What is Cryptocurrency? To better understand or appreciate cryptocurrencies, it’s important to get a good grasp of the nature of money.
This is because cryptocurrencies are a form of money and by understanding the true nature of money. Especially what important characteristics it should possess, you’ll be able to better appreciate and understand the nature of cryptocurrencies.
What is Money?
Money is something that is used to represent the value of other things. For example, you gave me money in exchange for receiving a copy of book, and that sum of money represents the value of book. The money I received from you and others who have bought my book, I’ll use to purchase or acquire something of value from other vendors today or tomorrow.
If you study history, you’ll see that the values of things have been expressed in different forms and money. The primary way by which values have been expressed has come in different shapes and materials. Case in point, things like gold, shells, wheat and salt have been used in the past to represent value and as a medium of exchange.
But for something to be able to continue representing value. The people who are using it must continue trusting that a medium of exchange is indeed valuable and more importantly. Its value will persist for a long time so that they will still be able to benefit from it in the future.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that is used as a medium of exchange, which uses cryptographical functions to conduct financial transactions, and can be used for buying goods and using services.
The most important feature of a cryptocurrency is that it is not controlled by any central authority. Cryptocurrencies can be sent directly between two parties via the use of private and public keys.
History of Cryptocurrencies
It all began in the 1990s when American cryptographer, David Chaum, created what was considered as the first kind of online money in the Netherlands: DigiCash. He created DigiCash as an extension of an encryption algorithm that was considered popular during those times, which was RSA.
The technology he created, together with its eCash product, was able to generate a huge amount of attention from the media. It became so popular that Microsoft Corporation tried to buy DigiCash for $180 million. With the intention of placing DigiCash on every computer in the world that ran on the Windows operating system.
One of the crucial mistakes Chaum and his company made was to reject Microsoft’s $180 million offer and earn the ire of De Nederlandsche Bank (Netherland’s Central Bank). Which was the Netherland’s primary monetary authority. All of those crucial mistakes eventually led to the demise of DigiCash. In 1998, when the company went bankrupt.
Since 2009, the growth in the popularity of the blockchain and Bitcoins has surged. This surgein popularity gave birth to other cryptocurrencies, which are referred to as altcoins or alternative coins to Bitcoin.
Today, there are more than 850 cryptocurrencies in the digital financial system being transacted internationally, which include Ethereum (Ether), Ripple, Litecoin, Monero and Stratis. And if you combine the total market capitalization of all altcoins with that of Bitcoin, the result would exceed $100 billion.
What is a feature of cryptocurrency?
Low Risk of Disruption
According to David John Grundy, the global blockchain head of one of the world’s biggest banks, Danske Bank. The only way anyone can stop or shut blockchains down is by shutting down the Internet itself. And by now, I believe you know that is practically impossible.
Cryptocurrencies can be easily transferred from one account to another using online gadgets such as computers, tablets or even smartphones. You don’t have to bring them with you physically because they’re stored in the Internet. So you can go anywhere with a good Internet connection and bring your cryptocurrencies with you regardless of the amount.
Better Value Storage
You can only consider an asset as a good value storage if it’s able to keep relatively unchanged levels of utility or satisfaction over time. Applying this to financial assets, it means having the ability to maintain purchasing power over time. A financial asset’s ability to keep value can be estimated through what is called as fundamental analysis, which takes into consideration both the quantitative and qualitative aspects of such an asset.
Just like gold in its physical form, cryptocurrencies like Bitcoin typically have a limited quantity of units, which is defined or set in their respective blockchain protocols. Bitcoin, for example, has a cap of only 21 million units that can ever be created. Litecoin on the other hand has an 84- million unit cap that’s also controlled by its operating protocols. This is what makes cryptocurrencies deflationary or disinflationary over the long haul.
Impossible To Fake
The blockchain technology is a revolutionary one in terms of facilitating online transactions and data or record keeping. Being such, it’s practically impossible to produce counterfeit versions of it. And as blockchains continue to evolve, it becomes even more impossible – if such a term exists – to produce fake cryptocurrencies that can be used to buy stuff.
Impossible to Control
Particularly for cryptocurrencies whose market capitalizations are already in the billions of dollars such as Bitcoin and Ether, one would need a huge amount of money to transact enough units of such cryptocurrencies just to be able to influence or manipulate their prices.
When you take a look at Bitcoin, for example, whose average market capitalization hovers somewhere around US$50 billion. One would need at least US$10 billion to play around just to be able to manipulate demand and supply.
Even if you’re talking about Ether, whose average market cap is much smaller at “only” around US$25 billion to US$30 billion. One would still need a couple of billion dollar worth of transactions just to sway prices to his or her favor.
What is Bitcoin?
Between 2008 and 2009, Bitcoin was created as the first decentralized cryptocurrency by the pseudonymous developer Satoshi Nakamoto. He published a white paper that expounded, among other things, the source code, technology and concept of what is now called the blockchain. And together with the blockchain, he launched the granddaddy of all cryptocurrencies as we know it; Bitcoin.
Bitcoin and other related cryptocurrencies rely on two different types of data structures: transactions and blocks. Transactions are grouped together in blocks. The blocks are chained together via hashes of their predecessors. Thereby forming an authenticated data structure, the blockchain . Transactions and blocks are disseminated among all participating nodes using a gossiping protocol over a peer-to-peer (P2P) network.
In 2016, the market capitalization of Bitcoin reached over 10 billion USD, proving that designing and maintaining a distributed cryptographic currency is technically feasible today.
Today, there are more than 16 million units of Bitcoin that are circulating in the digital financial system. These have a total market capitalization of around $50 billion.