Cryptocurrency 101: How Does Cryptocurrency Work?

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Estimated Reading Time: 6 minutes, 18 seconds
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Marketing Specialist
Last updated
December 5, 2018

Cryptocurrency is a term that’s becoming increasingly known throughout the entire world.

And, considering the fact that cryptocurrencies bring with them the promise of making the world a better place, their rising popularity is not overly exaggerated.

For some, they might seem like a technology of the future, but the truth of the matter is that blockchain technology and cryptos actively revolutionize the way we store and transfer money, how we do business, as well as how we pay for goods and services.

What is a Cryptocurrency?

Often called the “money of the future,” or the “21st-century unicorn,” a cryptocurrency is a form of digital currency designed to work as a medium of exchange. As its name suggests, a cryptocurrency also implies the use of strong cryptographic technology to ensure the absolute security of financial transactions and the control for the creation of new units.

Since their inception, cryptocurrencies have captured the attention of various traders and investors, and while some have changed their lives for the better, others have been left empty-handed.

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

Up until now, cryptocurrencies have displayed immense potential for disrupting many industries. Through their mass adoption, cryptocurrencies can help reduce the risk of fraud, increase crowdfunding and expand the worldwide business potential, make e-commerce stronger, encourage scientific research and advancements, and give people control over their funds.

To understand why, and to shed some light on the fascinating technology behind them, we will take a look at who invented cryptocurrencies and why, what are their benefits and downsides, what is a blockchain, and why Bitcoin was and still is important.

Who Created Cryptocurrencies?

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

There have been numerous attempts (more or less successful) to create digital currencies before cryptocurrencies emerged.

However, everything changed in late 2008, when the legendary and mysterious developer (or group of developers) operating under the pseudonym of 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. Back then, the idea was nothing short of radical: a cryptographically secure digital currency that is trustless, and which isn’t affected by any third party or central authority’s whims.

Thus, the blockchain was born.

And with it, Satoshi managed to invent a way to build a decentralized digital cash system which would set the stepping stones for thousands of other cryptocurrencies to come.

Blockchain Explained

Even if cryptocurrencies will eventually fade sometime in the future (even though that’s highly improbable), the blockchain will definitely not have the same faith. Governments, financial institutions, and society itself have just started to scratch the surface of blockchain’s potential as a technology. By allowing digital information to be distributed but not replicated, blockchain technology has set the foundation for a new type of Internet.

A blockchain is simply an append-only transaction ledger.

As its name clearly suggests, the information is stored in blocks. Once a block is completed and “filled” with information, it’s added to the ledger. The blockchain ensures that new information can always be written, but also that the one already stored in blocks cannot be changed.

Pros and Cons of Cryptocurrencies

Probably the main advantage of cryptocurrencies is represented by their uncompromising accessibility. To be more precise, anyone can access them as long as he or she has a functional computer with an Internet connection.

Cryptocurrencies are a gateway to financial freedom. They are not dependent on the infrastructure provided by banks, financial institutions, or governments, allowing anyone to make payments from anywhere in the world to anyone without many limitations.

Another big advantage comes in the form of privacy. You are not required to share any personal or sensitive information while making payments or transferring cryptocurrencies. Furthermore, cryptocurrencies boast extremely low fees when compared to their fiat counterparts.

Cryptocurrencies and especially their underlying technology are definitely one of the most amazing inventions of our time.

However, there are still some drawbacks. For starters, since they are not as popular as fiat currencies, the market is highly volatile, leading some investors to treat it as a minefield while others thrive within it.

They are also what many would call technologically complex. One of the main drawbacks stems from this fact alone, as people tend to be afraid of cryptocurrencies. This is mostly due to a lack of knowledge and the lack of patience and willingness to learn about them and their potential.

Bitcoin’s Approach to the Double-Spending Problem

Double-spending is the process through which a person or entity manages to successfully spend the same money more than once. Double-spending has been the biggest problem for digital currencies until Bitcoin (and the blockchain) was created.

If one could spend the same money more than once, of course, money would become worthless, since everyone would have massive amounts of money and the scarcity aspect of money would disappear. On the Bitcoin platform, double-spending is negated by both the usage of the blockchain, an open and immutable ledger that ensures that transactions are finalized by inputs confirmed by miners, and by a PoW (Proof-of-Work) mechanism.

In short, the PoW ensures that each recorded transaction is verified, making digital currencies (such as Bitcoin) viable.

How Many Cryptocurrencies Are There?

As of today, there are over 2,000 cryptocurrencies listed on CoinMarketCap, with Bitcoin at the head of the list, holding over 50% of the market cap.

Thanks to the massive expansion the crypto sphere is currently undergoing, new cryptocurrencies are born each day. However, because of the fierce competition, only a few of them reach mainstream adoption, while the rest quickly fade away from the pages of history.

What are Altcoins?

The term “altcoin” stands for “alternative to Bitcoin” or “Bitcoin alternative.” It’s a term used to describe any other cryptocurrency that is not Bitcoin. They are called this way because most altcoin projects hope that they will, eventually, manage to reach or even replace Bitcoin.

The world of cryptocurrencies is a fascinating one, and altcoins are a big part of the reason.

There are numerous exciting and innovative crypto altcoin projects out there. Most of them were not only born with the mission of improving upon 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. Ripple
  3. Bitcoin Cash

Besides these, numerous others have seen great success in the crypto world, including, but not limited to: EOS, Stellar, Litecoin, Tether, Cardano, Monero, TRON, Dash, IOTA, Binance Coin, NEO, and Ethereum Classic.

Final Thoughts

The world of crypto 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 clearly illustrated how blockchain technology can fundamentally disrupt most current financial systems, as well as industries such as healthcare, real estate, politics, law, charity, and education.

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