Because it’s here to stay, we’ll walk you through the ins-and-outs of this digital phenomenon—you don’t want to be left in the dark.
First Things First
Let’s start with some definitions. Mathematics alone form the basis of cryptocurrency, a form of virtual currency. Cryptography is by definition “the art of solving or writing codes.” But in terms of mathematics and computer coding, cryptography uses algorithms and protocols to secure and scramble information into an encrypted format. Imagine carefully placing letters into boggle, spelling out several words. Encryption is just the action of shaking up that boggle board, while decryption is the process of putting the original messages back together.
In essence, it’s an encrypted string of data that’s been encoded to signify a single, specific unit of currency. Solving mathematical problems, based specifically on cryptography–or the art of writing codes–produces cryptocurrency.
Other names for cryptocurrency include digital currency, crypto, or virtual currency. Basically, it’s “digital gold.” No governmental oversight is associated with cryptocurrency, which makes it unique. Instead, a peer-to-peer (P2P) Internet protocol monitors it (learn more about P2P networks here). Fiat currency, on the other hand, is physical money. Fiat currency includes both bills and coins, and a wallet stores them.
A wallet stores cryptocurrency, as well—just a digital one! (Check out our guide to wallets). A wallet requires a key, which is essentially a password. Without the key, you’re absolutely 100% unable to get into your wallet. There have been many stories of people losing their keys, and are never again able to access their wallets. So, write your password down and don’t let anyone else see it. Keep that puppy safe!
Tokens are essential to getting a true grip on cryptocurrencies. They’re the amount of digital resources you control on a given platform. As mentioned before, a digital wallet stores them and accessed with a key, which can be reassigned to to someone else. Two types of tokens exist.
First, is a native token. This type of token has an intrinsic utility. It forms the core part of a blockchain. That is to say, a blockchain could not run without a native token. Often times, they’re used as an incentive to validate transactions, or create blocks.
A asset-backed token is the other type. The basis of this token is claims from a specific user, on an underlying asset. Let’s get a little history under our belts, before diving deeper. In the old days, if you gave gold to a goldsmith, he’d hand you an IOU (I owe you) for the equivalent value of the gold you gave him. You could give anyone the IOU. And the possessor has the ability to claim the gold from the goldsmith.
In much the same way, asset-backed tokens allow you to “hand over” your asset to the blockchain, and you’ll receive a token stating as much. That token represents your asset, be it a car, house, or something else, and you can physically hand over the asset-backed token to someone else, just like you can hand over a virtual currency.
Be aware that there is a difference between tokens and coins. Most people often use them interchangeably, but this is not really correct. Learn about the difference between tokens and coins here!
Types of Cryptocurrency
There are literally thousands of cryptocurrencies on the market. The most famous of which is known as Bitcoin. As the first of its kind, it paved the way for other cryptocurrencies to expand the use of virtual currencies. An Altcoin, or alternative coin, is a cryptocurrency based on Bitcoin.
Different cryptocurrencies can serve different functions beyond being a digital currency. To learn more about the different types of cryptocurrencies, watch the video below, or check out our page here!
Bitcoin: the king of the castle. Created in 2008, it housed the original code for blockchain technology. Its creation spurred many other cryptocurrencies. It’s easily the most trusted and known virtual currency on the market, even if it has its flaws.
Ethereum: probably the second most well-known cryptocurrency. It’s allows users to do more than just use it as a virtual currency. It’s a open-source blockchain, and money and assets are quickly transferred with the use of smart contracts. Assets include houses, cars, stocks, and other property owned with a real-world value.
Litecoin: was one of the first cryptocurrencies to emerge after Bitcoin’s initial release. It has a much shorter processing time—about 2.5 minutes—than Bitcoin’s crazy 10 minute timeframe. Litecoin provides more tokens and a different mining algorithm, but it ultimately didn’t take off the same way its big brother did.
Ripple: Because every single token was mined prior to release, it is quite possibly the most despised cryptocurrency by the community. This action is known as pre-mining, and is a huge no-no. Essentially, this takes away the community aspect of virtually currencies. It attempts to take a decentralized platform and centralize it.
Monero: solved many of Bitcoin’s privacy issues. It adds an additional level on anonymity to transactions. A few darknet markets (networks that require specific software or authorization, in order to access them) started accepting the cryptocurrency in 2016, where it ultimately reached its peak.
Why Should I Care About Cryptocurrency?
Why can’t I just stick with my fiat money and leave it at that? Well, you certainly could do that. In the end, though, you’d really be missing the next big financial thing. Fiat money can be volatile. Take Venezuela, for example. Their economy is free falling and taking its national currency, the Bolivar, with it. So, Inflation has naturally skyrocketed. What this really means is that the Bolivar has no true value. Where does that leave Venezuelans?
Fortunately, not completely out of luck. Bitcoin has been a true savior in the South American citizens’ eyes. It has provided a safe, secure way for businesses to accept money. In fact, the number of online businesses accepting the cryptocurrency went from 450 in August 2014, to a whopping 85,000 in November 2016, according to surbitcoin.com. People are literally flocking to the virtual currency because it offers something government-backed money cannot: stability.
Just like in Venezuela, economic hardships, market volatility, or political unrest are all great reasons for a fiat currency to fluctuate in any country. You’re left high and dry when the fluctuation bounces too rapidly, or tanks it completely. Governmentally-backed currency is directly affected by the the country’s economy. This means that if the economy tanks, so will the currency. Consequently, cryptocurrency solves the issue of the involvement of governments in currency, which truly allows the market to work without outside influence.
Looking to the Future
Cryptocurrency markets are wild and fast. It seems like a new cryptocurrency enters the market every single day. Most are built solely for profit, only to be left to the graveyard of cryptocurrencies past. Many don’t even survive the first few months. Markets really are dirty. You could watch one particular virtual currency jump 1,000% in a day…..just to watch it lose that same 1,000% the next.
Even if market volatility exists, cryptocurrency is here to stay. It truly has changed the entire digital landscape and currency exchanges. As a result, Asian countries have fostered the expansion and implementation of Bitcoin as an actual form of payment. It’s not just crazy investors or super nerds who see the potential of cryptocurrency. No; governments, businesses, and regular people like you and I are welcoming cryptocurrency into our everyday lives.
As more cryptocurrencies emerge, they will continue to grow in market share. One day, everyone will know what Bitcoin is and what it does. The currency revolution has begun. Will you stand by and watch, or will you become a part of history?
Now that you’ve learned about what cryptocurrency is and it’s potential impacts to the way we do things in modern times, you may want to learn more about the concept of decentralization inherent in the tech, as well as the technology backing it all: blockchain.
Finally, test your knowledge about blockchain, crypto, and the like by taking our Beginner Quiz to see if you’re starting to master it all!