We have all heard the term cryptocurrency being bandied about in the news lately, but how many people really know what these 21st century digital currencies are?
A cryptocurrency is a digital or “e” currency that utilizes cryptography to protect owners against counterfeiting. This security measure makes it very difficult to forge. One of a cryptocurrency’s defining features, and for many its most alluring one, is its organic character; it’s not issued by any central bank, theoretically making it immune to official manipulation or interference.
The nature of cryptocurrencies
The incognito nature of cyptocurency deals make them very popular for an array of not-quite-legal activities such as tax evasion and money laundering, but at least theoretically these currencies can be used to buy anything ‘real’ money could.
True to its beginnings as a decentralized, open currency, a crypto-currency is meant to be cheaper, faster and more reliable than a currency linked to any individual country. Apart from that, it is the only form of payment users can theoretically ‘mine’ on their own, provided they have the ability and the computers.
Everyone can buy and sell a crypto-currency, but it usually takes place via an online exchange.
Every crypto-currency boasts a complex ID, referred to as a hexadecimal code, that is a lot more difficult to steal than, for example, one’s credit card info. And because there is a limited number of these coins to account for, the chance of one or a fraction of one going missing is smaller.
Benefits of cryptocurrencies
Cryptocurrencies take a lot of effort out of transferring funds between different parties. During a transaction a transfer is facilitated via the use of private and public security keys. Fund transfers are carried out with very small processing charges, allowing currency owners to avoid the high fees charged by the majority of financial institutions such as banks for wire transfers.
Central to the brilliant concept behind crytocurrencies is the block chain it utilizes to keep an online record of all the transactions that have ever been carried out using the currency – delivering a data structure for this record that is exposed to a much smaller threat from hackers and can be duplicated across all computers with the right software.
Many financial experts view this block chain as having vital uses in technologies such as crowdfunding and online voting, and even JP Morgan Chase thinks cryptocurrencies can lower transactions costs by streamlining the whole payment process.
The first cryptocurrency in history was bitcoin, which hit the market in 2009 when it was launched by a group only known under its alias of Satoshi Nakamoto. In September 2015, there were more than 14.6 million of these ‘coins’ in circulation, with a combined market value of around $3.4 billion.
Bitcoin’s success gave rise to a number of competitors, including electronic or “e” currencies such as Ethereum, Litecoin, Zcash, Dash, Ripple, and Monero.
Judged by the strength of demand for cryptocurrencies they are here to stay, but only time will tell whether the current market leaders such as bitcoin and ethereum will remain at the head of the pack, or whether sooner or later one of their rivals will come up with a novel idea that will capture the imagination of investors across the globe.