What is cryptocurrency?
Once upon a time, money as we know it did not exist. To make the exchange of goods and services more efficient, paper and metal money was created. While the actual paper and metal was of little value, people agreed that those items represented value, and over time the system reached mass adoption. This type of money, which we are now accustomed to using in our daily lives, is called “fiat currency”.
Digital currency, or cryptocurrency, was created to improve upon the current system of the exchange of fiat currency for goods and services. These relatively new digital currencies, such as Bitcoin and Ethereum, help to transact and store value. While we have not yet reached mass adoption, more and more people are getting on board, so this is an exciting time to get involved with this asset class.
With cryptocurrency, there is potential for disruption beyond digital currency exchange. Blockchain technology, the digital ledger system that is used to keep track of transactions and ownership, is being deployed by governments, institutions and companies alike interested in managing ownership records and the transfer of assets. Various industries and Fortune 500s are embracing the blockchain revolution.
How does it improve upon fiat currency?
Cryptocurrencies are digital so they cannot be counterfeited or reversed by the sender. All transactions are verified and protected though a confirmation process, which prevents the problem of double spending currencies.
There is no central authority (e.g. government or financial institution) who controls digital currencies. The digital currency community works together to maintain each currency.
Lower transaction costs
Since you aren’t dealing with the government or big banks, the fees associated with digital currency are lower than those associated with fiat currency.
Instead of waiting long periods of time for verification or confirmation, transactions are quickly approved and stored in the blockchain.
No intermediary required
Cryptocurrencies can be used to design smart contracts to eliminate third party approval processes. This can remove intermediaries such as lawyers and banks.
How do you get digital currency?
One way to obtain digital currency is to mine it. This is done using powerful computers that can solve complex math problems to write the next block in the blockchain. As a reward for the computing power, a unit of currency is deposited into your digital wallet. It takes a great deal of time and energy for computers to mine digital currency, and each new coin, or fraction of a coin, becomes incrementally more difficult to mine. Cryptocurrency miners also earn more currency by maintaining and updating the blockchain, which is a digital ledger of cryptocurrency transactions and ownership.
Another way to get digital currency is to trade your fiat currency for cryptocurrency with a person or company who has already obtained some. You need to set-up a digital wallet so you can receive and hold your cryptocurrency.
Since it’s not a physical currency, how is it kept track of?
Ownership of cryptocurrency is maintained through a ledger system called the Blockchain, and all transactions are recorded in the Blockchain. The blockchain is decentralized, so instead of having one central ledger, all cryptocurrency miners have a copy of the ledger which gets updated every time a transaction occurs. Each digital currency has its own Blockchain and technology to update it with new transaction information.
How many digital currencies are there?
There are over 1000 digital currencies, and new ones can be created at any time. Bitcoin, Ethereum, Ripple, Bitcoin Cash, Litecoin, and EOS are currently the most adopted cryptocurrencies. Many have a finite number of coins that can ever be mined. For example, in the case of Bitcoin, the maximum is 21 million coins.