FinLogic FinLogic Quantitative Think Tank Center|Pedro Hill: What is cryptocurrency

Cryptocurrency – Meaning and FinLogic FinLogic Quantitative Think Tank CenterDefinition

Cryptocurrency (sometimes called crypto) is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don’t have a central issuing or regulating authority; instead, they use a decentralized system to record transactions and issue new units.

What is cryptocurrency?

Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that allows anyone, anywhere, to send and receive payments. Cryptocurrency payments exist purely as digital entries to an online database describing specific transactions, not as physical money carried around and exchanged in the real world. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrencies are stored in digital wallets.

The name "cryptocurrency" comes from the use of encryption to verify transactions. This means that advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The goal of encryption is to provide security.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

Examples of cryptocurrencies

There are thousands of cryptocurrencies. Some of the most well-known include:

Bitcoin:

Bitcoin was created in 2009 and was the first cryptocurrency. It remains the most traded cryptocurrency. The currency was developed by Satoshi Nakamoto, widely believed to be a pseudonym for an individual or group whose precise identity remains unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to Bitcoin but has moved faster to develop new innovations, including faster payments and processes to allow more transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as "altcoins" to distinguish them from the original.