The word cryptocurrency refers to an entire class of digital currencies which are secured by cryptography, the science of writing codes. You’ve probably heard people talking about all sorts of cryptocurrencies – like Bitcoin, Ethereum, and XRP – but you’re still not sure what a cryptocurrency is or how it works. In this article, we’ll answer those common questions and more.
What Is a Cryptocurrency?
Let’s start with the basics: what is a cryptocurrency? In general, cryptocurrencies are any digital currencies which are secured by cryptography. They’re just like regular currencies in the sense that you can use them to send money or store value, but they are completely digital, so you must have an internet connection to send them. What’s more, most cryptocurrencies are designed to work without any central authority (e.g. bank or government).
You should also know that, in recent years, the meaning of the word cryptocurrency has expanded quite significantly. Nowadays, cryptocurrencies are any digital currencies using the same technology, even if they aren’t designed to be used as currencies. Instead, they might be redeemed for a specific function, like utility tokens, or represent shares in a separate asset, like security token. For example, Ethereum is technically a utility token, since it can be traded in to host applications on the Ethereum network, but it’s still categorized as a cryptocurrency.
What Is Bitcoin?
Bitcoin was the first cryptocurrency ever created. It was released in 2008 by an anonymous individual (or group) under the name of Satoshi Nakamoto. As of present, Bitcoin is also the world’s most popular cryptocurrency, with a market cap of over $57 billion.
Bitcoin was originally created as a currency, but its huge popularity in late 2017 demonstrated that Bitcoin’s technology wasn’t the right tool for the job, as transaction times rose to hours or days and fees rose to dozens of dollars. As a result, Bitcoin is viewed as a store-of-value or investment, while other cryptocurrencies have aimed to take its place as the leading currency.
How Do Cryptocurrencies Work?
Since most cryptocurrencies don’t have any central authorities to keep track of every account, transaction, and balance, they use peer-to-peer computing networks to do so. In the case of Bitcoin, each user keeps a copy of the blockchain – a list of transactions on the Bitcoin network dating back to its inception. The blockchain is one of many Distributed Ledger Technologies (DLTs), which are often used in cryptocurrency to ensure each user can verify transactions on their own.
What Can Cryptocurrencies Do?
As we alluded to earlier, cryptocurrencies can have a wide range of applications besides currencies. Here are some examples of what cryptocurrencies – in the wider interpretation of the word – can do, thanks to their impressive technology:
- Store data in a way that’s visible to the public and impossible to tamper with (Distributed Ledger Technology), such as
- Government decisions
- Healthcare records
- Authenticity or copyright certificates
- Automatically perform a given set of steps when certain conditions are met (Smart Contracts), such as
- Fulfilling currency exchanges immediately
- Processing insurance claims
- Decentralized voting
Why Use Cryptocurrencies?
Cryptocurrencies are more than just digital currencies: they can also be used as stores-of-value, payment platforms, or tokens representing something else. Focusing in on the currency aspect of cryptocurrencies, there are many reasons to use cryptocurrency over traditional alternatives:
- All cryptocurrencies are completely digital, so you can send them wherever and whenever (as long as there is an internet connection)
- As a result, most cryptocurrencies are fast and relatively low-cost ways to send money
- Most cryptocurrencies have no central authorities or middlemen, so you have total control over your money
- Most cryptocurrencies are deflationary by default, which means you don’t lose money just by holding coins
Of course, cryptocurrencies have their disadvantages. Right now, the biggest disadvantage of cryptocurrencies is the lack of clear regulatory information, which can make some crypto matters – especially tax matters – extremely difficult.
Are Cryptocurrencies Difficult to Use?
Many members of the public hear about the technical nature of cryptocurrencies and automatically assume that they’re difficult to use. In reality, community members and dedicated development teams have put many hours into building software and hardware that allows you to use cryptocurrencies without any technical understanding – or difficulty of any sort – whatsoever.
For example, most major cryptocurrencies offer a dedicated wallet, which is very similar to an online banking interface. They show your wallet address (akin to an account number) to which others can send coins, and have simple interfaces for core functions such as sending money yourself.
How Many Cryptocurrencies Are There?
According to our cryptocurrency research platform Coinpaprika, there are more than 1900 cryptocurrencies in existence. Of these currencies, nine have a market capitalization of over one billion US dollars, and more than 750 have a market capitalization of over one million US dollars.
The reason there are so many cryptocurrencies is that anyone can develop and publish their own cryptocurrency without much difficulty. However, only a small portion of these currencies are actively maintained or used.
Which Cryptocurrency Is Best?
A question we often hear is Which Cryptocurrency Is Best? The truth is that each cryptocurrency has its strengths and weaknesses, and so it really depends on the application you are looking for.
Take Bitcoin, for example. Since its technology isn’t the most efficient for everyday transactions, it’s probably not the best cryptocurrency to use as a currency. However, thanks to its huge market cap and first mover advantage, Bitcoin is more stable than other cryptocurrencies, which makes it a popular choice as a store-of-value or investment.
On the contrary, coins such as NANO offer transactions that are completely feeless and take place in seconds. This makes it a popular choice as genuine digital currency.
Learn More about Cryptocurrencies
This was just a brief introduction to the huge technological and financial space that is cryptocurrency. From here, we’d recommend you read our article How to Research Cryptocurrencies if you want suggestions on how to learn more about cryptocurrency as a whole. However, if you want to dive in and start learning about individual cryptocurrencies straight away, we’d definitely recommend our cryptocurrency research platform Coinpaprika