You have heard about it on the news or from a friend, but what exactly is cryptocurrency? Don’t feel down if you don’t yet have a firm grasp on this new asset class. Cryptocurrencies can be difficult to understand if you don’t know the basics.
To give you a better understanding of what cryptocurrency is and how it works, let’s go through the history of this relatively new technology, an overview of its inner workings, different types of cryptocurrency, and where this industry could go in the future. Once you get some background information on these subjects, you will gain a much more solid understanding.
Cryptocurrencies have gone down a long, winding road in the past decade. Even though the general public has only stumbled upon cryptocurrencies over the past several years, there has been significant work that has led to this point. In fact, cryptocurrencies have a history that dates back more than a decade, to a time when Bitcoin didn’t even exist.
Was Bitcoin the first cryptocurrency?
Cryptographers had been playing around with the idea of cryptocurrencies decades before Bitcoin came into existence. At the time, the question of ‘what is cryptocurrency?’ wasn’t yet fully answered, but that didn’t stop people from attempting to create their own. The most well known of these attempts came from Nick Szabo, a computer scientist who developed a cryptocurrency called Bit Gold in 1998. While Bit Gold was never fully launched, it is credited as paving the way for Bitcoin.
When was Bitcoin created?
In October of 2008, a white paper by the mysterious Satoshi Nakamoto was released. This paper described a decentralised network used to fuel a new cryptocurrency called Bitcoin. It would take years before merchants would begin to accept the new form of money as payment, but slowly Bitcoin began to catch on. Over the next several years, more cryptocurrencies would be launched on the back of Bitcoin and ride the emerging cryptocurrency wave.
By 2014, there were already dozens of cryptocurrencies popping up. Some of these, like Ethereum, would continue to grow and thrive over time, yet others would go bust as quickly as they came into existence. When 2017 rolled around, cryptocurrencies were becoming the darling new niche of the financial world, hailed as a saviour from the “corrupt” financial system. They were bought and sold on new trading platforms. Hundreds of tokens, another name for cryptocurrencies, had been created and their values were quickly rising. By the end of 2017, Bitcoin had skyrocketed in price from $900 to $20,000, and the entire industry hit a valuation of $600 billion. By 2018, it was clear: Cryptocurrencies were here to stay.
What is cryptocurrency?
A cryptocurrency is a digital currency that uses cryptography as a means of security. Most cryptocurrencies operate without the need for a central authority like a bank or government, and operate instead through a distributed ledger to spread power among its community. A cryptocurrency has a set, defined monetary policy, whether it be a fixed limit of tokens or allowing the creation of new tokens based on predetermined rules.
How does it work?
The distributed ledger that holds cryptocurrency transactions is known as a blockchain. A blockchain consists of blocks, which hold individual transaction information. This information is timestamped and posted to the ledger so that each transaction can be verified by other blockchain stakeholders and never be altered. In order to conduct a transaction on the blockchain, users agree to pay a small fee, which helps maintain the security of the blockchain itself.Let’s say you want to send your friend a small amount of Bitcoin. You create a transaction using your Bitcoin wallet and request to send Bitcoin to your friend’s wallet, agreeing to pay a nominal transaction fee along the way. After you make the transaction request, your transaction gets grouped with other transactions into a block on the Bitcoin blockchain. This block is verified by miners and posted to the blockchain, making the transaction complete.Through this process, you can send cryptocurrency to anyone, anywhere around the world, with low transaction fees. Want to send $1 million Ethereum to your family in Brazil? Go right ahead! Not only will the transaction usually be completed in a matter of seconds or minutes, it will only cost you a fraction of the fee you would have paid using a traditional money transfer service.
