When you think of “currency,” you are probably thinking of the cash you hand over at a store, or the credit cards or money transfers that can be used in place of physical money. In general, currency is a system of money backed by a government. Typically made up of coins and paper notes, currency is a medium of exchange, meaning that it is the basis for various kinds of trade and transactions. As technology has grown more sophisticated, digital currencies (which have no physical form) have grown as more financial transactions have gone online. Digital currency is simply a payment method that does not exist outside of its electronic form.
Within the past decade, a new particularly popular kind of digital currency has emerged: cryptocurrency. Although this new system is unlikely to replace the more traditional forms of currency any time soon, it has made a significant impact in less than 10 years.
What is Cryptocurrency?
The prefix “crypto” originally comes from the Greek word meaning “hidden.” This does not mean that cryptocurrency is secret, but rather that this “hidden” money is digital, and is kept secure with digital-code encryption. These digital currencies are the heart of systems that allow secure, direct payment for online transactions. “Crypto-” actually refers to the cryptographic data encryption that keeps the transactions protected from hackers or other digital eyes. It also makes cryptocurrency difficult to counterfeit.
Cryptocurrency has gained popularity because it offers a straightforward way to transfer funds entirely online, without involving third parties like banks or credit card companies (and paying the fees they often charge for processing transactions). Instead of physical coins or paper notes, cryptocurrencies have digital “tokens,” or different digital denominations (think of one- or five-dollar bill, etc.). For example, one bitcoin is equivalent to 100,000,000 satoshis, the smallest denomination of a bitcoin and named for bitcoin’s supposed inventor, Satoshi Nakamoto. This enables transactions smaller than a full coin. The transfer of funds involves “public” and “private” keys, which are lines of code that need to match on both sides, so the transaction can be completed. Cryptocurrency is saved in the user’s “wallet,” or a URL or internet account address that can only be accessed by the owner. The wallet has a public key, and the private key is used to sign a transaction, much like you would sign a check or a credit card slip.
Would-be cryptocurrency users can use particular websites to exchange different currency types (like euros or dollars) for cryptocurrency tokens. The system that supports cryptocurrencies online is called blockchain, which is essentially a digital ledger that tracks transactions across the internet. There is a blockchain for each kind of digital cryptocurrency, which records all transactions using that particular cryptocurrency. What helps make cryptocurrency unique is that there is no central bank or processing center. Instead, the blockchain is made up of “distributed ledger” technology, which is a database shared across a network of sites and servers. By involving a collection of different networks throughout a transfer, it creates a traceable trail, and reduces the chances that the transactions can be disrupted by a cyberattack or data breach by adding “witnesses” along the way.
Different types of cryptocurrency (sometimes also referred to as “altcoin”) include bitcoin, Litecoin, Ethereum, Zcash, Dash, Ripple, Monero, NEO, Cardano, and EOS. Because of the high-tech nature of cryptocurrency, new forms are emerging all the time.
The Bitcoin Revolution
The most popular form of cryptocurrency is bitcoin, created by a developer (or group of developers) under the pseudonym “Satoshi Nakamoto” in 2009. Bitcoin’s origins are shrouded in mystery—no one has been able to confirm the identity (or identities) of programmer Satoshi Nakamoto.
Like most digital currencies, bitcoins are not issued or regulated by a government. Instead of a central point of creation (like the United States Mint), bitcoins are created by “mining,” or allowing individuals to contribute their own computers to the transaction network in exchange for bitcoins and access to bitcoin transactions. The supply of bitcoins available is fixed by its developers at 21 million, with the value and the mining rate adjusted with that cap in mind. Bitcoin is by far the most popular cryptocurrency in circulation, although it is not considered legal tender (issued or backed by a government).
Currency of the Future?
The benefits and drawbacks of digital and cryptocurrencies (particularly bitcoin) have become a hot topic of debate. The security and anonymity of these digital-only currencies and the blockchain make it an appealing option for users who want to make discreet transactions, or avoid the fees and bureaucracy of traditional banks and financial systems. Still, some experts believe that the popularity of these cryptocurrencies is more of a trend than a sure bet for the future.
There are also legal and security issues at play here, with anonymous cryptocurrency transactions potentially being used to cover up criminal activity. However, it is likely that the unregulated, Wild West days of cryptocurrency are numbered, with governments looking for ways to regulate and monitor cryptocurrency transactions much like standard financial transactions.
