A cryptocurrency is a digital currency. Some of the most famous cryptocurrencies (cryptos) include Bitcoin, Ethereum, Litecoin and Ripple. And as of September 2020, there are a total over 6,955 different cryptos in existence.*
Like any currency, they can be used to buy and sell goods. You can use Bitcoin to purchase goods and services at household names such as Microsoft, Starbucks and Wikipedia.
*Sourced from coinmarketcap.com
Key crypto facts
They are decentralised
Cryptos are not regulated by any government or central bank and therefore free from their direct interference. Instead, they operate using a worldwide network of encrypted peer-to-peer transactions usually based on blockchain technology (cryptos take their name from their encrypted nature).
They are practically immune to fraud
The transparent and distributed structure of blockchain technology makes it very hard to manipulate.
A blockchain is essentially a public digital ledger that records transactions. Transactions are made up of blocks and after a certain number of transactions, a new block is permanently added to the chain.
As the ledger is open to everyone on the network and no one entity has control, any hacking attempts are made nearly impossible.
There’s a limited supply
In the case of Bitcoin, it was created so that there would only ever be 21 million Bitcoins in existence.
The reasoning behind this was to limit the supply so that the Bitcoins would eventually rise in value.
As of November 2020, there are over 18.5 million in circulation. The remaining 2.5 million are yet to be mined.
You can mine them
Mining Bitcoin is what drives its blockchain ledger. Powerful computers solve a computational puzzle which verify the transactions and add them to the blockchain. When this happens, a new Bitcoin is unearthed.
As a prize, the miners are rewarded with a new Bitcoin and the transaction fees.
This ‘gold rush’ in Bitcoin mining has led to the creation of vast energy-intensive Bitcoin farms and caused computer graphics cards (used to solve the computational puzzles) to double in price in 2018.
And although almost 90% of the Bitcoins have been issued, the final Bitcoin is estimated to be mined in the year 2140. This is because the computational puzzle to release them is getting harder and harder.
You keep them in a wallet
Cryptos such as Bitcoin are stored in digital wallets. Transactions occur through the use of private and public keys.
- The private key enables you to send currency from that wallet
- The public key is used to share with others so they can send you cryptocurrency
They can be extremely volatile
Cryptocurrencies are prone to massive up- and downturns in value.
Between December 2017 and November 2020, the price of a Bitcoin has fluctuated wildly, dropping from $19,783 to $3,000 before rallying back $19,000.
Some see them as a ‘digital gold’
Cryptocurrencies are sometimes viewed as a method to store value with foreign workers choosing to use cryptocurrencies to send money home.
Why were cryptocurrencies created?
In 2008, Satoshi Nakamoto released the white paper called Bitcoin: A Peer-to-Peer Electronic Cash System. It laid the blueprint for the cryptocurrency based on the revolutionary blockchain technology. To this day, Satoshi Nakamoto remains a mystery figure having never revealed his true identity or identities.
One of the main goals of cryptos was to eliminate transaction fees. Global payments companies such as Mastercard or Visa were perceived as unnecessary middlemen that took their cut whenever a financial transaction took place.
Cryptos were also in part a reaction to the 2008 financial crisis. The mismanagement of banks and government responses that control money had plunged many into poverty.
The creator of Bitcoin, Satoshi Nakamoto, commented:
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”
In 2009, Bitcoin was launched as the first-ever established cryptocurrency. Previous attempts at creating a cryptocurrency such as B-Money and Bit Gold failed to get off the ground.
And on 22 May 2010, the first recorded Bitcoin transaction took place when Laszlo Hanyecz paid 10,000 BTC for two pizzas. This event has gone on to be known as Bitcoin Pizza Day.
Benefits of cryptocurrencies
Cost – there’s no middleman or banking fees
Freedom – your money is not controlled by the government or institution. This is especially pertinent if you live in a country suffers from political instability or hyperinflation
Privacy – cryptos are discreet. This secrecy has led it to have some associations with criminal activity, but it’s worth noting that Bitcoin transactions are not anonymous
Access – cryptos give a banking alternative to anyone with a mobile phone
Want to know more? See Why trade cryptocurrencies?
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