What Is a Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
Key Points About Cryptocurrency:
- A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
- The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
- Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.
- Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
- Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.
Explained in simple words:
A cryptocurrency is a type of currency which uses digital files as money. Usually, the files are created using the same methods as cryptography (the science of hiding information). Digital signatures can be used to keep the transactions secure, and let other people check that the transactions are real. The first cryptocurrencies were made to be independent of government-issued currencies.
Cryptocurrencies use ‘decentralized control’, which means that they aren’t controlled by one person or government. This is different to ‘centralized’ electronic money and central banks. The control of each cryptocurrency works through a distributed ledger (a list of transactions shared by everyone), usually a blockchain, that serves as a public financial transaction database. Bitcoin, first released as open-source software in 2009, is often called the first decentralized cryptocurrency. Since then, over 4,000 cryptocurrencies (sometimes called ‘altcoins’, which is short for alternative coins) have been created.
You can now buy a Tesla with Bitcoin— Elon Musk (@elonmusk) March 24, 2021
According to Jan Lansky (HOD, The University of Finance and Administration), a cryptocurrency is a system that meets six conditions:
- The system does not require a central authority, distributed achieve consensus on its state.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines if new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the how to create new units, and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The owner of a unit of cryptocurrency can transfer this unit. For this transfer to be successful, the current owner must prove the ownership.
- If two different instructions for changing the ownership of the same cryptographic units are entered at the same time, the system performs at most one of them.