page title icon What is Cryptocurrency? – A 2021 Guide to this Digital Currency

Like the everyday dollar, cryptocurrency is a form of currency exchanged in online transactions. This digital or virtual currency works in the form of limited entries within a single database and operates around controlled environments and stated conditions.

But what does that all really mean? Is cryptocurrency legit, or is it just another world fantasy? Can you truly make money off of it? How did it all begin?

We’re going to answer these questions and more for you, clearing up some of the confusion surrounding the topic and leaving the final decision of investing up to you.

Cryptocurrency – The Beginning

cryptocurrency

Back in 2009, the financial world was invaded by the original cryptocurrency, Bitcoin. However, the history of this digital currency actually extends far earlier than even the 2000s.

In 1998, computer engineer Wei Dai introduced the idea of cryptocurrencies in his paper on “B-money.” This document outlined the possibility of sending groups of untraceable digital pseudonyms.

That same year, Nick Szabo attempted the notion with Bit Gold. Bit Gold had the same goal: to decentralize digital currency. However, the attempt never officially launched.

While the first attempts didn’t exactly succeed, they did spur the movement. Fast-forward to 2009, and Satoshi Nakamoto (who is still an anonymous figure today) launched Bitcoin: A Peer-to-Peer Electronic Cash System. The first block of the Bitcoin network was mined, known as the Genesis Block.

After two pizzas were bought for 10,000 Bitcoin, or BTC, the market was started. Over the last decade or so, the cryptocurrency market has seen many highs and lows. At times, Bitcoin rivaled the value of the US dollar. At other times, scammers emerged and caused the loss of hundreds of thousands to even millions of dollars.

Throughout the course of its rises and falls, cryptocurrency has added over 2,000 digital currencies. This rising system has become global, despite its seemingly untrustworthy market.

How Would You Define Cryptocurrency?

The Dictionary defines crypto currency as “a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than a centralized authority.”

In more simplistic terms, cryptocurrency allows users to buy goods and services, or trade currency, using an online ledger. This form of payment is almost akin to tokens you purchase at the arcade. You must purchase these tokens with real money, but you can only play the games with the tokens.

Because cryptocurrency is a decentralized system, it does not operate around a central banking authority. Therefore, it implements a peer to peer (P2P) network, allowing individuals to exchange currencies directly instead of through an authority.

Instead, P2P networks use blockchain technology. This system offers a secure way to record transaction information, which makes it difficult for hackers to change currency amounts or cheat users. One blockchain accounts for a digital ledger, which is multiplied and distributed across a network.

Your cryptocurrency, or digital cash, is stored in a digital wallet – much like you would store physical cash in a physical wallet. 

Key Attributes of Cryptocurrency

There are many ways that one can characterize cryptocurrency, though the industry tends to hold these three things as the standard to meet:

  • Decentralized
  • Trustless
  • Immutable

Breaking these key attributes down a little further can help us better understand the concept of cryptocurrency.

Decentralized

Decentralized is a word frequently used among cryptocurrencies of all sorts – it’s even included in the very basic definition of the concept. So, it’s crucial that we can define this word and apply it to the process properly.

The word decentralized takes almost a political meaning when it comes to digital currency. It basically means that no one controls the blockchains – there is no central governing authority or bank that authorizes and controls the transactions.

Instead, all members of the cryptocurrency community collectively acknowledge the process of transaction and behave as one centralized, single computer with direct transactions to one another.

Because of this decentralization, the entire system has a very low risk of failing, since it operates on networks spanning thousands, even millions, of components and not on one head system.

They’re also far less vulnerable to attacks, given that they are so widespread and lack central points.

Trustless

In order for a cryptocurrency network to be successful, there’s no trust involved. Not a single person has to trust another user or a centralized authority. It was the first of its kind to establish a system without a central authority.

Since everyone on the network has a copy of the ledger, there’s no need for a third party to legitimize or oversee the transaction. It’s essentially every man for himself.

Immutable

Immutable is just another way of saying something cannot be undone. All transactions through blockchains are irreversible. Realistically speaking, it is highly unlikely and extremely challenging to undo any movement of Bitcoin, etc., in cryptocurrency.

This principle should also follow the idea that no one but the owner of a private key can send or move their funds. To ensure that the two ideas mentioned above remain intact, each and every transaction is recorded on the blockchain.

All three of these principles work together in succession. Because cryptocurrencies are decentralized, there is no higher authority to put one’s trust into. Therefore, it’s a trustless network. And since it’s trustless, all information is public and therefore immutable.

Types of Cryptocurrencies & Their Worth

Since the inception of Bitcoin, there have been many other cryptocurrencies to enter the market. These virtual commodities have expanded the network to over 5,000 versions and types.

Because it’s the original, Bitcoin is still by far the most recognizable of the large group. At times, it has also been the most valuable, but those numbers tend to fluctuate frequently. Other cryptocurrencies, such as Ether, Litecoin, Ripple, Stellar, NEO, and EOS have bursted onto the scene and made quite the splash. Overall, the total cryptocurrency market comes to a market capitalization of $201B.

But if they’re all cryptocurrencies, then what’s the actual difference among these 5,000 options available? And what makes one digital currency more valuable than the next?

For starters, each currency has a varying number of circulating supply. For example, Bitcoin has less than 17 million of its currency in circulation, making its value higher than a currency like Litecoin, which has approximately 58 million in circulation.

Other factors, such as transaction speeds, may make some currencies more appealing to users than others. Although Bitcoin is the original and biggest player in the market, it has notoriously slow transaction speeds. It also requires specilaized mining equipment, which can be another turnoff for potential buyers.

Finally, some cryptocurrencies function on platforms that allow it to process multiple types of currencies, while others will only accept one. An exclusive currency such as Bitcoin may not be as accessible as one like Ripple or Stellar.

Top 10 Cryptocurrencies by Market Share

CryptocurrencyAbbreviationValue by Market Capitalization
1. BitcoinBTC$128B
2. EthereumETH$19.4B
3. XRPXRP$8.22B
4. TetherUSDT$6.4B
5. Bitcoin CashBCH$4.1B
6. Bitcoin SVBSV$3.4B
7. LitecoinLTC$2.6B
8. EOSEOS$2.4B
9. Binance CoinBNB$2.4B
10. TezosXTZ$1.5B

Popularity of Cryptocurrencies – Fake or Real?

Someone who has never truly researched or used cryptocurrencies before might not understand the popularity. It’s easy to be skeptical of these networks. After all, real money has been the standard for so long – why stop using it now?

However, there are several reasons why these digital currencies have maintained popularity, even across the very low lows that some of these networks have experienced. Here are just a few of them:

  • Super low usage fees
  • Disassociation with world governments
  • Worthwhile potential for significant profit
  • Easy to use with more commonality
  • Significant focus on cybersecurity
  • Easy to obtain from reputable sources
  • Ahead of the curve in terms of financial technology

It’s often declared that blockchain technology is going to change the world, making the exchange of goods, services, and money much more straightforward, faster, and more secure. The above reasons offer just a few more considerations.

While there is risk involved, there’s also a high potential for real profits. But we’ll get into the stakes a little more in our next section. 

Are Cryptocurrencies a Good Investment? Real or Risky?

When Bitcoin first became a hot commodity, the overall cryptocurrency system was viewed as an investment rather than money used to buy goods. Over the years, many more companies have begun accepting digital currency as payments, such as Overstock.com.

That being said, this technology still seems to be on the outside creeping in. So is it actually worth it to invest? Some people have become immensely rich through it, while others have lost a lot.

The reality of cryptocurrencies at this point is that the market is extremely volatile. As we’ve already mentioned, the value of these online tokens goes up and down all the time. Bitcoin itself has cost anywhere from just $900 to a whopping $20,000.

So, while investing at the right time could make you a lot of money, it could also lose its value the very next day.

There are still a lot of unknowns across this space, which shouldn’t be a massive surprise considering the founder is still anonymous and there isn’t exactly a head office you can contact with more questions.

Overall, cryptocurrency is akin to gambling. If you play it right, play it smart, and play it at the right time, it just may change your life for the better. But one wrong move or a step too far, and you could lose everything.

Is it worth the risk? That question is entirely subjective.

Conclusion – The Reality of Crypto

The digital age has long been upon us. From smartphones to homes that basically run themselves, it seems difficult for us to remember a time when there wasn’t technology in our lives.

Now, even our money can be digitized. Cryptocurrency certainly seems futuristic, but for now, it’s more closely related to a bold investment than a dollar bill. That being said, if you’ve done your research and have the money to spare, it could be an extremely worthwhile investment.

Just like when you loan money, never hand out dollars without expecting to lose them.

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