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Crypto 101: What is Cryptocurrency and How Does it Work?

Basics of Cryptocurrency | Last updated November 26, 2018

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

And considering hat 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. They use 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 or decentralization.

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.

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

To understand how, and to shed some light on the fascinating technology behind them, let’s look at some of the most common questions about them.

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. This is 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. Back then, the idea was nothing short of radical. A cryptographically secure digital currency which 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 which 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 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.

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 ledger.

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

4. Pros and Cons of Cryptocurrencies

pros and cons of cryptocurrencies

Probably the main advantage of cryptocurrencies is their uncompromising accessibility. 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 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 don’t need to share any personal or sensitive information while using cryptocurrencies. Furthermore, cryptocurrencies boast extremely low fees when compared to their fiat counterparts.

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

But there are still some drawbacks.

For starters, since they are not as popular as fiat currencies. Plus, the market is highly volatile, which leads some investors to treat it like 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.

5. Bitcoin’s Approach to the Double-Spending Problem

bitcoin double spending problem

Double-spending is the process through which a person manages to spend the same money more than once. It has been the biggest problem for digital currencies until the creation of Bitcoin and the blockchain.

If one 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.

On the Bitcoin platform, double-spending is negated by both the usage of the blockchain, which ensures that transactions are confirmed by miners, and by a Proof-of-Work mechanism.

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

6. How Many Cryptocurrencies Are There?

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.

Thanks to the 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 adoption, while the rest fade away from the pages of history.

7. What are Altcoins?

altcoins explained

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.

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

There are many exciting and innovative crypto altcoin projects out there. Most 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. XRP
  3. Litecoin

Besides these, numerous others have seen great success in the crypto world, including EOS, Stellar, Bitcoin Cash, 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 illustrated how blockchain technology can disrupt most current financial systems, as well as industries such as healthcare, real estate, politics, law, charity, and education.

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