Cryptocurrency is a virtual type of currency, which is decentralized and verified by a cryptographic technology like Blockchain, for example.
What is cryptocurrency?
Cryptocurrency is a medium of exchange, just like analogue money. However, cryptography is used to secure and verify sales and other transactions made in cryptocurrency. Furthermore, cryptocurrency is a virtual currency that represents values not issued by central banks or public authorities. Virtual currencies of this kind have long been known, but it is only now, that the technology to verify transactions has reached a more secure level.
Cryptocurrency should not be confused with electronic money, since electronic money functions as a representation of physically existent cash. Cryptocurrency could potentially fulfill the same functions as conventional money. However, it is not on the same level yet, due to its lack of acceptance as an obligatory, wide-spread and universal medium of exchange. Cryptocurrency is stored in a so called wallet, which functions similarly to a bank account.
Cryptocurrency and physical currency
Cryptocurrency need not be convertible with normal physical currency. Because cryptocurrency is decentralized and rarely tied to conventional Western physical currency, an exchange is not guaranteed. Nonetheless, cryptocurrencies are still used for transfers, payments or digital storage. Therefore, it is not yet possible to use cryptocurrency to validate equity or be indicated in a register of owners.
Centralized systems like governments, banks and economic systems regulate the flow of currency by printing physical currency or adding electronic money to digital bank accounts. This is not possible in a decentralized and collective system like cryptocurrencies. Often, this leads to a more insecure currency, which may not always be convertible but can yield a high return in a short time span.
In 2009, the pseudonym “Satoshi Nakamoto” published the document “Bitcoin: A Peer-to-Peer Electronic Cash System” and established Bitcoin as the first cryptocurrency. It is a decentralized, peer-to-peer currency, which is neither issued nor backed by a central bank, but can still be used as a means of exchange.
Bitcoin-transactions occur in a closed space with registered users and without the involvement of third parties. That space is regulated by a built-in code with cryptographic algorithms and protocols - a so called blockchain, that constantly validates and secures all trades. It ensures, that cryptocurrency is not issued and controlled by any one provider, but instead is mined and sustained with the help of complex algorithms using computer power and that it can only be used to pay if the recipient accepts it.
Bitcoin is not regulated by any public authority, regulatory agency or legal financial authority. This means, that transactions and payments using Bitcoin are not subject to financial regulations and legislation. The absence of a third party that provides the basis of reliability and trust in physical currencies is the essential element in Bitcoin and newer cryptocurrencies.
A deciding factor in any monetary system is that consumers can justifiably rely on electronic payments and transactions being processed correctly and the right people receiving the right amount. However, Bitcoin solves a fundamental and general problem for virtual currencies. It prevents the same money being used repeatedly.
By virtue of the digital nature of virtual and cryptocurrencies, it is relatively easy to copy a certain amount of the currencies and hereafter pay it to different recipients, if the digital keys are stored both online and offline on a local network or servers. The really groundbreaking element about Bitcoin is, that it eliminates said double-use problem without needing a third party. All transactions made within the Bitcoin-system, are registered in the public transaction archive available to all users. Since the components in this archive are “blocks” with transactions and these are “chained” together by date, time and cryptographic sequence, Bitcoin’s verification system is called blockchain.
There are over 1,500 different kinds of cryptocurrency, varying in popularity and value. The number keeps rising, since speculating on their value becomes more and more common. Apart from Bitcoin, other popular cryptocurrencies include Ethereum, Ripple and Litecoin.
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Disclaimer: This overview is for informational purposes only and cannot be counted as legal advice.