A cryptocurrency is a digital or virtual currency that is secured by cryptography. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions. “Currency” refers to the intended purpose of the product’s use in circulation as a medium of exchange, a standard of money.
Cryptocurrencies are created (and secured) through cryptographic algorithms that are monitored and organized by a peer-to-peer network called a blockchain. Essentially, the cryptocurrency is an encrypted data string that denotes a unit of currency. The blockchain functions as a secure ledger of transactions which makes cryptocurrencies nearly impossible to counterfeit or double-spend. This cryptographic algorithm is also the main difference between a cryptocurrency and other digital or virtual currencies.
Blockchains are maintained and confirmed in a process called mining. It is a network of computers or specialized hardware such as application-specific integrated circuits (ASICs) process and validate the transactions. The process of mining almost always includes an incentive for miners who run the network with the cryptocurrency, encouraging miners to continuously participate in the mining process which secures the blockchain network.
Unlike physical money, cryptocurrencies are generally not issued by any central government or financial authority. Many cryptocurrencies are decentralized networks based on blockchain technology, which as mentioned earlier is a distributed ledger enforced by a large network of computers. This feature render cryptocurrencies theoretically immune to government interference or manipulation. The decentralized systems also create a safety feature that cryptocurrencies do not collapse at a single point of failure.
Cryptocurrencies are likely to be cheaper and faster when handling money transfers. However, cryptocurrencies also have potential to be used in criminal activities and the mining activities of many cryptocurrencies consumes significant amount of energy.
Some experts believe that cryptocurrencies, blockchain technology and all the related technologies that got developed in the process will disrupt many industries. Some of the industries include finance, accounting, real estate, logistics and law.
As of the date that this article is written, cryptocurrencies are hardly used for retail transactions, including Bitcoin, the first and most popular cryptocurrency. The most common use of cryptocurrencies is a financial trading instrument, due to some of their spectacular price gains against the fiat currencies.
