The reality is much less sci-fi. A cryptocurrency is simply a virtual or digital currency that uses, for its security, a practice known as cryptography. Whilst this may raise its own questions, a cryptocurrency works in the same way as other currencies: you can use it to buy and sell goods and services, you can trade on it, and you can exchange it for different currencies.
In this article, we’re going to welcome you into the world of cryptocurrency. You’ll be comfortable in no time. So, what is cryptocurrency? Let’s take a look.
Cryptocurrency Explained: What is Cryptocurrency?
From one perspective, a cryptocurrency is a currency just like any other. Just like fiat currencies such as GBP, USD, or EUR, you can use cryptocurrencies to buy things, to get paid your salary, and to trade on.
Zoom in, however, and you’ll notice important differences that are crucial to understanding cryptocurrency. These are what we are going to be looking at here. Yet, we’ll need to confuse things before we even start: not all cryptocurrencies are the same, and not all work on the same technology.With 5,000 different cryptocurrencies out there, these are the cryptocurrency basics to understand...
Cryptocurrencies Are Digital
The first key cryptocurrency definition is that it is digital. Unlike traditional currencies, you will never be able to hold a piece of cryptocurrency in your hand. Rather, their entire existence is based on a network of computers. As well as being able to pay digitally, what is striking about cryptocurrencies is that their whole system is virtual, too. And, usually, they use a technology known as blockchain.
Blockchain and the Cryptocurrency System
Blockchain is one of the most characteristic features of the cryptocurrency system. It refers to a technology that is distributed across many different computers and that records transactions. Blockchain’s main appeals are that it is secure and public.
Whilst blockchain is usually described rather cryptically as a “decentralised public ledger”, these are not the most easily-understood terms. Rather, the clue’s in the name: it is a “chain” of “blocks”, in which the blocks are essentially units of digital information.
These blocks store the unique details of each transaction made in the given currency. The transaction details then need to be verified and added to the rest of the chain.
Given that the blockchain is public, though, everyone is able to see these transactions – whilst multiple identical versions of the blockchain are stored all over the world. This means that if hackers want to change transaction details, they have to change everything on the system.
They are (Usually) Decentralised
Another essential feature of cryptocurrency is the fact that they are, in most cases, decentralised. As such, they have no central authority – such as a central bank or government – regulating them.
This means that transactions work directly from peer-to-peer, without having to go through a central exchange. As a result, transaction fees are lower and, theoretically, transactions are faster too. However, it also means that there is no single authority to make decisions – and you end up having splits in crypto communities such as the one between Bitcoin and Bitcoin Cash.
We say “usually” decentralised for a reason, though. XRP (Ripple), one of the bigger cryptocurrencies, for example, is largely owned by one company.
What is ‘Crypto’?
Finally, cryptocurrencies are defined by their use of cryptography – hence the name. We said above that this enables greater security. But what is crypto?
Cryptography is the encryption system that verifies and secures every transaction – and therefore the whole currency system. The signatures written into every transaction record in the blockchain, for example, are cryptographic.
However, further, to enable the currency community to add a given block to the blockchain, a cryptographic puzzle must be solved too. This is essentially a complex mathematical problem that underwrites the veracity of the transaction. It’s this process from which cryptocurrency gets its name.
How Do You Get Cryptocurrency?
We’ve covered what defines a cryptocurrency. But if you want to actually get hold of some, you’ll need to know how cryptocurrencies work.
Before everything else, you are going to need a cryptocurrency wallet. Remember that cryptocurrencies are digital – but you are going to have to store them somewhere. That’s what a digital wallet is for: it’s just an app that stores crypto. Once you have one of these, you can obtain most cryptocurrencies – including Bitcoin and Ethereum – just by purchasing them with normal currencies.
But if you are truly committed, you don’t need to spend cash on cryptocurrency. Rather, you can become a miner – i.e. someone who helps to maintain and verify the system and its transactions. With Bitcoin, for example, you will be paid in Bitcoin for your efforts.
Which Cryptocurrency is Worth Most?
As we said above, there are now thousands of different cryptocurrencies on the market, since Bitcoin took off back in 2009. However, there are some cryptocurrencies that are worth much more than others.
According to CoinMarketCap.com, the top five most valuable cryptocurrencies at the time of writing (April 2020) are Bitcoin, Ethereum, XRP, Tether, and Bitcoin Cash. However, if the total value of cryptocurrencies is currently over $200 billion, the value of the vastly dominant Bitcoin makes up over 60% of that total.
Ethereum, the second-largest cryptocurrency by market capitalisation, makes up only 9% of the cryptocurrency market’s total value.
Summary: What is Cryptocurrency?
So, after all that... What is cryptocurrency? A cryptocurrency is a digital currency that is secured and verified by cryptography, an encryption system enabled by complex mathematical problems.
With its novel approach to security and its decentralised nature, cryptocurrency has the potential to change the way that money circulates around the globe.
Do you have other crypto-related questions? Check out our blog posts below:
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