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What is a Cryptocurrency?

What is a Cryptocurrency?

Cryptocurrency is one of those words that is slowly trickling into our everyday vocabulary. Thanks to massive media coverage, many people have heard of it, but few people understand what a cryptocurrency is and what it could mean for them.

The Cryptocurrency Evolution

Perhaps the most widely known cryptocurrency on the market today is Bitcoin, which boasts nearly 14 million bitcoins in circulation. You have probably heard of this particular cryptocurrency.

What you may not know, is that the intention of Bitcoin founder, Satoshi Nakamoto, was not necessarily to create a new currency, but to create a decentralized digital cash system.

Many attempts to do just that have failed over the last several decades, mostly because they all attempted to utilize a Trusted Third Party (TTP) approach. Ultimately, all of these previous attempts failed, primarily because of security holes in the TTP approach.

It was not until Satoshi tried to create a peer-to-peer system for electronic cash that a digital method succeeded.

What makes this system different than so many others that failed? One reason is it is currently decentralized. That means no central servers are involved, and there is no controlling authority.

What is a Cryptocurrency?

The transactions are recorded both publicly and chronologically on a digital ledger referred to as blockchain.

Blockchain technology has many uses other than cryptocurrency, but it works exceptionally well for this purpose because all currency transfers are verified simultaneously at both ends of the transaction.

Today, cryptocurrencies have moved beyond Bitcoin. While Bitcoin remains the most recognizable name in the industry, other names are making waves and Investopedia recommends keeping an eye on these cryptocurrencies:

  • Dash
  • Ethereum (ETH)
  • Litecoin (LTC)
  • Monero (XMR)
  • Ripple (XRP)
  • Zcash (ZEC)

Bitcoin may be leading the pack, but it is not the only one in the race. Of course, there is always the one we have not heard of yet that is waiting in the wings. One thing seems clear; cryptocurrencies appear to be here to stay.

What Sets Cryptocurrency Apart from Regular Money?

Several things that set cryptocurrencies apart from traditional money. Understanding these critical differences between conventional currency and cryptocurrency may help you understand the demand for cryptocurrency and how they might benefit you.

  • No government involvement
  • Limited circulation (eliminates inflation).

Government bodies do not create or issue cryptocurrencies. Computer programs use highly sophisticated algorithms to identify new 'coins' and release them for public use. The combined user base of each currency, using vast amounts of computing power, record transactions between users in a peer-to-peer blockchain. The methodology used to create cryptocurrency keeps supplies limited and removes political or centralized decision-making from supply considerations.

Because there is a restricted supply of any individual cryptocurrency, the value of the currency will theoretically grow over time. Fewer coins will be required to pay for goods in the future because the growing supply of products or services will outpace the limited, or static amount of coins.

That is a deflationary model rather than the inflationary model traditional currency creates. Because an increasing supply of money decreases its purchasing power over time, prices typically rise with conventional currencies. That is not the case with cryptocurrencies making them attractive investments to some people.

How Can It be Used?

Some of the benefits related to cryptocurrencies are the very things that set them apart from traditional money.

One of the most significant benefits is the anticipated increase in the value of these currencies over time. However, this is still more theory than fact as these currencies have not been around long enough to establish this maxim as absolutely correct.

There are some benefits cryptocurrency users can enjoy right away, however. They include things like:

  • Security
  • Anonymity or pseudo-anonymity (some cryptocurrency services provide better standards of privacy or anonymity than others, but all are public transactions)
  • Easy transportability
  • No transaction fees
  • Easily facilitates international digital transactions
  • Eliminates intermediaries (like banks, exchange services, etc.)
  • No risk of hyperinflation

For now, cryptocurrency is used primarily as a type of investment, but there is no limit in sight for its use if it becomes more widely available, distributed, and accepted.

What Does the Future Hold for Cryptocurrencies?

The one thing that remains up in the air about cryptocurrencies and their future is government regulations. Throughout the world, governments currently seem divided about how to address the issue of cryptocurrencies and their legalities.

When the use of cryptocurrencies become more commonplace, new laws and regulations are likely to appear.

We do not know how these things will impact cryptocurrencies and their usefulness. The evolution of technology has created more than a few new industries, regulations, and now even the invention of a new currency.

Cryptocurrency may very well become the currency of the future – and perhaps a new economy — one that is driven by technology and access to that technology rather than numbers in a bank account or on a credit report.