Cryptocurrency is a decentralized, digital form of currency that operates independently of any kind of central bank or government interference. Rather, cryptocurrency relies on strong cryptography (e.g., the blockchain with Bitcoin) to provide secure transactions and verify the transfer of specified units of cryptocurrency from one user to another.
The Beginnings of Cryptocurrency
Many consider Bitcoin’s creation in 2009 to be the genesis of cryptocurrency. Before this point, all attempts at creating a decentralized form of currency were doomed by massive amounts of fraud and unreliability. Bitcoin changed all of that. The blockchain, a system of records (technically called blocks) that are linked cryptographically, made use of distributed ledger technology in order to provide decentralized, secure digital transactions.
A distributed ledger is thus named because it is a form of record-keeping that links transactions globally without the need of a central administrator or consolidated data storage. Instead, a distributed ledger like the blockchain draws on the resources of thousands of different people in a peer-to-peer network.
The process of keeping this peer-to-peer network is extremely energy-intensive; with Bitcoin, the process relies on “mining” and combining the processing power of thousands of different users. The country of Iceland, interestingly, has become a hotbed of Bitcoin mining because of its affordable electricity rates. The Chinese government, by contrast, has taken a more draconian approach and shuttered all virtual currencies.
The idea of a peer-to-peer network undergirding a distributed ledger has certainly caught on since Bitcoin’s inception in 2009. Over the last decade, over 4,000 altcoins have been created. Altcoins are the name given to digital cryptocurrencies other than Bitcoin. The term “altcoin” was perhaps coined by Wall Street Journal financial writer Stephen Yang in reference to alternative digital currencies.
Differences with Central Banks
Regular currencies are regulated by central banks. A board of directors will decide how much money to have in circulation and what the interest rates should be.
Aside from being decentralized, Bitcoin is radically different from traditional currency in that there is a cap on the number of Bitcoins in circulation, and the value of each “unit” of Bitcoin fluctuates in reference to that finite limit.
Since the release of Bitcoin, there have been other types of cryptocurrencies in circulation (e.g. Litecoin and Dash). This digital form of currency has changed the way we perceive currency. We live in a digital world, so it is only fitting that we have a digital currency.