A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.
Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. Despite their name, cryptocurrencies are not considered to be currencies in the traditional sense, and while varying treatments have been applied to them, including classification as commodities, securities, and currencies, cryptocurrencies are generally viewed as a distinct asset class in practice. Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens, or other such reward mechanisms.
Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC). When a cryptocurrency is minted, or created prior to issuance, or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database. Traditional asset classes like currencies, commodities, and stocks, as well as macroeconomic factors, have modest exposures to cryptocurrency returns.
The first cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of March 2022, there were more than 9,000 other cryptocurrencies in the marketplace, of which more than 70 had a market capitalization exceeding $1 billion.
A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. A cryptocurrency exchange can be a market maker that typically takes the bid–ask spreads as a transaction commission for its service or, as a matching platform, simply charges fees.
Some brokerages which also focus on other assets such as stocks, like Robinhood and eToro, let users purchase but not withdraw cryptocurrencies to cryptocurrency wallets. Dedicated cryptocurrency exchanges such as Binance and Coinbase do allow cryptocurrency withdrawals, however.
In 1983, American cryptographer David Chaum conceived of a type of cryptographic electronic money called ecash. Later, in 1995, he implemented it through Digicash, an early form of cryptographic electronic payments. Digicash required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by a third party.
In 1996, the National Security Agency published a paper entitled How to Make a Mint: The Cryptography of Anonymous Electronic Cash, describing a cryptocurrency system. The paper was first published in an MIT mailing list and later in 1997 in The American Law Review.
In 1998, Wei Dai described “b-money”, an anonymous, distributed electronic cash system. Shortly thereafter, Nick Szabo described bit gold. Like Bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.
In January 2009, Bitcoin was created by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme. In April 2011, Namecoin was created as an attempt at forming a decentralized DNS. In October 2011, Litecoin was released which used scrypt as its hash function instead of SHA-256. Peercoin, created in August 2012, used a hybrid of proof-of-work and proof-of-stake.
Cryptocurrency has undergone several periods of growth and retraction, including several bubbles and market crashes, such as in 2011, 2013-2014–15, 2017-2018 and 2021–2023.
On 6 August 2014, the UK announced its Treasury had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered. Its final report was published in 2018, and it issued a consultation on cryptoassets and stablecoins in January 2021.
In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such.
In August 2021, Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as Bitcoin.
In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.
On 15 September 2022, the world’s second largest cryptocurrency at that time, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an upgrade process known as “the Merge”. According to the Ethereum Founder, the upgrade can cut both Ethereum’s energy use and carbon-dioxide emissions by 99.9%.
According to Jan Lansky, a cryptocurrency is a system that meets six conditions:
In March 2018, the word cryptocurrency was added to the Merriam-Webster Dictionary.
According to Jan Lansky, a cryptocurrency is a system that meets six conditions:
In March 2018, the word “cryptocurrency” was added to the Merriam-Webster Dictionary.
Further information: List of cryptocurrencies
Tokens, cryptocurrencies, and other digital assets other than Bitcoin are collectively known as alternative cryptocurrencies, typically shortened to “altcoins” or “alt coins”, or disparagingly “shitcoins”. Paul Vigna of The Wall Street Journal also described altcoins as “alternative versions of Bitcoin” given its role as the model protocol for altcoin designers.
Altcoins often have underlying differences when compared to Bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than Bitcoin’s 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin. Another example is Ethereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain. Ethereum was the most used blockchain in 2020, according to Bloomberg News. In 2016, it had the largest “following” of any altcoin, according to the New York Times.
Stablecoins are cryptocurrencies designed to maintain a stable level of purchasing power. Notably, these designs are not foolproof, as a number of stablecoins have crashed or lost their peg. For example, on 11 May 2022, Terra’s stablecoin UST fell from $1 to 26 cents. The subsequent failure of Terraform Labs resulted in the loss of nearly $40B invested in the Terra and Luna coins. In September 2022, South Korean prosecutors requested the issuance of an Interpol Red Notice against the company’s founder, Do Kwon. In Hong Kong, the expected regulatory framework for stablecoins in 2023/24 is being shaped and includes a few considerations.
A cryptocurrency exchange can typically send cryptocurrency to a user’s personal cryptocurrency wallet. Some can convert digital currency balances into anonymous prepaid cards which can be used to withdraw funds from ATMs worldwide while other digital currencies are backed by real-world commodities such as gold.
The creators of digital currencies are typically independent of the digital currency exchange that facilitate trading in the currency. In one type of system, digital currency providers (DCP) are businesses that keep and administer accounts for their customers, but generally do not issue digital currency to those customers directly. Customers buy or sell digital currency from digital currency exchanges, who transfer the digital currency into or out of the customer’s DCP account. Some exchanges are subsidiaries of DCP, but many are legally independent businesses. The denomination of funds kept in DCP accounts may be of a real or fictitious currency.
A digital currency exchange can be a brick-and-mortar business or a strictly online business. As a brick-and-mortar business, it exchanges traditional payment methods and digital currencies. As an online business, it exchanges electronically transferred money and digital currencies.
Often, the digital currency exchanges operate outside the Western countries to avoid regulation and prosecution. However, they do handle Western fiat currencies and maintain bank accounts in several countries to facilitate deposits in various national currencies.
Decentralized exchanges such as Etherdelta, IDEX and HADAX do not store users’ funds on the exchange, but instead facilitate peer-to-peer cryptocurrency trading. Decentralized exchanges are resistant to security problems that affect other exchanges, but as of mid 2018 suffer from low trading volumes.
Cryptocurrency is a type of currency which uses digital files as money. Often, people create these files using the same ways as cryptography (the science of hiding information). Cryptocurrency users can use Digital signatures to keep the transactions safe, and to let other people check that the transactions are real. The creators of the first cryptocurrencies made them to be free of government-given currencies.
No single person controls cryptocurrencies. Instead they are decentralized and controlled by many people. This is different from ‘centralized’ electronic money and central banks, which a small group of people control. The control of each cryptocurrency works through a distributed ledger (a list of transactions shared by everyone), usually a blockchain. This lets everyone know all of the financial transactions that happen.
Bitcoin, first released as open-source software in 2009, is famous because it was the first decentralized cryptocurrency. Since then, people have created more than 4,000 cryptocurrencies (sometimes called altcoins, or alternative coins).
In many cases, it is not possible to exchange cryptocurrencies for real currencies such as the US dollar. It is only possible to convert them to other cryptocurrencies. People can also use them to buy things. But you can convert some cryptocurrencies to real currencies. Those cryptocurrencies usually have high volatility, (their price changes very often). Using them is very risky. They are also a target for Pump-and-Dump-Attacks. They act like a big distributed economic system: because they are not issued or controlled by central banks, their value is difficult to influence. For this reason, they cannot really take the place of a stable currency.
People often use cryptocurrencies to do speculation. That makes building a system of more or less stable exchange rates very difficult. Another problem is the inequality of distribution: a small number of people have most of the cryptocurrency. For example: about 1.000 people hold half of the total amount of bitcoins in the world. So if any of these people start using the Bitcoin that they own, they will change the exchange rate. It also means that these people have a great influence on the value of the currency. They can change its value easily. The currency itself only tells you who owns it. Exchange rates of cryptocurrencies are established outside the system. Traders and brokers set the exchange rate. This is not a guarantee that they trade cryptocurrency at the value that they suggest. The unit of cryptocurrency doesn’t have value by itself.
In contrast to cryptocurrencies, central banks control “real” currencies such as the US dollar, Japanese yen, euro, or Chinese renminbi. Certain economic phenomena such as inflation or deflation may change the value (and exchange rate) of a currency. The people who own units of the currency have no direct influence on its value.
Crypto mining is the process of using specialized hardware and software to verify transactions on a blockchain network. The process involves solving complex mathematical equations to validate transactions and add them to the blockchain. Miners are rewarded for their efforts with cryptocurrency, usually in the form of the coin that they are mining. There are three main types of crypto mining: Proof of Work (PoW), Proof of Stake (PoS) and Proof of Authority (PoA)
Proof of Work is the most widely used consensus mechanism in the crypto space. It is used by Bitcoin and many other cryptocurrencies. In PoW, miners have to solve complex mathematical equations to validate transactions and add them to the blockchain. The miner who solves the equation first is rewarded with cryptocurrency.
Proof of Stake is a newer consensus mechanism that is becoming increasingly popular. In PoS, instead of solving complex equations, miners are chosen to validate transactions based on the amount of cryptocurrencythey hold. This is known as ‘staking’. The more cryptocurrency a miner holds, the more likely they are to be chosen to validate transactions.
Proof of Authority (PoA) is a consensus algorithm for private or consortium chains. It uses a set of trusted nodes, or validators, to secure the network. These nodes are pre-selected by the network administrator and are responsible for validating transactions and adding them to the blockchain.
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