When you think of "currency," you probably think of the cash you hand over at a store, or the credit cards that can be used in place of physical money. Currency is a system of money used by a country, backed by the government. This means that merchants are required by law to accept that money as payment for services or debt. Currency is typically made up of coins and paper notes. It allows people to exchange, trade, and purchase different things.
As technology has advanced, digital currencies have developed. They have grown in popularity as purchases and money exchanges are more and more frequently made online. Digital currency is a payment method that only exists electronically. It does not involve physical coins or paper notes.
Over the past 10 years, a new form 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 significantly changed the way that purchases are made online.
What Is Cryptocurrency?
The word "crypto" is a Greek word that means "hidden." This "hidden" money is digital, and is kept secure with digital-code encryption. Encryption allows information to be hidden, so that it cannot be accessed or read without a password. This encryption keeps transactions protected from hackers or other digital eyes. It also makes cryptocurrency difficult to counterfeit. In other words, cryptocurrencies allow secure, direct payment for online transactions.
Cryptocurrency has gained popularity because it offers a straightforward way to transfer money entirely online. These payments can be made without involving third parties like banks or credit card companies, which often charge processing fees. Instead of physical coins or paper notes, cryptocurrencies have digital "tokens." These tokens have different values, just like a one- or five-dollar bill. For example, bitcoin is a form of cryptocurrency. One Bitcoin is equivalent to 100,000,000 satoshis, the smallest denomination of a bitcoin. The satoshi is named for bitcoin's supposed inventor, Satoshi Nakamoto. Having tokens of different values allows transactions smaller than a full bitcoin.
Funds are transferred using both "public" and "private" keys. The keys are lines of code. In order for a transaction to be completed, the keys must match on both sides. Cryptocurrency is saved in the user's "wallet," which is an account that can only be accessed by the owner. The wallet has a public key, which allows users to securely send a transaction to others. The private key is used to sign a transaction, much like signing a check or credit card slip.
Individuals who want to use cryptocurrency can exchange different currency types, such as euros or dollars, for cryptocurrency tokens online. The system that supports cryptocurrencies online is called blockchain, which is basically a digital record of transactions across the internet. There is a blockchain for each kind of digital cryptocurrency, which records all transactions using the particular cryptocurrency.
What makes cryptocurrency unique is that there is no central bank or processing center. Instead, the blockchain is made up of a database that is shared across a network of sites and servers. Many different networks are involved throughout a transfer. This creates a trail that is easy to trace, which reduces the chances that the transactions could be disrupted by a cyberattack or data leak.
Different types of cryptocurrency, sometimes also referred to as "altcoin," include bitcoin, Litecoin, Ethereum, Zcash, Dash, Ripple, Monero, NEO, Cardano, and EOS. New forms of cryptocurrency 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 alias "Satoshi Nakamoto" in 2009. No one has been able to confirm the actual identity of the mysterious Satoshi Nakamoto.
Like most digital currencies, bitcoins are not issued or regulated by a government. Bitcoins are created by "mining." Individuals "mine" by contributing their own computers to the transaction network in exchange for bitcoins and access to bitcoin transactions. The supply of available bitcoins is fixed by its developers at 21 million.
Bitcoin is by far the most popular cryptocurrency in circulation. However, it is not considered legal tender because it is not issued or backed by a government.
Currency of the Future?
The benefits and drawbacks of cryptocurrencies, particularly bitcoin, have become a hot topic of debate. These digital-only currencies are secure, and transactions can be completed without revealing the user's identity. This makes cryptocurrency an appealing option for users who want to make secret transactions. Users can also avoid the fees and rules of traditional banks and financial systems. Still, some experts believe that the popularity of these cryptocurrencies is just a trend.
There are also legal security concerns about cryptocurrency. Unnamed cryptocurrency transactions could potentially be used to cover up criminal activity. However, it is likely that governments will soon find ways to regulate and monitor cryptocurrency transactions.