20 November 2020
We are all familiar with banknotes, coins, and credit/debit cards as forms of dollars, yen, euro, and lira, but now there is one more player on the block: digital cash.
Digital cash or cryptocurrency — only exists in a virtual format within a blockchain network. Unlike plastic payments (those done through credit/debit cards), cryptocurrency transactions do not have a hard cash (banknotes or a physical money) equivalent. Additionally, plastic payments go through third party authorization (normally a bank) while cryptocurrency transactions are sealed in peer-to-peer action.
Just like conventional currency, cryptocurrency can be used to purchase goods and services.
Key Features of Cryptocurrency:
They exist online.
Cryptocurrencies operate on and through a blockchain network, all existing online. In order to gain access to cryptocurrency, you have to use a device (computer, laptop, tablet, mobile, etc) with an internet connection. Unlike regular currencies, you cannot hold cryptocurrencies in your hands. It has no physical counterpart, and exist only digitally!
Transactions are permanent.
Cryptocurrency transactions are recorded on the blockchain, and since the blockchain is immutable (unchangeable), once a transaction is made it becomes permanent and irreversible.
While cryptocurrency transactions cannot be reversed or cancelled, one way to “refund” a cryptocurrency transaction would be for the person receiving the funds to perform a second transaction “returning” them.
They exist in a decentralized, peer-to-peer network.
Unlike conventional cash, cryptocurrencies are not governed by a single entity such as a person, bank, government, or regulatory authority. Nearly all cryptocurrencies are spread out across a network of computers located all over the world, and do not exist in just one place. This results in a system that is free of monetary policies, immune to bank and system collapses, and that is free of the constraints of exchange rates (they allow you to kiss tariffs goodbye).
They use encryption and guarantee anonymity.
Since cryptocurrencies use cryptography, they offer a sturdy security system that is exceedingly difficult to hack. The decentralized network, coupled with the military grade cryptography make for a very secure asset.
Additionally, and in part due to the role of encryption, cryptocurrencies allow those making transactions to remain anonymous. You do not have to disclose personal information to send or receive.
In short, the use of cryptocurrencies allows those transacting to:
- Be free of scrutiny from a government or a regulatory authority,
- Rid themselves of hidden fees and third-party commissions,
- Perform instant and efficient transactions that are free from human error, and
- Make untraceable transactions.
How Cryptocurrency Actually Works
Using blockchains decentralized technology, cryptocurrencies allow users to store and use money (digital cash). You can earn/create crypto coins (or tokens or assets) by either performing an activity called mining or by purchasing them. Mining is essentially the process of creating new cryptocurrency by solving a computational puzzle. Simply put, you allow your computer to calculate complex equations, and you are awarded coins. This is the most common way of adding tokens to the digital currency ecosystem.
After purchasing or mining a cryptocurrency, you must store it in your digital wallet, after which you can exchange it for goods and services, or save it for a rainy day.
Real quick, a digital wallet is a software-powered system that allows users to safely store cryptocurrency. Just like a physical wallet is used to hold your credit cards and cash, cryptocurrency wallets are used to store your crypto.
The Most Common Types of Cryptocurrency
Bitcoin has become synonymous with cryptocurrency with many thinking that the only type of cryptocurrency is Bitcoin. In fact, while Bitcoin is the “Kleenex” of crypto, there are actually many different types. Here are the most common and popular ones:
Fun fact: all cryptocurrencies that are not Bitcoin are called Altcoins!
Launched in 2009 by a person or group of people known as Satoshi Nakamoto, Bitcoin was the first cryptocurrency and remains the most popular. Bitcoin is also the largest cryptocurrency by market capitalization valued at $210.5 billion as of September 2020. You can also read all about Bitcoin in simple terms.
The second most popular and valuable cryptocurrency, Ether was developed in 2015 as the token for the Ethereum blockchain. As of September 2020, Ethereum’s market cap is $48.6 billion.
Created back in 2011 by a former Google employee, Litecoin functions identically as Bitcoin only with shorter transaction times and more dedicated miners.
This cryptocurrency is dedicated to serve in economies with limited access to traditional banking systems (i.e. developing countries) and focuses on money transfers.
You might be wondering about the difference between the types of cryptocurrencies. In fact, most of them are built around the basic framework first utilized by Bitcoin but each system functions slightly differently with different cryptocurrencies being created for various purposes.
You can also learn more about how cryptocurrencies gain value.