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What is Cryptocurrency? An Elementary Guide to Understanding Cryptocurrencies

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Marketing Specialist

Last updated December 22, 2021

Cryptocurrency is a term that’s becoming more and more popular each day. 

And considering that cryptocurrencies come with the promise of a better world, their rising popularity isn’t exaggerated.  

For some, they might seem like a technology of the future. But the truth is that blockchain technology and crypto coins revolutionize the way we store and transfer money. From how we do business to how we pay for goods and services, digital coins slowly impact every transaction. 

1. What is Cryptocurrency?

what are cryptocurrencies

A cryptocurrency is a form of digital currency designed to work as a medium of exchange. It uses strong cryptographic technology to ensure the security of financial transactions and control the creation of new units.  

Besides cryptography, there are several other measures in place that help secure the whole transaction. Two of the most important are crypto wallets and decentralization.  

But there’s a deeper process behind cryptocurrencies and their underlying technology – the blockchain.   

Up until now, cryptocurrencies have displayed immense potential for disrupting industries.  

Since their creation, cryptocurrencies have captured the attention of many traders and investors. And while some have changed their lives for the better, others remained empty-handed.

Through their mass adoption, cryptocurrencies can help reduce the risk of fraud, encourage scientific research and advancements, and give people control over their funds.  

Much of the interest around these unregulated currencies comes from the high-profit potential, with speculators at times driving prices skyward. This phenomenon causes a fear of missing out motivating people to invest in cryptocurrencies and hold more than buying goods with them.  

Cryptocurrencies have no physical form and are not owned by banks. Since the launch of the first cryptocurrency, Bitcoin, many others have emerged. Yet Bitcoin is the most popular even nowadays. 

To understand how it works and shed some light on the fascinating technology behind them, we must look at some of the most frequent questions. 

Who invented cryptocurrencies and why, what are their benefits and downsides, what is a blockchain, and why Bitcoin was and still is important?

2. Who Created Cryptocurrencies?

who created cryptocurrencies

There are many fascinating aspects carved in the history of cryptocurrencies. But for starters, it’s worth noting that they are a side product of another great invention of our time.

The blockchain.

There have been many attempts to create digital currencies before cryptocurrencies emerged.

But everything changed in late 2008 when the mysterious developer (or group of developers) known as Satoshi Nakamoto published a whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System”.  

Satoshi’s main goal was to create a digital cash system without a central authority, similar to a P2P file sharing network. The idea was nothing short of radical back then—a cryptographically secure digital currency that isn’t affected by any third party or central authority’s whims.

And so, the blockchain was born.

And with it, Satoshi built a decentralized digital cash system that would lay the foundation for thousands of cryptocurrencies.

3. Blockchain Explained

blockchain explained

Although unlikely, even if cryptocurrencies will fade sometime in the future, the blockchain technology will live on.  

Governments, financial institutions, and society itself have just started to scratch the surface of blockchain’s potential. 

By allowing digital information to be distributed but not replicated, blockchain technology has set the foundation for a new type of Internet

To put it simply, a blockchain is simply a transaction ledger. As its name suggests, the information is stored in blocks. Once a block is completed and “filled” with information, it’s added to the chain of blocks. 

The blockchain ensures that new information can always be written, but also that the one already stored in blocks cannot be changed. 

There are some notable applications of blockchain in the public and private sectors. They include government, healthcare, financial and banking services, supply chains, and media. So, if you’re starting to get interested in crypto, you should know that it’s not the first time you’ll encounter blockchain technology.

4. Advantages of Cryptocurrencies

pros and cons of cryptocurrencies

Probably the main advantage of cryptocurrencies is their accessibility. Anyone can access them as long as they have a device able to access the internet.  

Besides accessibility, cryptocurrencies are a gateway to financial freedom. They don’t rely on the infrastructure provided by banks, financial institutions, or governments. This allows anyone to make payments from anywhere in the world without too much trouble.  

Another big advantage comes in the form of privacy. You can use crypto without sharing personal or sensitive information. However, as more legislation is coming out, increasingly more Dapps and services require the completion of Know Your Customer procedures. 

Furthermore, cryptocurrencies offer significantly lower fees when compared to their fiat counterparts.  

5. Common problems of Cryptocurrencies

bitcoin double spending problem

Cryptocurrency is not all sunshine and roses. The market is highly volatile, which leads some investors to treat it like a minefield while others thrive within it.  

The technology behind it is complex and people tend to be afraid of cryptocurrencies as they don’t fully understand how they work.  

Yet, the most significant disadvantages associated with crypto are the economics (that may vary from one cryptocurrency to another), the lack of consumer protection, and the high risk of loss.  

And of course, there comes the double-spending.  

“What is the double-spending? Is it frequent with Bitcoin?” you might ask. 

So, the answer is that double-spending is the process through which a person manages to spend the same money more than once. It has been the biggest obstacle in the creation of digital currencies until Bitcoin and blockchain came around.  

If anyone could spend the same money more than once, money would become worthless. Everyone would just have massive amounts of money, and the scarcity aspect of the currency would disappear.   

Altough, With Bitcoin, double-spending is virtually impossible thanks to the proof-work algorithm and the vast network of miners that ensure the transactions are legit. In a proof-of-work blockchain, in order to double-spend, an attacker would need to produce a fork prior to his transaction’s block and mine faster than all the other miners combined. In Bitcoin’s case, this procedure would require an impossible amount of computing power. 

As for the cryptos that followed Bitcoin, the answer depends on how much did their network grew. Cryptocurrencies with small miner communities have been historically targeted by such attacks. 

6. How Many Cryptocurrencies Are There?

how many cryptocurrencies are there

Nowadays, there are over 15,000 cryptocurrencies listed on CoinMarketCap, with Bitcoin at the head of the list.  

Thanks to the expansion of the crypto sphere that’s currently undergoing; new cryptocurrencies are born each day.   

However, because of the fierce competition, only a few of them reach adoption, while the rest fade away from the pages of history. 

7. Alternatives to Bitcoin

altcoins explained

Altcoins are the main reason why the world of cryptocurrencies is soo fascinating. As for the term “altcoin,” it stands for “coins alternative to Bitcoin.” It’s a term used to describe any other cryptocurrency that is not Bitcoin.  

There are many exciting and innovative crypto altcoin projects out there. Many of them were not only born with the mission of improving on the groundwork laid by Bitcoin but to offer solutions for real-life problems.  

For instance, Dash aims to be the best alternative to other cryptos by offering lightning-fast transactions, and IOTA aims to become the de-facto distributed ledger for the Internet of Things.  

According to CoinMarketCap, the top 3 most successful altcoins so far are (in this order):  

  1. Ethereum  
  2. Binance Coin 
  3. Tether 

Besides these, many others have seen immense success in the crypto world, including EOS, Stellar, Bitcoin Cash, Cardano, Monero, Polkadot, and Solana. 

Final Thoughts

The crypto world can seem daunting for newcomers, just like the crypto market can seem wild for new investors.  

In the crypto sphere, each day brings with it a promise of a better tomorrow. Each day, new cryptocurrencies emerge, old ones die, and investors either make or lose money.  

At the end of the day, cryptocurrencies have illustrated how blockchain technology can disrupt most current financial systems and industries such as healthcare, real estate, politics, law, charity, and education.   

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