What is cryptocurrency?
*This article was originally posted in 2019 and was updated in July 2021.
Recently, cryptocurrency awareness and adoption have skyrocketed. In 2020, many turned to Bitcoin as a store of value during the financial uncertainty of the COVID-19 crisis. For some, this increase in popularity may have come as a surprise because of Bitcoin's former reputation as a volatile and highly speculative asset.
However, due to its decentralized nature and lack of oversight from central banks, Bitcoin was unscathed by the crisis's adverse financial effects. Instead, 2020 gave Bitcoin the chance to solidify its position as a safe haven asset and fulfill its role as digital gold.
Now, major corporations, financial institutions, and individuals are adding bitcoin and other cryptocurrencies to their balance sheets. With all the hype, it is important to understand what cryptocurrencies are and what the future holds.
What is cryptocurrency?
In the most simple terms, a cryptocurrency is a form of digital money. Similar to traditional fiat currencies like the US Dollar or Euro, you can exchange cryptocurrency for goods and services, though not every store accepts them as payment at this time.
Essentially, cryptocurrencies eliminate the middlemen, like banks, and allow users to make transactions directly with one another - or peer-to-peer. They are also independent of countries’ monetary policies that can increase inflation or cause depreciation.
Instead, they use complex mathematics to verify transactions and reduce the risk of fraud. The "crypto" in cryptocurrency comes from the mathematical field of cryptography, which is used to ensure transactions are secure and cannot be counterfeited.
Cryptocurrencies combine cryptography with a technology called blockchain. Most cryptocurrencies have a native blockchain where all transactions are kept in a publicly available ledger. There are no central authorities when it comes to cryptocurrencies and blockchains. Instead, a network of computers called nodes monitor all transactions and confirm their validity.
The fact that cryptocurrencies rely on a large network of computers rather than any single institution makes them decentralized. Essentially, cryptocurrencies eliminate the middlemen, like banks, and allow users to make transactions directly with one another - or peer-to-peer.
How cryptocurrencies are created
Most cryptocurrencies are minted through a process known as mining. Miners are responsible for grouping transactions into "blocks." As new blocks of transactions are strung together, they create a chain - the blockchain.
Once a block is added to the chain, it cannot be deleted or changed - blocks are permanent. They cannot be tampered with or erased, and the original order of blocks can never be disrupted. The chain only moves forward in time. This immutability makes cryptocurrencies incredibly secure and nearly impossible to counterfeit.
To add a new block to the chain, miners have to solve a cryptographic puzzle based on the block's transactions and other factors. Depending on the type of cryptocurrency, these puzzles often require specialized computers. Once the puzzle is solved, the miner that got it right broadcasts that they have added the block. Every time a miner adds a new block to the chain, they are rewarded in cryptocurrency. These rewards are how new crypto coins are introduced into the ecosystem.
There are thousands of different kinds of cryptocurrencies, and they all work in different ways. For some, mining new coins looks different from the example I provided above, referred to as Proof of Work. Bitcoin, the world's first, most valuable, and most popular cryptocurrency, uses Proof of Work to mint new coins and verify transactions.
The Bitcoin network’s code is designed so that there will only ever be 21 million BTC in existence. Currently, there are almost 19 million in circulation and the last bitcoin is expected to be mined in 2140. The fact that there is a limit to the number of bitcoins to exist makes it scarce.
Since Bitcoin's creation, miners have been investing their time and computational power into the cryptocurrency. This initial investment by miners, paired with the transparency of blockchain technology, helped to create a snowball effect of trust over time.
As confidence and trust in bitcoin grow, demand grows alongside it as more people decide they want to invest. The price of bitcoin is determined by the economic principles of supply and demand. This means that as demand increases, then the price per BTC is also increased.
Bitcoin is often referred to as digital gold because like gold, it is scarce and needs to be mined - although that mining process does look pretty different.
How to buy cryptocurrency
It is essential to research which coins are best suited for your needs before purchasing cryptocurrency. With over 5,000 different cryptocurrencies available, likely, the vast majority of them will never be useful or profitable. Fortunately, CoinFlip has whittled down the long list of cryptocurrencies to just ten that we believe are the most valuable and reliable. To learn more about these coins and what makes them useful, click here.
Before purchasing cryptocurrency, you will need to have a crypto wallet. For more information about crypto wallets, check out this article with everything you need to know.
There are numerous ways to purchase cryptocurrency. Some of the most popular methods are online through cryptocurrency exchanges or in person at a Bitcoin ATM. With CoinFlip, you can buy crypto at one of our Bitcoin ATMs, online with a debit or credit card, or by bank transfer.
For more information on buying cryptocurrency for beginners, check out our definitive guide.
The future of cryptocurrency
Cryptocurrency and blockchain technology have the potential to revolutionize the way we do banking. These new technologies help streamline transactions, reduce the risk of fraud, and create more equitable financial systems.
The peer-to-peer nature of cryptocurrency can drastically reduce the costs associated with traditional financial services like bank and remittance fees and makes space for the creation of innovative new financial products. However, as a relatively new technology, cryptocurrencies are still just getting started.
As the cryptocurrencies like Bitcoin continue to become more popular, the technology behind them will be developed further for new purposes and applications. Currently, central bankers are considering launching central bank digital currencies (CBDCs) that take the technology behind cryptocurrencies and applying them to traditional fiat currencies like the dollar. Some countries like China and Sweden are already in more advanced stages with their CBDC development and are currently piloting them in certain areas.
What cryptocurrency has already shown is that blockchain has many uses in our digital world, which is likely not going away. New crypto and blockchain companies pop up every day in the financial technology sector. Many believe that cryptocurrency and the technology behind it are some of the most incredible advances in technology to happen in our lifetime and will play a massive role in shaping the future.
Time can only tell what is in store for the future of cryptocurrency. Still, the technology has already done so much to disrupt the financial sector in the best way possible.
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