What is Cryptocurrency?
Cryptocurrency is digital money designed to be used as a store of value or medium of exchange that doesn’t require a middleman like a bank. It is called “crypto” because it uses cryptography to keep it safe and secure.
The Long Definition
Cryptocurrency is digital money. It allows you to buy, sell, or trade with anyone in the world without needing a middleman like a bank. You can also use it as a short-term/long-term store of value.
Crypto means secret and currency means money. Cryptocurrency uses cryptography; techniques and methods that secure information and communication. This helps make it a safe and private currency, allowing users to remain anonymous.
Cryptocurrency can only be used on the internet. It runs on a special computer technology called the Blockchain. This technology is used to keep records of all cryptocurrency deals and make sure these records are true, correct, safe, and anonymous. Think of it as a ledger of crypto transactions.
A blockchain is immutable – meaning it can’t be edited. So, once details of a transaction have been recorded on a blockchain it is very hard to change, hack or cheat. This makes it very trustworthy.
Today, there are many cryptocurrencies running on their respective blockchains. Examples include Bitcoin (BTC) which runs on the Bitcoin blockchain, ether (ETH) on Ethereum, Solana (SOL) on Solana, Binance Coin (BNB) on Binance Smart Chain (BSC), and more.
Overall, cryptocurrencies provide a cheaper and faster way to do money transactions without the need for a middleman like a bank.
History of Cryptocurrency
Cryptocurrency, as we know it, was born in 2009. Its creation is credited to Satoshi Nakamoto. For all we know, Satoshi may be an individual– man or a woman– or a group of people.
Either way, Satoshi created the first cryptocurrency, Bitcoin (BTC). It was created to provide an alternative to fiat currencies like the US dollar. His idea was to create a payment system powered by a decentralized network that gives us more privacy and control over our money.
In the years since Bitcoin has gone on to be very successful. This success has inspired the creation of many new cryptocurrencies. The new cryptocurrencies are known as altcoins. About 20,000 of them have been created so far.
Today, Bitcoin is the most valuable cryptocurrency while the most popular altcoin is Ether.
Cryptocurrencies are also called virtual currencies because they are digital and can only be used online. They exist as bits of data on their respective blockchain networks.
Like regular money, you can use crypto to buy goods and services or invest. You can also exchange it for other currencies on certain platforms. These platforms are known as crypto exchanges.
What is the Difference between Cryptocurrency and Normal Money
The normal, regular money you use in your day-to-day transactions is called fiat currency.
A fiat is a decree or command by a government. So, fiat currency is what a government decrees as currency (money) in its country. For example, The U.S. government decrees that the dollar is the national currency, England has the pound, India the rupee, and the European Union has the Euro.
Cryptocurrencies are very different from fiat currencies. The most obvious difference is that crypto is digital money held in a digital wallet and must be transacted on a blockchain. There are no physical cryptocurrencies.
Fiat money, on the other hand, can be physical and digital. You can hold physical dollar bills, and store them in a physical wallet. It can also be digital such as when you use your credit card or transfer money to and from your checking account.
The most important difference, however, is that a central authority does not issue cryptocurrency. Digital currencies exist and function outside of mainstream financial systems. In fact, anyone can launch their own cryptocurrency. However, they need to be familiar with blockchain technology to do so.
Cryptocurrencies became appealing partly because of the inadequacies of fiat currencies. Inflation is one such inadequacy.
Under the control of governments and central banks, fiat currencies lose purchasing power over time. For example, in 1960, one US dollar could buy two gallons of milk! Now one gallon of milk costs much more. A rough estimate is that fiat currencies lose half their value every 20 years.
Why Was Cryptocurrency Invented?
Satoshi created Bitcoin to stop banks and governments from having so much control over the monetary system.
Some think it was the 2008 financial crisis that motivated the creation of cryptocurrency. The crisis was caused by big banks making risky investments and pushing mortgages on people who couldn’t afford them.
They made such a mess of things that many people lost vast sums of money, their jobs, and in some cases their homes. The banks got bailed out by the government, but the average person suffered. After that, most people were angry and scared.
So, Bitcoin and cryptocurrency were meant to stop things like that from happening again. The goal is to put the financial power back in the hands of the everyday citizen and away from centralized banks and governments.
What Are Cryptocurrencies Used for?
People can use cryptocurrency for buying things from vendors who accept crypto payments, for trading, or as a long-term investment.
How is a Cryptocurrency Coin Created?
Depending on the blockchain, cryptocurrencies are created through mining or minting. Mining occurs on proof-of-work (PoW) blockchains like Bitcoin. It is like digging for gold, but instead of using a shovel, people use computers to solve complex math problems. When they solve the problem, they get a piece of cryptocurrency as a reward.
On the other hand, minting occurs in proof-of-stake (PoS) blockchains like Ethereum. Here, instead of solving complex puzzles, participants get selected to confirm crypto transactions based on the size of their holdings. They then receive rewards in the form of newly minted cryptocurrencies.
It all starts with blockchain technology
A blockchain is a decentralized network maintained by hundreds or even thousands of people running specialized software on their computers.
Each blockchain has a cryptocurrency that can be used for different purposes, depending on what the blockchain does. The blockchain’s cryptocurrency is most often used to pay people for verifying and entering records of transactions.
Bitcoin is mined on the Bitcoin Blockchain and miners get paid in Bitcoin. Similarly, the Ethereum blockchain uses its currency called Ether (ETH) to pay what they call gas fees– fees charged for transactions.
Other blockchains use their cryptocurrencies for governance. The more of that cryptocurrency you own, the more voting power you have.
There are thousands of cryptocurrencies and they’re all unique in their own way. Popular ones include bitcoin (BTC), ether (ETH), Solana (SOL), and Binance (BNB).
What is the Difference Between a Cryptocurrency Coin and a Cryptocurrency Token?
It can be confusing because a cryptocurrency coin is different – yet similar – to a cryptocurrency token.
A crypto coin is created as part of a blockchain. It is native to that protocol, meaning it gets released at the same time the network goes live. Usually, its functionality is linked to the blockchain because it is used for a variety of things, depending on what that blockchain does.
For example, ether is used to pay gas fees and reward validators on the Ethereum blockchain. Bitcoin is used to pay transaction fees and reward miners on the Bitcoin blockchain.
A cryptocurrency token is not native to its blockchain. It is usually created after a blockchain is released. The purpose of a token is to let people use a different cryptocurrency than the blockchain’s native currency. It represents the non-native cryptocurrency.
For example, if you want to use Bitcoin on the Ethereum blockchain, you will need Wrapped Bitcoin (WBTC) tokens.
Are cryptocurrencies legal?
It depends on where you live.
Governments around the world have taken very different views of cryptocurrency. Some have embraced it, like El Salvador which adopted Bitcoin as a legal tender in 2021.
Other countries, like China, put strict laws in place to prevent their citizens from accessing cryptocurrency.
Most countries are somewhere in the middle. These countries want to regulate cryptocurrency without outlawing it.
Many governments are working on laws and regulations that may impact how people can use cryptocurrency. It’s important to be aware of the laws where you live at all times.
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