What is Cryptocurrency?
Everyone is talking about cryptocurrency (or “crypto”) these days, but the basic concepts can be a little confusing at first.
The history of cryptocurrency
Prior to Bitcoin’s creation, the idea of cryptocurrency had been brewing in engineering and computer science, and computer developer communities. The first version of cryptocurrency was developed in 1983 by cryptographer David Chaum. His “ecash” was a form of electronic money that could transfer between anonymous accounts. Between 1995 and 1998, Chaum put his idea into action through Digicash, an electronic payments software.
Over the next decade or so, several iterations of digital currency were proposed in academic papers. In 2008, a developer going by the pseudonym Satoshi Nakamoto published a whitepaper describing Bitcoin, the world’s first decentralized cryptocurrency.
As its cult status grew in online forums, the number of Bitcoin users—and the value of a single bitcoin—would steadily increase. Today, Bitcoin and other cryptocurrencies have become a worldwide phenomenon.
How does cryptocurrency work?
Cryptocurrency is designed to transfer units of value between users in a secure and confidential way. But how do they do that, exactly?
Each unit of cryptocurrency is a digital asset, sort of like a computer file. Each one has an assigned value that reflects the user community’s level of enthusiasm for it. To transfer units of cryptocurrency (“tokens”), users need a digital wallet where crypto can be sent from or received. In that sense, a digital wallet is much like a bank account.
But the cryptocurrency ecosystem differs from traditional financial systems in the way that it records transactions and in its approach to security.
Cryptocurrency operates using blockchain technology. A blockchain is a digital ledger of transactions that record all of the transaction history for a cryptocurrency. Unlike traditional financial systems that often use a central banking system model, blockchains rely on a decentralized network of computers to verify each and every transaction.
In this way, a blockchain’s transaction history can never be altered by a bad actor trying to hack into a central data system. (By contrast, consider how easy it would be to change a few cells in an Excel spreadsheet and press “Save.”)
As the name would suggest, the other element that is key to cryptocurrency’s functionality is cryptography.
Cryptography is a way of protecting information through complex coding that allows only the intended parties to read or process the information. Basically, cryptography helps keep the world’s digital data secure from hackers and other unwanted viewers.
By design, cryptocurrency is intent on protecting user privacy, and it allows users to have some degree of anonymity.
What is cryptocurrency used for?
Initially, cryptocurrencies like Bitcoin were used to store and transfer value assigned to them. (For example, 1 bitcoin had a value of $0.08 in 2010.) At the time, critics pointed out that there was no way to use Bitcoin in the “real world” economy.
Today, cryptocurrencies have a wide variety of uses, including:
- The payment of employee wages
- The purchase of goods and services
- The trade of one cryptocurrency for another
- The use as legal tender in some countries
If cryptocurrencies continue to become more mainstream, people and institutions will find new and innovative ways to make use of them.
How popular are cryptocurrencies?
As of 2021, it is estimated that more than 106M users globally hold at least one form of cryptocurrency. With the user base almost doubling each year, total cryptocurrency users are on pace to reach more than 200M by 2022.
Driving this growth, according to a recent report on crypto adoption, is the “huge growth of DeFi [aka decentralized finance] last summer, PayPal’s opening up crypto services, and massive institutional adoption and facilitation of cryptocurrencies.” As more and more businesses accept cryptocurrencies as a legitimate form of payment, the user base will continue to grow. Here are a few news-making milestones you may have heard about:
- Cashapp now allows users to buy and sell BTC directly from their app.
- Visa’s crypto-backed cards enable consumers to buy cryptocurrencies and cash out in government-backed currencies. (In the first half of 2021, spending surpassed $1B!)
- Several countries are considering the implications of accepting cryptocurrencies as legal tender. El Salvador became the first to do so in 2021, marking a milestone in the mainstream adoption of crypto.
Many investors predict that Bitcoin will continue to appreciate faster than gold. If it does, demand and interest in bitcoins and altcoins in the crypto ecosystem will keep rising.
Why are cryptocurrencies so popular?
Cryptocurrencies like Bitcoin have seen tremendous user growth over the past few years. Their popularity has risen because they:
- Operate independently of governments and banking institutions, making them less susceptible to inflation
- Are seen by many see as the future of currency and finance
- Have the potential to be high-growth assets and can appreciate faster than stocks, gold, and many other assets
- Have a rising market capitalization (above $1.3T as of July 2021)
- Use blockchain, which gives users a sense of security that traditional payment systems do not
How many types of cryptocurrencies exist?
There are hundreds, if not thousands of cryptocurrencies currently offered on exchange platforms. While anyone can technically create a cryptocurrency, it’s not easy to make one that is functional and has perceived value.
What are the most popular cryptocurrencies?
Bitcoin was created in 2009 by developer Satoshi Nakamoto. In the Bitcoin whitepaper he published, he wrote: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Due to Bitcoin’s status as the original cryptocurrency, it enjoys the largest user growth of any cryptocurrency to date. The scarcity of bitcoins is also seen as an asset: only 21 million bitcoins will ever be mined.
Presently, Bitcoin is the most valuable cryptocurrency (out of many thousands) on the market: one bitcoin is priced above $30,000.
Ether is the world’s second-largest cryptocurrency. Launched in 2015, Ethereum’s infrastructure enables it to host smart contracts and allows users to build apps on top of its technology. In light of its many uses, it is an attractive alternative to Bitcoin. Ethereum is the second-most traded crypto today, behind only Bitcoin.
How do you invest in cryptocurrency?
Most cryptocurrencies can be traded on exchanges like Gemini, Coinbase, Kraken and FTX. Once you create an account with one of these exchanges, you can transfer cash into your account in order to purchase crypto.
Each exchange has its own rules of operation. Most charge transaction fees of some sort, often in the form of a percentage of a trade. Some allow users to move their holdings to a digital wallet not on the exchange, while other require that your crypto is kept on the exchange.
Best cryptocurrencies by market capitalization
These are the ten cryptocurrencies with the highest individual market cap (as of August 2021):
|Cryptocurrency||Global Market Capitalization|
|Binance Coin (BNB)||$67,674,298,851|
|USD Coin (USDC)||$27,452,787,900|
Source: Coinmarketcap.com (August 2021)