What is Cryptocurrency?

Cryptocurrency is a digital asset that is designed to work as a medium of exchange similar to "normal" currencies like the USD. Unlike "normal" currencies, cryptocurrencies are designed to secure the transactions, to control the creation of additional units of the currency, and to verify the exchange of currency units. This is done using encryption techniques.

Created in 2009, Bitcoin was the first decentralized cryptocurrency. Since then, hundreds of cryptocurrencies have been created. These are commonly referred to as Altcoins.

Fiat Money - inconvertible paper money made legal tender by a government decree.

Most cryptocurrencies are fully decentralized. So, unlike "normal" or fiat currencies, centralized banking institutions, like the Federal Reserve System, do not control the value or creation of cryptocurrencies. Most cryptocurrencies are also created so that a limited amount of units can be created. This creates a market cap on them. For example, Bitcoin can never have more than 21 million coins. This is different from fiat currencies where financial institutions can create more causing inflation.

So, Cryptocurrency:

  • Is a medium of exchange that is created and stored electronically in a blockchain.
  • Is not redeemable for another commodity (at this time), such as gold or silver. Therefore, it has no intrinsic value.
  • Only exists in the network.
  • Has a supply that is not determined by central financial institutions, and, in most cases, is completely decentralized.
  • Does not represent debt. Fiat money represents debt, a system of IOUs. Cryptocurrencies only represent themselves.

What Makes Cryptocurrency so Special?

You can think of Bitcoin as a decentralized ledger (a list of transactions). Bitcoin keeps track of transactions in the ledger that can only be added to the ledger and existing transactions cannot be modified. Each of these transactions is verified using known algorithms. After a transaction is verified, that transaction is then combined with the other transactions and a new block of data for the ledger is created. That block of data is then added to the existing blockchain. At that point, the transaction is permanent and unalterable.

Transactions are:

  • Irreversible - After a transaction is added to the blockchain, the transaction cannot be reversed. If you send a cryptocurrency to a scammer, there is no getting it back.
  • Pseudo-anonymous - Cryptocurrencies are received on randomly generated addresses that are not connected to real-world identities. Although it is possible to view and analyze the transaction flow of a coin, it is not always possible to connect the addresses to real-world identities.
  • Global - Transactions happen on a global network of computers and don't care about the location of the person making the transaction.

Cryptocurrency as an Investment

Although cryptocurrencies are quickly gaining acceptance, it is still a very speculative market. The dynamic and fast-growing nature of cryptocurrencies, allows users to quickly make money and lose it just as quickly. With the volatility of cryptocurrencies, it is not uncommon to see a coin have a 10, 20, or even 100% gain in a day and lose that amount just as quickly.

Investors and traders can use exchanges like Coinbase, Bittrex, Poloniex, and others to buy and sell coins.

Another way to invest in cryptocurrencies is to participate in Initial Coin Offerings (ICOs). ICOs are a means of crowdfunding using cryptocurrency. This can be a source of capital for startup companies. In an ICO a percentage of the newly issued cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin or Etheruem. This is a highly speculative and sometimes controversial method of crowdfunding. By participating in an ICO, you are not guaranteed to receive anything in return.

Bitcoin is definitely the most popular and recognized cryptocurrency today. There are currently over 1000 currencies listed on coinmarketplace.com. Most of these coins' market caps are so low that they are not worth trading. Investors and traders should keep an eye on several cryptocurrencies in order to diversify their portfolios.

Here are the top 5 currencies as of the writing of this article.