What Is Cryptocurrency?
A cryptocurrency is a digital currency that uses a blockchain and relies on cryptography for security.
Many are based on public blockchain technology, a distributed ledger of all transactions that are decentralized and can't be changed under most circumstances.
The nature of the blockchain means that individuals can transact directly with each other, even if they don't trust each other.
Unlike traditional currencies, such as the U.S. dollar, they are not controlled by any central government or authority.
Cryptocurrencies don't need a centralized party like a bank to carry out transactions between individuals.
Cryptography is used to keep transactions secure and to control the creation of additional units of a currency.
Bitcoin is considered the first cryptocurrency and is currently the largest and most famous out of the more than 1,600 cryptocurrencies available on the interwebz.
Types of Cryptocurrency
The first blockchain-based cryptocurrency was Bitcoin, which 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 built from scratch.
Bitcoin was launched in 2009 by an individual or group known by the pseudonym "Satoshi Nakamoto." As of Aug. 2021, over 18.8 million bitcoins were in circulation with a total market cap of around $858.9 billion, with the figure updating frequently. Only 21 million bitcoins exist, preventing both inflation and manipulation.
Some of the competing cryptocurrencies spawned by Bitcoin's success, known as "altcoins," include Litecoin, Peercoin, Namecoin, Ethereum, Cardano, and EOS. By Aug. 2021, the aggregate value of all the cryptocurrencies in existence is over $1.8 trillion—Bitcoin currently represents approximately 46.5% of the total value.
Advantages and Disadvantages of Cryptocurrency
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. Instead, these transfers are 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 banks and financial institutions charge for wire transfers.
The semi-anonymous nature of cryptocurrency transactions makes them well-suited for many illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing privacy benefits 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.
However, more privacy-oriented coins do exist, such as Daesh, Monero, or cash, which are far more difficult to trace.