What is a Cryptocurrency?

In this guide, we will explain just what a cryptocurrency is, the background of cryptocurrencies and how they work.

You might have heard about either cryptocurrencies, blockchain or Bitcoin from colleagues at work, read about it in the papers or recommended to you by a tech-friendly relative.

In this guide, we will break it down for you in an easy way. And at the end of this guide, you will have a wide enough grasp about cryptocurrencies.

In this guide to what a cryptocurrency is you will learn:

  1. What are cryptocurrencies?
  2. Bitcoin: The beginning of a new digital currency universe
  3. Blockchain is the technology behind cryptocurrencies
  4. This is how cryptocurrencies work
  5. There are thousands of different cryptocurrencies
  6. Why you should be interested in Cryptocurrencies

What are cryptocurrencies?

Cryptocurrencies are digital currencies (digital assets) created on a blockchain or digital ledger technology. They are based on cryptography and they are designed to be decentralised, different from Fiat currencies which are controlled by central banking systems.

While Bitcoin was the first cryptocurrency, there are over thousands of different cryptocurrencies. To buy or trade a cryptocurrency the most common method is to join a cryptocurrency exchange where people can trade with other people from around the world.

Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized cryptocurrency.[6] Since the release of bitcoin, over 4,000 altcoins (alternative variants of bitcoin, or other cryptocurrencies) have been created.

Bitcoin logo

 

“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”

– Eric Schmidt (ex CEO of Google)

Bitcoin: The beginning of a new digital currency universe

Bitcoin is the first cryptocurrency ever created and also heralded the start of a new, exciting digital age. Created by an unknown mysterious figure known only as Satoshi Nakamoto it was created as an answer to the global financial crisis in 2008 and the result of emerging digital technologies.

Bitcoin is built on a technology known as the blockchain. The blockchain is a super exciting new technology that is currently taking the world by storm. Almost every industry is going to be transformed or affected by this new technology in one way or another.

To really understand its potential, imagine a decentralised world where all the applications we need in our lives are running on smart digital technology, which removes unnecessary middlemen and work through smart automated technologies.

Blockchain illustration for guide What is a Cryptocurrency?

Blockchain is the technology behind cryptocurrencies

The technology known as blockchain is what most of the world’s cryptocurrencies are built on. To summarise briefly what the blockchain is, we have taken this paragraph from another Go Cryptowise article:

“Blockchain is a decentralised and distributed record of transactions, that is shared across a network. This means it’s not owned or controlled by one entity. Every transactions is put onto a block of data. And each block of transactions has a record of the previous blocks, forming a chain of blocks. This makes all the information shared on the blockchain transparent, immutable and trusted”.

Go Cryptowise

In the blockchain model, new blocks of transactions are added to this decentralised ledger, and every new block contains information of all previous blocks.

Thus creating an immutable and continuous record of past transactions. Each block holds the data from previous transactions which is cryptographically coded, known as hashes, designed to create a secure and tamper-proof database record.

What each block contains:

  1. A nonce (a number only used once – basically a 32-bit arbitrary random number)
  2. A full list of previous transactions
  3. A timestamp
  4. The group of new transactions being added onto the block
Block structure blockchain that makes up what is a Cryptocurrency?

Why blockchain is amazing

  1. It is a decentralised technology, where no government or ruling body can control it, or own it – fundamentally it is bringing back the power to the people
  2. It can be used in almost every industry in the world and brings tremendous value. Through added Smart Contract technology and decentralised applications, there are no limits to the potential use cases
  3. It will continue the rise of a transparent and open world, where we get better insight to where our taxes goes to, how policies are formed and increased control of our personal data

Find out more about how blockchain is going to change the technology landscape for most global businesses in coming years here

Blockchain future usage by global tech companies chart

To find out more about what the blockchain is and how it works visit this guide here below.

cryptocurrency Bitcoin

This is how cryptocurrencies work

A cryptocurrency or a virtual currency is something that only exists digitally. It only lives on the network that it is running on.

Cryptocurrencies were created to solve the problem of double-spending, which is a potential flaw with digital currencies, where the same digital coin/token can be spent more than once.

If people could just copy the digital currencies and spend them endlessly, it would cause inflation and bring down the entire system.

As we have mentioned, Bitcoin was the first-ever cryptocurrency and it works on a so-called Proof of Work mechanic.

That means that people around the world can perform a computational task known as mining to solve complex digital algorithms. In return for their work, they get rewarded with Bitcoins (or parts of Bitcoins). This mining process validates new transactions that are later on added to the blockchain forever.

At the beginning of Bitcoin’s time, anyone with a personal computer could get started mining it. But since then it quickly grew very popular, and people started using better tech to mine faster and increase their rewards.

Today, no one is really using their personal computers at home to mine Bitcoin, but specialised mining rigs are used. And anything else won’t be able to compete.

But this mechanic, known as Proof of Work (PoW,) is a so-called ‘consensus model’ in the blockchain and cryptocurrency world. For a long time it was the only model existing, but today there are new additions known as Proof of Stake, and Proof of Authority.

Proof of Work and Proof of Stake illustration

Proof of Stake

Proof of Stake or PoS, is a method used to secure a blockchain network and validate the transactions on it. Without it, the blockchain wouldn’t be able to function.

With PoS the owners of the cryptocurrencies running on that blockchain stake their coins and those coins are used to validate transactions and create new blocks.

Proof of Authority

Proof of Authority is a similar type of Proof of Stake blockchain method to Proof of Stake. With PoA only certain nodes are allowed to validate new blocks. Known as Authority nodes.

So instead of the focus and priority given to nodes and holders with more cryptocurrency staked (PoS), they give priority to pre-selected validators.

To read the full guide on what Proof of Stake and Proof of Authority is click here.

What is a Cryptocurrency?

There are thousands of different cryptocurrencies

The most well-known cryptocurrency in the world is of course Bitcoin! And yes to your question: are there more cryptocurrencies than Bitcoin?

In fact, there are more than a thousand different cryptocurrencies in the world as we speak. But they are far from the same, and they all provide different use cases and purposes.

Check out the top 10 cryptocurrencies in the world here below (for a full list and live prices for all the cryptocurrencies visit our Live prices page)

Crypto Live Table x-small
#CoinPriceMarketcapVolume (24h)SupplyChangeLast 24h
1
bitcoin
Bitcoin
BTC
$ 8,470.07$ 152.93 B$ 27.08 B18.05 M1.86%
2
ethereum
Ethereum
ETH
$ 179.99$ 19.55 B$ 9.29 B108.57 M2.37%
3
ripple
XRP
XRP
$ 0.261036$ 11.29 B$ 1.93 B43.30 B2.51%
4
bitcoin-cash
Bitcoin Cash
BCH
$ 263.90$ 4.78 B$ 2.86 B18.12 M4.54%
5
tether
Tether
USDT
$ 0.999971$ 4.29 B$ 29.29 B4.29 B0.15%

 

There are also different classes of cryptocurrencies

Cryptocurrencies can be broadly classified into three different categories. They are known as:

  1. Bitcoin (The first-ever created cryptocurrency and the world’s most famous one – also known as Digital Gold)
  2. Altcoins (Are another type of cryptocurrency. All other coins that were created after Bitcoin are collectively known as altcoins)
  3. Tokens (Another type of cryptocurrency that exists are called tokens. Tokens are cryptocurrencies that are hosted on another crypto network. Ethereum was the pioneer of the crypto token feature)

To find out more about Bitcoin, Altcoins and tokens visit our guide on the different types of cryptocurrencies here below.

Beyond that there are also different types of cryptocurrency assets:

  1. Stablecoins – cryptocurrencies that are designed to keep a stable price. Most cryptocurrencies are very volatile and this presents itself with its own issues of course, hence stablecoins were created. A stablecoin can be pegged to the USD, EUR or other Fiat currency for example, by being backed by an equal amount of Fiat assets
  2. Security token – derives value from external assets and is a tradable asset itself. It is classified as a security token and thus becomes subject to traditional federal securities regulations. This new space of tokens is still not yet regulated and defined
  3. Utility tokens – assets that are created to be used on the blockchain. These tokens are not created as traditional investment assets, but represent individual usage on the blockchain and thus create value and speculative opportunities

Interesting future use cases for cryptocurrencies

Some cryptocurrencies are like digital money, which we can use to pay for products and services. Examples of those cryptocurrencies are Bitcoin, Litecoin and Nano.

Then there are smart contract cryptocurrencies like Ethereum, VeChain and Neo.

And beyond that we have a whole range of different cryptocurrencies running off different types of blockchain supporting new products and industries like E-Sports, supply chain industry, banking, insurance, casinos and so much more.

The potential of cryptocurrencies is almost limitless.

Cryptocurrencies and Bitcoin keep on dividing the world

It seems at times that people can be grouped into two camps.

  • Where one group is excited by this new technology they believe can positively shape the future,
  • And the other group thinks it is harmful and will be a negative influence.

One the one hand, we’ve got famous investors, brilliant tech and seasoned financial experts people like Warren Buffet, Bill Gates, Mark Cairney talking down Bitcoin and cryptocurrencies as harshly as they can:

“‘(It is) rat poison squared’ and trading Bitcoin ‘something like dementia'”

Warren Buffet
Warren Buffett about cryptocurrencies
Berkshire Hathaway Chairman and CEO Warren Buffett gestures during an interview with Liz Claman on the Fox Business Network in Omaha, Neb., Monday, May 5, 2014. The annual Berkshire Hathaway shareholders meeting concluded over the weekend. (AP Photo/Nati Harnik)

“Bitcoin is a sort of tulip. It’s an instrument of speculation but certainly not a currency and we don’t see it as a threat to central bank policy.”

Vitor Constancio, the former Vice President of the European Central Bank

And then on the other side you’ve got people from similar backgrounds promoting this new technology and standing behind it as firmly as they can:

“It’s bigger than the Iron Age, the Renaissance. It’s bigger than the Industrial Revolution.”

Tim Draper – Successful Venture Capitalist investor

“Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.” 

Nassim Taleb a Lebanese–American scholar and former trader and risk analyst

Why you should be interested in Cryptocurrencies

  1. Obviously they are a form of investment. So making money via cryptocurrencies is often the primary reason for why so many people get interested in them
  2. They are part of a new transformative set of technologies, which could fundamentally change big parts of the world forever. Being part of that should be exciting enough!
  3. They represent a shift where privacy, decentralisation and transparency are central to us as citizens, societies and how we interact with each other
Transparency word cloud

Are cryptocurrencies a smart investment?

So maybe one of the most important questions you could ask yourself after reading this guide and researching about cryptocurrencies is, are they a smart investment or not?

Well, as with any investment it is crucial for you to do your own research and truly understand what you’re investing in before throwing all your money in.

You should be more comfortable by now, knowing what cryptocurrencies are, and how they work. But you another important question you need to be able to answer is, are they worth investing in?

But this new emerging technology brings with it an exciting investment opportunity, and here’s why:

  1. Potential for really high returns – Cryptocurrencies have by far been the most rewarding investment option in recent times. Popular cryptocurrencies such as Bitcoin and Ethereum have increased over thousands of percent in value in just a few years.
  2. It is a market that never sleeps, similar to how the world works these days, cryptocurrency trading is a global phenomenon where you can trade instantly with people from all over the world with thousands of different cryptocurrencies
  3. It is still such a young and interesting space, where no one can really tell where it will all end up. But what we can tell is that some of the brightest people from the financial and tech world are all heading into the world of blockchain and cryptocurrencies. It’s like being at the heart of the digital age with the Internet and Smartphones being born again

If you are thinking about investing in cryptocurrencies, then you should familiarise yourself with how to invest in cryptocurrencies.

Our recommended exchanges to buy cryptocurrencies at

  1. Binance
  2. Coinbase
  3. OKEx
  4. Kucoin

It’s a bit trickier than perhaps other types of investments, but don’t worry we have created the perfect guide for you to get started here below.

It will give you our best and most popular tips, a rundown of the common mistakes to avoid and suggestions from the crypto community. Making your first cryptocurrency investments a bit smarter.

cryptocurrency exchange colour icon

The steps to invest in cryptocurrencies are essentially this though:

  1. Find a cryptocurrency that you want to invest in. Something that you believe in, maybe it is Bitcoin or something new and with great potential
  2. Decide on which cryptocurrency exchange to use for buying that cryptocurrency (we recommend Binance, Coinbase – get $10 free when signing up, Kucoin for beginners)
  3. Buy a secure wallet to store the new cryptocurrency that you bought
  4. Wait to see if your investment is rising in value and maybe take some profit – follow live prices for all cryptocurrencies here

Conclusion

We are glad that you read all the way to the end of this guide, now you should be much more knowledgeable about the topic of what a cryptocurrency is. And what a blockchain is.

Furthermore what are some interesting use cases for cryptocurrencies? And whether not investing in cryptocurrencies seems like the right choice for you.

If you ever are unsure about something then either leave a comment here below or get in touch with us here.

Other popular guides:

  1. The best way to invest in cryptocurrencies
  2. How to sell Bitcoin for cash
  3. How to invest in Bitcoin the beginner guide
  4. The top 9 crypto exchanges in 2019

Written by:

Per Englund – Founder of Go CryptoWise a cryptocurrency and tech fan that wants to see better and smarter products and services that make our lives better and easier

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