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What Is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Understanding Cryptocurrencies
Cryptocurrencies are systems that allow for secure payments online which are denominated in terms of virtual "tokens," which are represented by ledger entries internal to the system. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Types of Cryptocurrency
The
first blockchain-based cryptocurrency was Bitcoin, which still remains
the most popular and most valuable. Today, there are thousands of
alternate cryptocurrencies with various functions and specifications.
Some of these are clones or forks of Bitcoin, while others are new
currencies that were built from scratch. Bitcoin was launched in 2009
by an individual or group known by the pseudonym "Satoshi Nakamoto."1 As
of March 2021, there were over 18.6 million bitcoins in circulation
with a total market cap of around $927 billion.2 Some of the competing
cryptocurrencies spawned by Bitcoin’s success, known as "altcoins,"
include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano,
and EOS. Today, the aggregate value of all the cryptocurrencies in
existence is around $1.5 trillion—Bitcoin currently represents more than
60% of the total value.3
Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.
Advantages and Disadvantages of Cryptocurrency Advantages
Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake. In modern cryptocurrency systems, a user's "wallet," or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.
Disadvantages
The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others. Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.
Special Considerations
Central
to the appeal and functionality of Bitcoin and other cryptocurrencies
is blockchain technology, which is used to keep an online ledger of all
the transactions that have ever been conducted, thus providing a data
structure for this ledger that is quite secure and is shared and agreed
upon by the entire network of an individual node, or computer
maintaining a copy of the ledger. Every new block generated must be
verified by each node before being confirmed, making it almost
impossible to forge transaction histories. Many experts see blockchain
technology as having serious potential for uses like online voting and
crowdfunding, and major financial institutions such as JPMorgan Chase
(JPM) see the potential to lower transaction costs by streamlining
payment processing.4 However, because cryptocurrencies are virtual and
are not stored on a central database, a digital cryptocurrency balance
can be wiped out by the loss or destruction of a hard drive if a backup
copy of the private key does not exist. At the same time, there is no
central authority, government, or corporation that has access to your
funds or your personal information.
$927billion Total market cap of Bitcoin, as of March 2021
Criticism of Cryptocurrency
Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity. Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2017 before dropping to around $7,000 in the following months.2 Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble. There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.
Cryptocurrency
blockchains are highly secure, but other aspects of a cryptocurrency
ecosystem, including exchanges and wallets, are not immune to the threat
of hacking. In Bitcoin's 10-year history, several online exchanges have
been the subject of hacking and theft, sometimes with millions of
dollars worth of "coins" stolen.5 Nonetheless, many observers see
potential advantages in cryptocurrencies, like the possibility of
preserving value against inflation and facilitating exchange while being
easier to transport and divide than precious metals and existing
outside the influence of central banks and governments.
What Is Cryptocurrency FAQs
What Is Cryptocurrency in Simple Words?
Cryptocurrencies are systems that allow for secure payments online which are denominated in terms of virtual "tokens.
" How Do You Get Cryptocurrency?
Any investor can purchase cryptocurrency through crypto exchanges like Coinbase, Cash app, and more.
What Is the Point of Cryptocurrency?
Cryptocurrency Many experts see blockchain technology as having serious potential for uses like online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower transaction costs by streamlining payment processing.
How Does Cryptocurrency Make Money?
Cryptocurrencies allow for secure payments online which are denominated in terms of virtual "tokens," which are represented by ledger entries internal to the system. Investors can make money with cryptocurrency by mining Bitcoin, or simply selling their Bitcoin at a profit.
What Are the Most Popular Cryptocurrencies?
Bitcoin is by far the most popular cryptocurrency, followed by other cryptocurrencies such as Etherum, Litecoin, and Cardano. Compete Risk Free with $100,000 in Virtual Cash Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today
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