using cryptocurrencies, payment is done in just a matter of seconds. You don’t need to provide a lot of personal details – all you need is the wallet address of the person or entity you want to send the payment to.
Because you only need to have internet access to be able to make transactions, fast settlements and lower fees are made possible with cryptocurrencies. This is also because of the elimination of the middleman that normally profit from your transactions with fees.
The primary reason Bitcoin was created in the first place was to cut out the middleman – traditional banks. This is because they usually take a big chunk of your payment.
When you buy, a house, you will need to pay a real estate agent, which is the middleman, his six percent commission. If you’re going to transfer money to a bank in another country, you’ll also need to pay a processing fee.
Aside from eliminating the need to pay hefty amounts for commissions or handling fees to middlemen, cryptocurrencies will also address fraud issues when making any kind of payment. Using traditional payment systems, you’ll need to divulge private information, which could be used fraudulently.
Transactions: Transactions are stored in the bitcoin database, known as a distributed ledger, and is shared. It can then be accessed using the blockchain, which calculates the spendable balance of each bitcoin wallet. It will also verify new transactions.
Private Keys: These are pieces of data that are kept in bitcoin wallets. They are used to sign transactions or transfers of value between bitcoin wallets. They are to be used only once. Blockchains will also verify whether a particular transfer comes from the owner of the wallet. To ensure that no unauthorized transaction will be made, you need to keep your private key secured.
Mining:This is a distributed consensus system that confirms pending transactions in the blockchain. It is also the process of putting all private keys in a blockchain in chronological order.
Mining also allows various computers to agree on the state of the system. After that, transactions will be stored in a block that follows rigid rules verified by the network, preventing other blocks from being modified, which would invalidate subsequent blocks.
Bitcoin transactions are verified by the computers mining worldwide. These computers need to prove they are real and are properly adding to the ledger by solving a mathematical problem. Because mining uses a lot of electricity, the miners are rewarded with new bitcoins for their work. This process is what incentivizes people to participate in the network and keeps it running.
Despite the fact that Bitcoin has been adopted by many merchants worldwide, it is not the easiest cryptocurrency to use.
Here are some of Bitcoin limitations:
- Higher fees: Because of the number of people using Bitcoin, the network got congested over time. This leads to higher and higher fees as people are willing to pay more to get their transactions through faster. Developers have been trying to solve this issue and so far, fees are starting to become lower again.
- Not easy to use: People who are not computer savvy will have a hard time using cryptocurrencies, like Bitcoins. Aside from that, you’ll need to keep a long set of numbers (private keys) safe to be able to make a transaction.
- Need for electricity: Mining requires a lot of electricity, which is bad for the environment. Plus, it’s quite expensive. It is estimated that total mining electricity worldwide rivals the annual consumption of a small country.
- Used for criminal activities: You don’t have to use your own identity when using bitcoin. This makes it easier for criminals to use Bitcoin for illegal activities like money laundering and illegal transactions
Altcoin is a title that traditionally refers to anything that is not Bitcoin. There have been numerous that have come and gone throughout the years. Most have tried to be competitors to the Bitcoin throne, unsuccessfully. In the past these altcoins have tried to fill a niche that Bitcoin lacks. Today there are thousands of these altcoins available, many perfoming their own functions that Bitcoin was never intended for. Here is a breakdown on some of the notable altcoins that arose to address Bitcoin’s most glaring shortcomings throughout the years:
This is an older experimental open source technology that was born two years after Bitcoin. It was intended to replace the domain name system to improve security, censorship resistance, decentralization, privacy, and speed of certain components, such as identities and DNS. Unfortunately, it never really caught on, although it had some lofty aspirations:
- Registration is inexpensive, costing only around $0.05. Compared to the standard procedure, the costs of a domain name registration is far lesser.
- There’s no need to pay a renewal fee to retain the domain, but you must publish a transaction with the domain name every 6 months.
- Management of subdomains is similar to the management of the current domain system. For example, you will have access to all the subdomains of mywebsite.bit after you registered it to the Namecoin System.
- Use Namecoin to propose ideas, such as voting, file signatures, notary services, proof of existence, and bonds/stocks/shares.
Litecoin was born in October 7, 2011 and went live 2 days after, sometime after Namecoin. It was created by Charlie Lee, an ex-Google employee, who envisioned creating a lighter, cheaper version of Bitcoin. While Bitcoin was considered “gold”, Litecoin was the “silver”, a means for cheaper transactions.
Both Bitcoin and Litecoin use proof-work consensus mechanism, helping safeguard the networks from attacks and abuses. Miners solve difficult cryptographic puzzles through their computational power. The main difference between Litecoin and Bitcoin lies in its mining procedure.
With Bitcoin, you need a very powerful computer to mine, which are called ASIC miners. In fact, whole warehouses have been built to process Bitcoin mining. Experts believe there is a risk in this practice. Bitcoin’s total supply could be controlled by a small number of people – something that will contradict the reason cryptocurrency was created, which was to spread wealth evenly to all people.
Charlie Lee created Litecoin to be mined using ordinary computers. This means that more people could get involved.
Bitcoin uses SHA-256 algorithm, which favors processing power when mining cryptocurrency. Litecoin, on the other hand, uses “script algorithm,” which prioritizes those with high-speed random access memory rather than with processing power.
Litecoin is the second most forked cryptocurrency and, besides the mining puzzle, it differs from Bitcoin with some parameter changes. For example, the time between block creation is 4 times shorter than Bitcoin, which takes 10 minutes.
DogeCoin is a somewhat notorious cryptocurrency that started as a joke but quickly spread as a huge community grew around the new coin. It was born from a meme that was popular at the time, hence the Shibu Inu dog from the “Doge” internet meme on its logo.
Dogecoin was created by Billy Markus and Jackson Palmer on December 6, 2013 with the intention of having an interesting digital currency that would reach more people than Bitcoin. In fact, it supported several marketing campaigns and public events. Some of the events it sponsored were as follows:
- A NASCAR driver installed Dogecoin logo on his car
- A community that raised over 30 thousand dollars to support the Jamaican bobsled team to let them travel and compete in 2014 Winter Olympic Games
Another interesting difference between Dogecoin and other cryptocurrencies was the notion of random block rewards. With Dogecoin, each block bonus is random instead of being fixed, depending on a pseudo-random function used on the previous block hash. This allows miners to determine whether a reward is low or high, giving them time to mine other cryptocurrencies instead.
Unfortunately, this feature was removed a few months later. Today, this cryptocurrency’s block reward system is fixed as all halving events have been completed since February 2015.
Ethereum is the first cryptocurrency that allows smart contracts to be created using a Turing-complete programming language. It was developed with the idea that contracts can correspond to a computer program and can be fulfilled and applied using a series of conditions that need to be met. These contracts are known as “smart contracts” and are a foundational principle in Ethereum.
For a smart contract to be installed and run on a peer-to-peer network, users must pay in Ether. Ether serves as both the contract fuel and cryptocurrency of the Ethereum network.
Some other uses for the Ethereum network are financial markets, electoral systems, registration of domain names, and crowdfunding platforms among many others. Ethereum also rose to prominence through 2016 and 2017 as being the #1 platform for other businesses to build their own cryptocurrencies and ICOs with.
Monero is a cryptocurrency that operates in a private, secure, and untraceable manner. It uses a ring signature algorithm where multiple signatures from participants are needed for monetary exchanges to be made. A transaction may be linked to a group of users but will not be traced back to them. This currency is also fungible, which means every coin circulated is completely identical to other coins in circulation.
To ensure privacy, Monero’s privacy protections require a sender to specify a payment ID of their choice. This way, the receiver will have no idea about the source of funds. You can also generate an integrated address along with the payment ID for faster transactions.
Cardano is a third-generation cryptocurrency designed to protect user privacy while allowing regulations to be imposed. Since its start in 2015 its roadmap continues to evolve. At the beginning of 2018, it finally hit the spot in the top ten market cap cryptocurrencies.
Unlike other early born cryptocurrencies, Cardano is high speed, allows money ownership, security, and pseudonymity, supports the side-chain concept, and allows for extensible applications, such as gaming and gambling, identity management, and verifiable computations.
What makes Cardano different from Bitcoin?
It has an innovative multi-layer architecture that protects an individual’s rights to privacy in financial transactions while integrating regulations.
- Cardano Settlement Layer (CSL) is a stand-alone blockchain with ADA as a token. It stores and accounts for transactional value and supports a Control layer extension. In gaming and gambling, the settlement layer helps verify how honest the numbers were generated and the outcomes of a game.
Ripple was released in 2012 by Chris Larsen and Jed McCaleb. It has many conceptual differences with Bitcoin in that it acts as a cryptocurrency too, but is more focused on being a digital payment network. The aim is to “do for payments what SMTP did for email, which enables the systems of different financial institutions to communicate directly.” This allows banks and other financial institutions to incorporate Ripple into their own systems.
Ripple was designed to operate on an open source and peer-to-peer decentralized platform that allows users to conduct financial transactions in any currency, be it in litecoin, bitcoin, USD, Yen, or other.
How Ripple works can be a little bit complex. For example, Person A wants to send a payment of $100 to Person B who is from another city. Person A does this through Agent A with a password that will require Person B to answer correctly. Agent A will alert Person B’s agent, Agent B, of the transaction details, consisting of the password, recipient, and the amount to be reimbursed.
What makes the process complex is that the funds that Agent B will transfer to Agent A, Person A’s agent, will come from his/her own account. This means that Agent A owes Agent B the amount of $100. Agent B can make a record of the transaction also known as IOU, which Agent A would pay on an agreed day, balancing out the debt.
All of these activities will be done through a medium called Gateway, which serves as a link in the trust chain. This medium also works as a credit intermediary that sends and receives currencies over the network. Given this example, the Ripple network requires trust to initiate such transactions. Unlike Bitcoin and other cryptocurrencies, Ripple does not run with a proof-of-work or proof-of-stake system.
Bitcoin’s birth and the subsequent cryptocurrency evolution that has gone on since 2009 is stunning. In less than a decade, there has been so much real-world accumulation of data that it becomes much easier to forecast how cryptocurrency will evolve en-route to becoming a viable global currency alternative.
Last May 2018, Tim Draper, a famous venture capitalist, predicted the fate of Bitcoin. He said that it will reach $250,000 by 2022. Draper also made a prediction in 2014, saying that Bitcoin will be worth $10,000 in three years. His first prediction did come true because BTC hit a $10,000 mark in 2017. In fact, it made an all-time high value of $19,783 by the end of 2017.
When asked by Rachel Wolfson, a Forbes contributor and cryptocurrency writer herself, what his basis for his prediction was, Draper said that it “based on the idea that Bitcoin was going to be easy enough to use in the future and that people would be able to start trading with it and using it as a store of value.”
Draper also believes that more and more people are going to start spending currencies in everyday situations just like credit cards. He also said that cryptocurrencies will completely eradicate fiat currencies.
It is true that cryptocurrency has had its fair share of ups and downs. But the trends of the market make it easier for people to make virtually accurate predictions of what to expect in the near future.
Experts predict that Bitcoin and other digital currencies will have more patronage from institutional investors. More and more governments are looking to regulate cryptocurrencies, giving investors more confidence in putting putting their hard-earned money into them. In fact, more people are acknowledging cryptocurrencies’ potential as a viable asset for enticing returns.
However, other experts believe that despite the measures being taken to regulate these digital currencies, there are still so many factors that make them volatile.
- Lack of institutional capital
- Not enough intrinsic value
- Implementation of regulations
Those who have their eyes on the cryptocurrency market believe that as cryptocurrency becomes more popular, there should be a rhythmical pattern of its volatility.
Cryptocurrencies are believed to be volatile no matter what will be done to address this issue. This is the very reason Stablecoins have been created.
Stablecoins are a form of digital currency that were created to specifically address the volatility of cryptocurrencies. Currently, there are two distinct categories: fiat-backed Stablecoins, which are backed by real-world fiat currencies, like Euro, US dollar, and British pounds, and crypto-backed Stablecoins, which are backed by a second cryptocurrency.
Another kind of Stablecoin is believed to become mainstream very soon. These Stablecoins will be backed by commodities like oil, and precious metals, namely gold. An upcoming Stablecoin is expected to be the leader in this emerging sector of cryptocurrencies. This new Stablecoin is Kinesis. It is designed to offer rewards to its users, as well as offer a flexible and reliable digital monetary system.
Kinesis combines stability, cryptographic technology, and yield, making it easier for users to spend and at the same time, maintain their token value without the fear of volatility. The Kinesis team said, “Under the Kinesis Monetary System, we can take the greatest store of value, gold, make it an efficient medium of exchange via blockchain and cryptocurrency technology, then stimulate money velocity and economic activity through a multifaceted incentivizing yield system. Kinesis is not abstract or theoretical, it has been meticulously planned.”
There has long been a need for an instrument like these Stablecoins. Exchanges in particular are in dire need for an asset that can make an appropriate pairing for other cryptocurrencies. While USD has long been the go to, Stablecoins provide all the functionality and features of normal cryptocurrencies that USD simply cannot compete with. This will enable the onramp of millions of dollars from investors that cannot trust the volatility of other cryptocurrencies as well as finally providing one of the initial purposes of crypto, a useable store of value for everyday purchases and exchanges. These are some of the concepts highlighted in the original whitepaper written for Bitcoin. Stablecoins will usher in the next era of cryptocurrencies and will lead to the mass adoption in everyday situations that crypto has been fighting for since the beginning.