2/25/2021 Cryptocurrency Definition
INVESTING CRYPTOCURRENCY
Cryptocurrency
By JAKE FRANKENFIELD | Reviewed By MICHAEL SONNENSHEIN | Updated May 5, 2020
What Is a 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.
KEY TAKEAWAYS
A cryptocurrency is a new form of digital asset based on a network that is
distributed across a large number of computers. This decentralized structure allows
them to exist outside the control of governments and central authorities.
The word “cryptocurrency” is derived from the encryption techniques which are
used to secure the network.
Blockchains, which are organizational methods for ensuring the integrity of
transactional data, is an essential component of many cryptocurrencies.
Many experts believe that blockchain and related technology will disrupt many
industries, including finance and law.
Cryptocurrencies face criticism for a number of reasons, including their use for
illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure
underlying them. However, they also have been praised for their portability,
divisibility, inflation resistance, and transparency.
Understanding Cryptocurrencies
Cryptocurrencies are systems that allow for the 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
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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." As of Nov. 2019, there were over 18 million bitcoins in circulation with a total
market value of around $146 billion.
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 $214 billion—Bitcoin
currently represents more than 68% of the total value.
Important: 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.
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 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. 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.
Advantages and Disadvantages of Cryptocurrency
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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 to arrest and prosecute
criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash,
which are far more difficult to trace.
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. 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
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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.
Nonetheless, many observers see potential advantages in cryptocurrencies, like the
possibility of preserving value against inflation and facilitating exchange while being more
easy to transport and divide than precious metals and existing outside the influence of
central banks and governments.
ARTICLE SOURCES
Related Terms
Bitcoin
Bitcoin is a digital or virtual currency created in 2009 that uses peer-to-peer technology to facilitate
instant payments. It follows the ideas set out in a whitepaper by the mysterious Satoshi Nakamoto,
whose true identity has yet to be verified. more
Blockchain Explained
A guide to help you understand what blockchain is and how it can be used by industries. You've
probably encountered a definition like this: “blockchain is a distributed, decentralized, public ledger."
But blockchain is easier to understand than it sounds. more
Distributed Ledger Technology
Distributed Ledger Technology, such as blockchain, is all about the idea of a ‘"decentralized" network
against the conventional "centralized" mechanism. more
What is DigiCash?
DigiCash was one of the earliest versions of electronic money and a predecessor of cryptocurrencies.
more
Encryption
Encryption is a means of securing digital data using an algorithm and a key. more
What is digital copy in cryptocurrency?
A digital copy is a duplicate record of every Bitcoin transaction that has taken place over a peer-to-
peer network. more
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