If you’re reading this, then you probably already went over our introductory article on what blockchain is, and getting to know cryptocurrency is the next logical step in the journey.
Let’s get right into.
What, really, is a cryptocurrency then?
Cryptocurrencies – a definition
At their core, cryptocurrencies are a form of digital money that can be used to buy and sell goods and services, just like traditional currencies such as dollars, euros, or pounds. However, they are not backed by any government or central authority, which means that they are not subject to the same rules and regulations that govern traditional currencies. This gives cryptocurrencies a unique level of freedom and flexibility, and that, as it turns out, is very enticing to a lot of people.
Dubbed simply “crypto”, most, if not all, cryptocurrencies are based on blockchain technology. This simply means that every cryptocurrency exists not on a server or a computer, but on a blockchain network. Cryptos power the chain’s digital economy by allowing transactions between users in a peer-to-peer manner.
In the background, a cryptocurrency is “just” computer code – zeros and ones – albeit a tiny bit more complicated than that. The code’s representation, what you see and interact with, is called a coin or a token – a representative for a given cryptocurrency.
Tokens and coins are not the same thing!
- A coin is a digital asset that has its own standalone blockchain: Bitcoin is a coin, as the name suggests, because it has its own blockchain – the Bitcoin network.
- A token is a digital asset that doesn’t have its own blockchain, but “lives” on another: The Ethereum network has its own ETH, which can be called a coin, but all other assets that run on the network are tokens instead.
How do digital currencies work
To understand how cryptocurrencies work, imagine a world where money is no longer represented by physical bills or coins, but by lines of code that exist only in the digital realm. This code is stored on a blockchain, which is essentially a digital ledger that records all transactions made with the currency.
When you want to send a cryptocurrency to someone else, you simply initiate a transaction using your digital wallet, which is a software program that stores your currency. This transaction is broadcast to the decentralized network of computers that make up the blockchain, and these computers work together to verify and validate the transaction.
Once the transaction has been verified, it is added to the blockchain, along with all other transactions that have been made with the currency. This creates a transparent and immutable record of all transactions, which anyone can view and verify.
Furthermore, the creation of new units of cryptocurrency is controlled by a process known as mining, which involves solving complex mathematical problems to unlock new coins. This process is designed to be difficult and time-consuming, which ensures that new coins are not created too quickly, and that the currency remains scarce and valuable.
But what makes cryptocurrencies truly unique is their use of cryptography to ensure the security and integrity of transactions. Every transaction is digitally signed with a private key, which is essentially a secret code that only the sender knows. This key is used to verify that the transaction is legitimate and has not been tampered with.
The point of cryptography
Cryptography is a key aspect of cryptocurrencies (not very surprising, yes). It is the element that secures communication and information on a blockchain network by converting it into an unreadable format, known as ciphertext, using complex mathematical algorithms. Cryptography secures transactions and ensures the integrity of the network.
Without cryptography, cryptocurrencies are just currencies. With it, they offer much, much more.
When a transaction is initiated on a cryptocurrency network, it is first verified and then encrypted. The encrypted transaction is then broadcast to the network for validation and inclusion in the blockchain. As most blockchains are public, anyone can attest to the authenticity of the transaction, guaranteeing transparency and legitimacy. Because of the decentralized nature of most blockchains, no one can revert a transaction once it has been recorded in the blockchain. It is set in stone, diamond, adamantium, you get it. Forever unchangeable, unless all a majority of nodes on the network agree that such an action is necessary.
Cryptocurrencies use public key cryptography to verify ownership of assets. Each user has a “public key” and a “private key”. The public key is used to verify transactions, while the private key is used to sign transactions on the blockchain, sort of like a password or a fingerprint, which identifies the one initiating it. This private key lets you access your assets, transfer them, use them, and so on – it is literally your key to the blockchain.
Cryptocurrencies use cryptographic algorithms to maintain the privacy of users on the network. While transactions are recorded on a public ledger, the identities of the users involved in the transactions are kept anonymous.
Double spending prevention
Cryptocurrencies use a cryptographic consensus mechanism, such as proof-of-work or proof-of-stake, to prevent double spending. This ensures that a user cannot spend the same cryptocurrency more than once.
In conclusion: we can’t have nice things without cryptography.
Now let’s take a look at how it all started.
A (very brief) history of crypto
The general idea of cryptocurrency can be traced back to the 1980’s, but we’re going to jump ahead to when it actually started to make ripples. It all began in the aftermath of the 2008 financial crisis, when people around the world were reeling from the collapse of the banking system and the reckless behavior of financial institutions.
It was in this environment that an anonymous person or group of people, using the pseudonym Satoshi Nakamoto, published a whitepaper outlining a new digital currency called Bitcoin. This currency would be decentralized, meaning that it would not be controlled by any central authority, and it would operate on a system of trust and verification called the blockchain.
At first, Bitcoin was dismissed as a novelty or a passing fad, but over time it began to gain traction among a small group of tech enthusiasts and libertarians who saw it as a way to challenge the status quo. They believed that Bitcoin had the potential to disrupt the traditional banking system and provide a more democratic and transparent way to exchange value.
Over the next few years, Bitcoin began to grow in popularity, and other cryptocurrencies started to emerge. Each currency had its own unique features and characteristics, but they all shared the common goal of providing a decentralized and secure way to transfer value, free from governmental and institutional control.
As cryptocurrencies gained popularity, they have also faced challenges and criticisms, while at the same time gathering a global following for their many practical uses and their potential. The adoption of crypto continues to grow, and they are now being used in various industries, from finance to real estate.
But you’re probably asking yourself a question by now…
Why is magic internet money valuable?
These questions pop up a lot. Why is Bitcoin worth anything at all? What is crypto’s value, if it’s not backed by government or industry?
The very same can be asked about a great many things. Why is green paper with dead people on it valuable, if not backed by gold (looking at you, Nixon)?
On that topic, why is gold valuable – it’s just some shiny rock that we dig from the dirt. Is it the rarity, the purity? Purity is arbitrary, and so is gold’s value – it means nothing to one, and everything to another.
Maybe it’s the color. If it is, is that a good enough reason?
What about colorless rocks that bend light in fancy ways? Changing perspectives, that’s exactly what diamonds are – fancy little stones and nothing more.
All of these things have value simply because we, humans, assigned it to them. Diamonds can be created artificially, yet people still want the real thing, because for some reason they consider it more valuable than the other. The cost of mining diamonds is, meanwhile, very hard to justify, but we won’t get into it here.
All this applies to cryptocurrency. We have assigned value to it because it is scarce, and because it has a purpose and a use case. It cannot be controlled or censored, it is nearly impossible to take down, and it makes you the sole owner of your assets. All this could be seen as pretty valuable.
So, on that topic…
How do you acquire crypto?
It’s getting easier and easier by the day. All you need is a wallet to hold your assets. From then on, you have several choices:
Cryptocurrencies can be bought and sold on cryptocurrency exchanges, which are online platforms that allow users to trade coins and tokens for fiat currency or other cryptocurrencies. The choice of exchange is entirely up to you,
Mining is the process by which new cryptocurrencies are created and added to the blockchain. In this process, miners use powerful computers to solve complex mathematical problems and validate transactions on the blockchain. As a reward, they receive newly created cryptocurrency. Mind you, you will need to invest somewhat heavily into mining equipment to mine effectively.
Accept it as payment
Some merchants and businesses already accept cryptocurrencies as payment for goods and services. In this case, the buyer sends the agreed-upon amount of cryptocurrency directly to the seller’s digital wallet, and this can be done in a number of ways, but is most convenient through a mobile wallet.
Some projects and companies offer cryptocurrency rewards and giveaways to users who perform certain tasks or participate in promotional events. You can find plenty on Twitter, for example.
Trade something for it
Cryptocurrencies can be traded like stocks, with investors buying and selling them based on their perceived value and market conditions. Trading can be done on cryptocurrency exchanges or through over-the-counter (OTC) trading platforms.
The future of crypto
While some view cryptocurrencies as a revolutionary force that could transform the financial system, others see them as a speculative bubble that will eventually burst, leaving many investors with significant losses. The only certain thing is that the future of crypto is uncertain, but there are several potential directions that the industry could take.
Which direction the industry takes will depend on a range of factors, including regulatory developments, technological advancements, and investor sentiment.
Hypothetical Future No. I: Crypto Simply Fades Out
In this scenario, crypto fades and its adoption dwindles. The once-promising technology has faded, now remembered mainly for its early hype and the enthusiasm it generated among early adopters.
Cryptocurrencies gradually lose their value as demand for them wanes, and the once-thriving crypto markets become stagnant and lifeless. The lack of interest leads to a decline in the number of businesses that accept cryptocurrencies as payment, further limiting their usefulness and acceptance.
As interest in cryptocurrencies fades, so does the development of new blockchain technologies and applications. Without the resources and investment to fund ongoing innovation, the pace of technological advancement slows to a crawl, and the crypto space becomes increasingly stagnant and outdated.
However, and it is a big however, past developments have shown that interest in crypto is anything but dwindling, and the list of use cases continues to grow. This scenario seems unlikely, but we have included it for sake of absolute objectivity.
Hypothetical Future No. II: Regulation and Taming
Another possible pessimistic scenario is that governments around the world will crack down on cryptocurrencies, limiting their adoption and usage. Governments may see cryptocurrencies as a threat to their control over the financial system and take steps to regulate or ban them. This could lead to a significant decrease in demand for cryptocurrencies, as well as a decline in the number of businesses that accept them.
Blockchain technology has also been integrated into the existing financial infrastructure, with governments establishing their own blockchain networks for secure and efficient payment processing. These networks are monitored and regulated by government agencies, ensuring that all transaction remains unnoticed or uncalled for. CBDCs, anyone?
In this future world, the use of decentralized cryptocurrencies has been largely supplanted by government-issued digital currencies. These currencies are backed by the full faith and credit of governments and are designed to be used for all types of transactions, from daily purchases to international remittances.
The once-revolutionary potential of blockchain technology to disrupt the financial system has been largely co-opted by governments, limiting the space for radical innovation and disruption. Moreover, the heavy-handed regulation of crypto has created a sense of distrust among some members of the public, who view it as an infringement on their personal freedoms.
Hypothetical Future No. III: Mass Adoption
One possibility that seems ever so likely is that cryptocurrencies could become mainstream and widely used in daily transactions. The developments of the past two years add to this hypothesis. As more people and businesses begin to use cryptocurrencies, their value could increase, and they could become a more stable investment. However, for this to happen, there needs to be more widespread adoption and integration into traditional financial systems, which is still a work in progress, and one that advances daily.
In this future world, decentralized finance (DeFi) is the norm, where financial instruments like loans, insurance, and savings accounts are all built on the blockchain. Smart contracts automatically execute these financial transactions, making them faster, cheaper, and more transparent than traditional banking services.
There is also a push to integrate cryptocurrencies with traditional financial systems, potentially replacing or complementing existing payment methods. This could lead to the creation of an entire new model for finance, as well as increased security and transparency globally.
There is no doubt that crypto has already had a significant impact on the world of finance and technology. As the industry continues to evolve, it’s essential to stay informed and educated about the latest developments and trends to make informed investment decisions.
In many ways, cryptocurrencies are a symbol of the new digital age we are living in, a world where borders are becoming increasingly blurred and where technology is driving rapid change. They represent a new kind of financial system, one that is not bound by the traditional rules and regulations of the past.
As more people become familiar with digital currencies and more businesses accept them as payment, cryptocurrencies could eventually become a ubiquitous part of everyday life. The rapid growth and development of the ecosystem suggest that digital currencies will continue to play an increasingly important role in the global economy. Only time will tell how far cryptocurrencies will go in their journey towards mainstream adoption.
We hope you’ve found this article useful and insightful. If so, keep on reading – we’ve got a lot more on the subject and a lot more coming up.