Digital currencies have been around for the last decade or so, and since then, they have created both apprehension, speculation, and ambiguity in the world. Just like any currency, cryptocurrencies were designed to be used for buying goods and services, but eventually, they have become a popular form of investment. Unlike other fiat currencies, cryptocurrencies are digitalized and use cryptography to provide secure online transactions.

In this guide, we will explore the core of what cryptocurrencies are and how they work.

What is a cryptocurrency?

Cryptocurrencies are a form of digital assets that were created to be used as a payment or medium of exchange when purchasing goods or services online. In order to execute secure financial transactions, cryptocurrencies use secure, strong cryptography to verify these transactions and control how the tokens work.

As opposed to normal banking systems and centralized digital currencies, cryptocurrencies are decentralized. This means that they are not governed nor regulated by governments or central banking systems. Cryptocurrencies operate using a technology called blockchain, which is a decentralized technology spread across various servers that manage and record transactions.

The very first open-source cryptocurrency is Bitcoin, which was first released in 2009 by its anonymous creator Satoshi Nakamoto.

Where did the idea of cryptocurrencies start?

While Bitcoin was the first cryptocurrency created and released, the idea of a digital cryptocurrency was conceived long before that. An American cryptographer, David Chaum, first envisioned the concept in 1983. In the mid-90s, he implemented the first cryptographic electric money called ecash that an early form of cryptographic electronic payments which compelled user software in order to withdraw cash from a bank as well as designate specific encrypted keys before it was sent to a recipient.

In 2009, Satoshi Nakamoto published Bitcoin’s white paper, which was titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. The paper was a detailed explanation of how peer-to-peer networks work does generate what was described as “a system for electronic transactions without relying on trust”.

What are altcoins, and how many are there out there?

Since the release of Bitcoin, as many as 6000 alternative coins have been released, which are now called altcoins. Some are variants of Bitcoin, while others are completely different cryptocurrencies. Currently, there are over 2000 different cryptocurrencies that are traded publicly. You might have heard of some of these altcoins, like Ethereum, Ripple XRP, Litecoin, and others.

The total value of all the cryptocurrencies is over $200 billion, and this market cap continuous growing. The value of the first and most popular cryptocurrency, Bitcoin, is by far the leading with a value of over $150 billion.

What defines a cryptocurrency?

In order to be considered a cryptocurrency, a digital currency must meet the following six conditions:

  1. The digital currency should not have a central authority but must be maintained through a blockchain.
  2. The digital currency maintains an overview of its units and their ownership.
  3. The digital currency defines whether or not new units are created as well as their origin and how to determine the ownership of these units.
  4. The ownership of the digital currency’s units can be proved exclusively cryptographically.
  5. The digital currency allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  6. If simultaneously two different instructions for changing the ownership of the same cryptographic units are entered, the system performs at most one of them.

Are cryptocurrencies legal?

The legal status of cryptocurrencies varies based on jurisdiction, with some countries not having yet defined the legality of crypto coins in the region. Currently, there is an “absolute ban” on cryptocurrencies in Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. There is an “implicit ban” in another 15 countries:  Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia, and Taiwan. In Russia, although cryptocurrencies are legal to own, it is illegal to purchases anything with them, while in China, financial institutions are not allowed to handle bitcoins, yet individuals can.

Cryptocurrencies are legal in the USA and Canada but are under heavy watch and regulation. Advertising of cryptocurrencies is also highly regulated, with Facebook, Google, Twitter, Bing, Snapchat, LinkedIn, and MailChimp banning the advertising of crypto on their platforms.

Why are cryptocurrencies so popular?

Cryptocurrencies have both their advocates and opponents for many reasons:

  • Supporters consider cryptocurrencies like Bitcoin to be the future. They believe that eventually, fiat currencies like the US Dollar and the Euro will eventually be replaced by digital currencies.
  • Decentralization: Some BTC and crypto advocates appreciate the decentralization behind cryptocurrencies. They enjoy the fact that central banks are removed from managing the money supply and reducing its value through inflation.
  • Security: crypto advocates appreciate the technology behind cryptocurrencies, such as blockchain and decentralized recording and processing of transactions.
  • Value: Many initial skeptics were surprised with Bitcoin’s price leap. Many cryptocurrencies leaped grew incredibly in value, making them an almost effortless investment opportunity.

Stay tuned for part 2 of our guide to cryptocurrencies!