Crypto Beginner Series EP 2: What Are Cryptocurrencies?
At the time of writing, almost 10,000 known cryptocurrencies exist, and their pace of creation does not appear to be slowing. But what are cryptocurrencies?
What is this evolutionary innovation that brick-and-mortar stores are beginning to accept, retail investors are making millions off of, banks are announcing custody support for, and governments are beginning to legislate on?
This will briefly cover their history, technical components, and their value proposition. Now, it is our belief that anything can be a currency, so why are these digital assets in the spotlight?
What Are Cryptocurrencies?
Looking back at history, cryptographers had been experimenting with electronic cash all the way back to 1983. Historians have often debated if these “e-cash” experiments represent a cryptocurrency. But for our purposes, we will consider Bitcoin as the first true cryptocurrency, which was invented in 2009. Satoshi Nakamoto’s white paper and Bitcoin’s subsequent evolution in becoming a standard for cryptocurrencies resulted in what many today represent as the true definition of a cryptocurrency. Technically, a cryptocurrency does not include decentralization. Despite this, it is commonly thought this feature is a fundamental part of what a cryptocurrency should be. So, what exactly is a cryptocurrency composed of?
First and foremost, a cryptocurrency is entirely digital, there are no physical copies or hard versions. This is not to be confused with the idea that cryptocurrencies can be backed up physically with codes. These codes are simply representations of the token on the blockchain. Due to its virtual nature, a cryptocurrency is secured cryptographically, a fancy word meaning the transactions are secured privately.
Running On A Blockchain
Most cryptocurrencies are decentralized, generally running on a blockchain, which is essentially a distributed digital ledger. This network, or chain of blocks stores all of the data of the corresponding system. To summarize, a cryptocurrency is a decentralized digital asset that securely runs on a blockchain.
The technicalities above are important, but it is my belief that they will eventually fall into the same category as SMTP to email or HTML to the internet – a normalized, proven technology. As cryptocurrencies become more common, newcomers will disregard their inner workings, and instead blindly enjoy the benefits.
But What Makes Them Valuable?
Right now, cryptocurrencies are in an innovative boom phase, incentivizing anyone with a coding background to mint a new cryptocurrency in hopes of capturing capital inflows. Cash grabs are happening left and right through forks, airdrops, exchange listings, and IDO’s adding to the frenzy. This is a good reason to discuss where their value comes from in the first place.
At a basic level, the value of any asset, whether it be a cryptocurrency or not, is simply what someone is willing to pay for it. It is important to understand the reasons that someone would be willing to place a bid or ask on these digital assets. Unfortunately, like the Dotcom boom, most cryptocurrencies will not survive in the future. Over a billion websites exist today, but the vast majority of internet-goers use about 50 websites.
Cryptocurrencies will undergo the same pattern; people will only need to use the same few that suit their needs, which will dictate which cryptocurrencies hold long-term value.
Many Are Doomed To Fail
It won’t be long until we use cryptocurrencies every day, but their ascent from just an idea on a single computer screen to a worldwide value system will be a journey of twists, turns, ups, and downs.
If you own some cryptocurrency, make sure you safely secure your crypto before it’s too late.