An Introduction to Cryptocurrencies
By Paul McCoy, CIMA®
Cryptocurrencies, also known as crypto, have been a hot topic in both the tech and finance industries for the past few years. 2017 saw the first huge success of cryptocurrencies, with their total market capitalization hitting an all-time high of $600 billion in the month of December. You may have seen them mentioned on the news, or perhaps heard a colleague talk about Bitcoin’s price exceeding $18,000, but you might not understand what this cryptocurrency space is all about. Here are a few of the basics.
What Is Cryptocurrency?
In simple terms, cryptocurrency is electronic money created and verified using technology, while hiding the identities of those involved in the transactions. The term cryptocurrency is made up of two parts: crypto and currency. Crypto, short for ‘cryptography,' is the computer technology used for encryption to help hide information and identities, as well as provide security for this digital cash. Currency, on the other hand, is simply a monetary token (something that carries some monetary value and can be used for the exchange of goods and services).
Cryptocurrencies are designed to be more reliable, cheaper, and faster to use as compared to government-issued currencies. With cryptocurrencies, you don’t have to rely on the government to create and distribute your money while banks store, send, and receive it. All these duties are transferred into your hands. You can easily use your cryptocurrencies to quickly transact with others both online and offline, and you are also able to store your money by yourself (using hot or cold wallets). Sending money directly without involving a middleman (mostly banks) makes transactions fast and very affordable.
To make the process efficient and help thwart fraud or manipulations, all cryptocurrency users can simultaneously record, view, and verify their own transactions, as well as those of other users. The digital transaction recordings are made in a “ledger” that is publicly available for anyone to view. In fact, the ledger is not located in one place. Its copies are with all the participants engaged in the distributed network. The public ledger helps transactions become transparent, secure, efficient, and permanent, hence there is little chance of manipulation.
Cryptocurrencies don’t require you to trust a bank to hold your money. Provided you have a secure wallet for the storage of your cryptocurrencies, your money is safe in your hands at all times. You also don’t need to trust the person you are transacting with online because you can actually see the money being transferred, received, verified, and recorded by hundreds, if not thousands of people.
Salient Transactional Properties of Cryptocurrencies
1. Irreversible
Cryptocurrency transactions are irreversible once you hit the confirmation button. No one can help you recover your funds if you send them to the wrong address. So, be extra careful!
2. Pseudonymous
Accounts and transactions cannot be connected to real-world entities. Identities of all parties involved are anonymous.
3. Fast
Cryptocurrency transactions are fast and can be carried out anywhere in the world. Confirmation takes only a couple of minutes.
4. Secure
The public key cryptography system used in protecting your funds is ultimately secure. Addresses used to send and receive cryptos are more secure than most other systems.
5. Accessible to anyone
You need no permission from anyone to use cryptocurrencies. Just create a wallet, mine, or buy some cryptocurrencies online, and you are good to go. You can spend it there and then, or you can store it safely for future use.
Brief History of Cryptocurrencies
The idea of having some mathematically secure chain blocks was brought up back in 1991. However, it was only conceptualized as a digital currency between 1998 and 2005 by Nick Szabo as “Bit Gold.” In 2009, an anonymous person/group known as Satoshi Nakamoto created the first decentralized digital currency known as Bitcoin, which became the most commonly known and used cryptocurrency in the world.1
As of today, there are over 1,400 alternative coins to Bitcoin, commonly referred to as altcoins, and there are many more entering the space every year. Ethereum, Litecoin, and Ripple are the top alternatives to Bitcoin in terms of market capitalization.
Blockchain
This is one common term you will hear in the cryptocurrency world. A blockchain is the technology used to create permanent and secure digital recordings that are not managed by a single person or group. It can be used to store any type of information, including medical records and computer information, but the first blockchain was used to record Bitcoin transactions. Imagine the blockchain as a book of records, where each page in that book is a block that can record anything. The blocks are created simultaneously, hence creating a chain of blocks known as the blockchain.
Mining
Another common jargon term in this space is mining, which refers to the process of registering transactions on the blockchain. This requires computer work, and therefore, any computer that completes this process gets rewarded with some cryptocurrency. Mining is how many new cryptocurrencies are made, but considering that it’s a fairly complicated process, many people choose to buy preexisting currencies.
The world of cryptocurrencies is growing fast and wild. There are many emerging cryptocurrencies that have the potential to disrupt the future, while others seemed doomed to fail. Some investors have become extremely wealthy by investing early in worthy projects, while others have lost their money, so it's important to tread carefully in this space.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.