What is cryptocurrency?
*This article was originally posted in 2019 and was updated in March 2023.
Cryptocurrency awareness and adoption skyrocketed in 2020, as many turned to bitcoin as a way to diversify their holdings during the financial uncertainty of the COVID-19 crisis. For some, this increase in popularity may have come as a surprise because of bitcoin's former reputation as a volatile and highly speculative asset.
However, due to its decentralized nature and lack of oversight from central banks, bitcoin was unscathed by the crisis's adverse financial effects. Instead, 2020 gave bitcoin the chance to solidify its position as a safe-haven asset and fulfill its role as digital gold.
Now, major corporations, individuals, and even financial institutions are adding bitcoin and other cryptocurrencies to their balance sheets. With all the hype, it is important to understand what cryptocurrencies are and what the future for them holds as they make the shift from being an investment to a functional utility.
What is cryptocurrency?
In the most simple terms, cryptocurrency is a form of digital money. Similar to traditional fiat currencies like the U.S. dollar or euro, cryptocurrency can be exchanged for goods and services, though not every store accepts them as payment at this time.
Cryptocurrencies use complex mathematics to verify transactions and reduce the risk of fraud. The "crypto" in cryptocurrency comes from the mathematical field of cryptography — used to ensure transactions are secure and cannot be counterfeited — which is combined with a technology called the blockchain.
Most cryptocurrencies have a native blockchain where all transactions are kept in a publicly available ledger. There are no central authorities when it comes to cryptocurrencies and blockchains. Instead, a network of computers called nodes monitors all transactions and confirms their validity.
The fact that cryptocurrencies rely on a large network of computers rather than any single institution makes them decentralized. Essentially, cryptocurrencies eliminate the middlemen, like banks, and allow users to make transactions directly with one another (peer-to-peer). Cryptocurrencies are also essentially independent of countries’ monetary policies that can increase inflation or cause depreciation.
How cryptocurrencies are created
Most cryptocurrencies are minted through a process known as mining. Miners are responsible for grouping transactions into "blocks." As new blocks of transactions are strung together, they create a chain, aka the blockchain.
Once a block is added to the chain, it cannot be deleted or changed, as blocks are permanent. They cannot be tampered with or erased, and the original order of blocks can never be disrupted. The chain only moves forward in time. This immutability makes cryptocurrencies incredibly secure and nearly impossible to counterfeit.
To add a new block to the chain, miners have to solve a cryptographic puzzle based on the block's transactions and other factors. Depending on the type of cryptocurrency, these puzzles often require specialized computers. Once the puzzle is solved, the miner who discovered the solution broadcasts that they have added the block. Every time a miner adds a new block to the chain, they are rewarded in cryptocurrency. These rewards are how new crypto coins are introduced into the ecosystem.
There are thousands of different kinds of cryptocurrencies, and they all work in different ways. For some, the process of mining new coins looks different from the proof-of-work example I provided above. Ethereum, the world's second-most-popular coin, uses a proof-of-stake model, which has much less of an impact on the environment.
Bitcoin is the world’s first, most popular, and most valuable cryptocurrency. It was launched in 2009 by an elusive figure known as Satoshi Nakomoto.
The bitcoin network’s code is designed so that there will only ever be 21 million BTC in existence. Currently, there are almost 19 million in circulation and the last bitcoin is expected to be mined in 2140. The fact that there is a limited number of bitcoins makes it similar to a tangible precious asset, like gold.
Since bitcoin's creation, miners have been investing their time and computational power into the cryptocurrency. This initial investment by miners, paired with the transparency of blockchain technology, helped to create a snowball effect of trust over time.
As confidence and trust in bitcoin grow, demand grows alongside it as more people decide they want to invest. The price of bitcoin is determined by the economic principles of supply and demand. This means that as demand increases, the price per BTC also rises.
It is essential to research which coins are best suited for your needs before purchasing cryptocurrency. With over 13,000 different cryptocurrencies available, it's likely. that the vast majority of them will never be useful or profitable. Fortunately, Olliv has whittled down the long list of cryptocurrencies to just those that we believe are the most valuable and reliable.
The future of cryptocurrency
Cryptocurrency and blockchain technology have the potential to revolutionize the way we do banking. These new technologies help streamline transactions, reduce the risk of fraud, and create more equitable financial systems.
The peer-to-peer nature of cryptocurrency can drastically reduce the costs associated with traditional financial services — like bank and remittance fees — and make space for the creation of innovative new financial products. However, as a relatively new technology, cryptocurrencies are still just getting started.
As cryptocurrencies such as bitcoin continue to become more popular, the technology behind them will be developed further for new purposes and applications. Currently, central bankers are considering launching central bank digital currencies (CBDCs) that take the technology behind cryptocurrencies and apply them to traditional fiat currencies like the dollar.
What cryptocurrency has already demonstrated is that blockchain technology has many uses in our digital world which are likely not going away. New crypto and blockchain companies pop up every day in the financial technology sector. Many believe that cryptocurrency and the technology behind it are some of the most incredible advances in technology to happen in our lifetime and will play a massive role in shaping the future.
Time can only tell what is in store for the future of cryptocurrency. Still, this technology has already done so much to disrupt the financial sector in the best way possible.