If you’re reading this, chances are you’ve heard the term “cryptocurrency” at least a few times before. Originally a concept for a new type of tech-based currency that could become influential in the future, cryptocurrency has become a very real phenomenon, taking several forms and serving a variety of different uses. It’s something that deserves the attention it’s receiving, and it’s no longer seen as a passing fad or a buzzworthy tech term.
So—what exactly is it? In the sections below, we’ll delve into this crucial question both with a basic overview and with an examination of some of the important underlying factors.
- Cryptocurrency Defined
- Where Cryptocurrency Came From
- How Cryptocurrency Works
- Prominent Examples
- What Is An Initial Coin Offering?
- Using Crowdfunding to Launch a Currency
- What’s the Benefit of Investing in an ICO?
- Currencies That Used an ICO
- There are New Options Available All the Time
- Why Invest in an ICO?
- What Is A Distributed Ledger?
- A More Permanent and More Secure Solution
- Lower Cost
- Useful Across Different Industries
Like many other concepts in both technology and finance (both of which are relevant here), cryptocurrency can seem a little bit complex when you first look at a technical definition. The simplest way to phrase it is that cryptocurrency is a type of purely digital currency that uses cryptography for security and verification. This is the sort of description you might easily gloss over, or read without giving real thought to. But it’s a concise means of explaining the concept when you begin to unpack it.
The idea that it is a “digital currency” is really the key point in understanding it. What this means is that cryptocurrency exists entirely in digital form. It is different from, say, digital representations of your ordinary currency (such as you might see in Apple Pay, for instance). As a fully digital currency, cryptocurrency has no physical form, and does not originate in a bank or any other regulated financial institution or system. If it helps, consider thinking of it as little more than a line of code that happens to have monetary value.
As for the cryptography aspect of the definition, it speaks to the notion that cryptocurrency is inherently secure and protected from counterfeiting and interference. A form of encryption is involved from the very creation of new cryptocurrency “coins” and through any successive transactions involving those coins. So, while cryptocurrency is designed such that transactions are transparent and easy to track (more on that later), the currency itself is digitally protected from its creation. In theory, it cannot be manipulated or corrupted.
Where Cryptocurrency Came From
One of the more puzzling aspects of all of this when you’re first starting to learn about cryptocurrency is where it came from. It can seem as if the idea simply sprung up overnight. In some ways, that’s true. Bitcoin—the cryptocurrency that ushered in the modern era of this technology—did more or less just appear one day. However, it wasn’t an entirely original concept, and it likely wasn’t even intended to become what it is today.
There have actually been attempts at the establishment of digital payment methods dating back to the 1980s. In the late ‘80s, a company called DigiCash emerged trying to spread electronic currency through the Netherlands banking system. Many companies made similar attempts thereafter, until PayPal became perhaps the most successful means of electronic currency transfer. It was unique in that it allowed for peer-to-peer transactions, rather than just those involving merchants or banks. But efforts like these can’t rightly be called cryptocurrencies in the current sense, because they did not necessarily involve decentralization or encryption.
Decentralized verification of transactions was the major breakthrough of Satoshi Nakamoto, the inventor of bitcoin (or at least the pseudonym of said inventor). Until Mr. Nakamoto got into the game, verification could only be conducted by a single authority or central regulating system. The idea was to prevent the same currency from being used twice (or generally prevent any other fraudulent activity). A central authority controlling a digital transaction would have final say over the validity of all transactions, which in a way goes against the very idea of a secure, digital currency unattached to financial systems or institutions.
Nakamoto’s 2009 contribution, through bitcoin, was the introduction of a decentralized network in which every single user could see (and therefore verify) every single transaction. The easy way to think of it is that every Bitcoin transaction is public knowledge, and thus no one user can make fraudulent transactions without others noticing. This invention effectively built on the existing idea of digital cash and enabled cryptocurrency as we know it today.
How Cryptocurrency Works
The basic definition can be explained with relative ease, and the history is certainly interesting, but not necessarily essential to practical usage or understanding. But it’s the “how” of cryptocurrency that can still be particularly tricky if you’re not already familiar with it. The best approach is to break it down into four steps that explain the various processes involved in cryptocurrency use: mining, acquisition, storage, and transactions.
- Mining – This is the process by which certain individuals (or groups of individuals) verify “blocks” of cryptocurrency transactions via complex mathematical processes. Once a block is verified—a block being a full set of the transactions that take place in a given time—it can be added to the blockchain, which is the public ledger visible to all users. Those responsible for verification are awarded with brand new cryptocurrency, which in the case of bitcoin is capped at 21 million total units (after which miners will no longer be putting new bitcoins into circulation).
- Acquisition – Assuming you do not mine for cryptocurrency on your own, there are other methods of acquisition. Typically, the most convenient option is to simply purchase the cryptocurrency of your choice via any of a number of online exchanges. You can do this with your ordinary currency, much like buying a stock, commodity, or, if you’d like to think of it in even simpler terms, a sort of coupon or gift card. In some cases, such as with Bitcoin, you can also occasionally make a purchase at a real life machine, much as you’d withdraw cash from an ATM.
- Storage – You might be wondering what it actually means to acquire cryptocurrency when it doesn’t have physical form. This is best explained via storage. When you take ownership of cryptocurrency, what you’re essentially doing is gaining exclusive access to it. In other words, it already exists online, at a “public address” that anyone can see. When you acquire a quantity, you gain “private keys” that serve as your way to use the currency. Only with both key and address can you conduct any sort of transaction.
These pieces of data are stored on one of three kinds of “wallets”:
- There are paper wallets, which are literally those on which you record your relevant data on paper;
- There are hardware wallets, which are like small USB devices that store your keys and can be plugged into computers or mobile devices;
- And there are software wallets which act as cryptocurrency bank accounts on your desktop or in an app. (You can read more about the ins and outs of cryptocurrency storage in our Bitcoin Wallet Guide).
- Transactions – To make a cryptocurrency transaction, which can only happen via digital wallets and exchanges, you would use your private keys to access your currency, input the address of the recipient you wish to pay, and confirm the transaction. It can take a few minutes for miners to verify the transaction, but the process is generally fairly efficient. You will effectively be transferring access to the agreed upon amount of cryptocurrency.
It can still take some getting used to once you actually start acquiring and/or trading cryptocurrency. Additionally, different currencies, wallets, and exchanges can work in slightly different ways. But the above steps cover the general process of how this all works.
Prominent Examples of Cryptocurrency
To list all of the active cryptocurrencies at this time would take pages and pages. New ones seem to be springing up all the time, some equipped with new features and ideas and others essentially serving as smaller versions of existing currencies. But we can at least quickly run through some of the primary examples you’re going to see if you start exploring the cryptocurrency market:
- Bitcoin – Effectively the one that started it all, bitcoin first came to life in 2009. It has set the standard for additional cryptocurrencies, introduced the blockchain concept, and is at this time by far the most valuable option. Read our full bitcoin guide.
- Litecoin – Perhaps the most popular and direct alternative to bitcoin, litecoin emerged in 2011. It operates similarly to bitcoin, though at a fraction of its value (leading some to believe it could be more practical as a day-to-day currency).
- Ethereum – Ethereum is one of the younger cryptocurrencies to have gained significant traction. It launched in 2015 and already has the second highest market cap to bitcoin.
- Dash – Dash first emerged as “Darkcoin” back in 2014, but eventually rebranded. It is effectively a direct alternative to bitcoin but for the fact that transactions are less visible, and users more anonymous (even though bitcoin itself is often praised for anonymity).
- Dogecoin – Dogecoin is, in a few words, less serious than most of its counterparts. Yet it has gained enough of a following to be noteworthy. Originally intended as a joke, it has become a semi-valuable digital currency used largely in online circles as a sort of reward token.
As you can see, there’s plenty to learn in any effort to better understand cryptocurrency. It’s a complex technology, and one that’s always expanding and evolving. But while some of the terms and concepts can seem a little bit daunting at first glance, the core ideas are fairly straightforward. The more you engage with cryptocurrency, whether by reading about it, tracking individual currencies, or even collecting some of your own, the better you’ll come to understand it all.
What Is An Initial Coin Offering (ICO)?
Have you ever wondered how a cryptocurrency like bitcoin or ether gains its initial value? Well, in some cases, companies use a method called an initial coin offering (ICO) to obtain the funding that they need to get a currency off the ground. An ICO is a way in which people can buy into a currency early, and by doing so, you open yourself up to a number of opportunities that you may not have if you were to simply adopt a digital currency after its inception.
ICOs are used by organizations looking to create their own currency as a means of funding it in advance of a wider distribution. This is helped along by the company provisioning documentation about what features this particular currency will add to the existing marketplace that will make it stand out. If a company develops a currency that has its own unique strategy for security and accountability, it’s much easier for potential users to buy in and use it for their own needs.
Using Crowdfunding to Launch a Currency
What’s the main reason people contribute to an ICO? The clearest goal of people who participate in this practice is an obvious one: they stand to gain a lot through their early investing. When someone is among the first arrivals when it comes to emerging currency, that gives them a foothold over anyone who wants to pick up that currency down the road.
Because these currencies don’t rely on venture capitalists for initial funding and instead rely on people who are willing to get a leg up on the competition, it gives early investors even more incentive to buy in. It also makes these currencies much easier to get off the ground because they’re not held back by the same level of legal constraints that face similar enterprises in the same space. That means that almost anyone can start a currency if they want to.
Without the worries of having to conform with governmental regulations like one would when setting up an IPO, these companies avoid having to pay in too heavily. It provides a lightweight ability to get their currency circulating faster without having to deal with too much red tape.
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Currencies that Used an ICO
Every day, new currencies are being developed that come with their own unique benefits. Several currencies have been funded through an ICO in the past, and many continue to use it as a tool to establish initial value. Some past examples of currencies that have benefited from an ICO are:
This is just a small number of the currencies that have taken advantage of ICO. Every time a new currency is listed for investment, it goes through its own growth, and that growth informs how that particular currency will be received going into circulation.
What’s the Benefit of Investing in an ICO?
When it comes to why people are investing into companies developing new cryptocurrencies, the reasons are many, but there’s a common theme: new currencies often come with the promise of some increase in flexibility or usability that makes them the perfect means of becoming the next great standardized currency.
Companies that are working on developing new currencies build a compelling case for investment with demonstrations, white papers, and other similar materials to showcase the benefits of switching to their new currency. They frequently highlight items like security, accountability, and speed, all of which impact how people using the currency will be able to do so reliably without the worry of theft, fraud, or breakdown.
Also, many emerging currencies emphasize multiple avenues of access. Giving potential new users access to this kind of documentation means they have a convincing incentive to invest because it shows that choosing a particular currency comes with real benefits.
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There are New Options Available All the Time
New currencies are being developed every day, each with their own goal and set of directives, and that means that there are continually opportunities to invest into a new currency. Joining in on an ICO has never been easier, and the benefits are potentially huge.
Any single new currency carries the weight of being the one that potentially makes it big, but buying into any new currency early also means that you have time to get to know its pros and cons and develop a first hand opinion over its worth. Investing means that you gain an early foothold into any new currency, giving you a sizeable leg up on that currency’s value compared to people who will adopt it after you.
Why Invest in an ICO?
The biggest component to factor into any potential investment is that when it’s done with a new currency that’s gaining momentum, you never know how the currency will react to being made official.
When you begin investing into an ICO, the big incentive is that in many cases, the initial conversion amount of the currency might be a fraction of a dollar. But once it’s made official, that amount can adjust up to a few dollars for each unit. This means that you can stand to see a dramatic shift in income based on whether or not you get in on an emerging currency early enough.
Given how much fluctuation these currencies go through over time, there’s the potential that it could pay off to invest early. It can mean gaining a foothold in what ends up growing up to becomes a large-scale currency, meaning that you can multiply your initial investment by several times over by the time the currency goes online. Plus, having an initial stake in the currency early on can help put you at a competitive advantage over those that chose to wait.
Of course, it’s important to note that this is not always the case. As with any investment, it’s recommended that you perform the due diligence and remember that nothing is guaranteed.
What is a Distributed Ledger?
A distributed ledger is similar to a normal traditional ledger on the surface, but it possesses a number of features that make it much more useful for any business.
It’s similar that on the user end, all transactions are completed normally. But on the backend, all transactions are completed and maintained in a decentralized form across different locations and sites. That means that you maintain the same, singular level of control over your records with the key advantage that those records are not all located in one place. Instead, your ledger data is distributed amongst a network, and synchronized.
Everything that is amended to the ledger is immutable once entered, making it an even more accurate system of taking account of transactions than traditional systems. In other words: there is a footprint for every single interaction.
[image of distributed ledger]
A More Permanent and More Secure Solution
The clearest benefit of a distributed ledger is that it’s extremely accurate in both short- and long-term referencing. Because every entry made into the distributed ledger is unchangeable from the time of entry, there is a record of everything entered, including records of who entered it, when, where, and more. That means that there’s total accountability available with this system that may otherwise be in question with traditional methods of accounting where files can be deleted or removed without recovery.
The distributed ledger’s biggest advantage is permanence. Because a distributed ledger is distributed amongst so many different places and sites, it’s nearly impossible to alter a record. This comes as a result of each version of the distributed ledger being kept in synchronization with the others. If one record is attacked or compromised, it’s easier to tell it happened as a result of the replication of data across the distributed ledger, and it’s simple to track and undo. That means that any system using a distributed ledger is much less likely to run into issues when it comes to hacking.
Choosing the distributed ledger over a traditional alternative is a step in the right direction for any business or personal account. It provides a way of tracking your finances without the added cost of system maintenance. This comes as a direct result of all information entered in the distributed ledger being permanently recorded with minimal effort. Because of its simplicity and ease of implementation, it gives you a way to easily bring it into any kind of business, personal account, or enterprise without the fear of over complications or disrupting established workflows.
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Useful Across Different Industries
With a wide array of uses, a distributed ledger makes for an ideal system for almost any industry out there. From banking to government to retail, taking a business or personal account’s accounting to the next level with a distributed ledger can help create the best system possible. Its strength is the intelligent way it holds and maintains synchronized duplications of the same data throughout every instance of it that exists. This provides a surefire way of making sure data is safe and entered.