What is a cryptocurrency?
Now you know a little theory behind the why, the rest of the information in this report will be easier to digest. We will now take a look at what a cryptocurrency is, and what role they fill in the real world.
What actually is a cryptocurrency?
Cryptocurrency is a contraction of two words, cryptography and currency.
Cryptography is defined as the art of writing or solving codes.
If you ever created secret messages as a child using a code wheel or made up your own code, you were using cryptography. You may have heard of Alan Turing and the code-breakers at Bletchley Park who created the Enigma machine to crack secret messages sent by the Nazis during WWII and gain an advantage in key battles. If you’ve ever used internet banking or credit cards online, cryptography is used to secure your information.
No doubt you already know what currency is, and a cryptocurrency is in most cases a digital, virtual currency which uses cryptography to secure transactions.
The big players (Bitcoin and friends)
Of all the crypto coins and tokens available, some get most of the attention and publicity. Of course, Bitcoin has the advantage of being the first and most widely adopted: other coins were created to address opportunities that their developers felt were missing from the Bitcoin platform.
Here is a quick description of six of the most talked about coins.
Bitcoin – This is the original cryptocurrency created by Satoshi Nakamoto. Being the first, it is the most widely adopted and is the cryptocurrency that gets most of the publicity on news channels. Bitcoin is open source, meaning that the code is available to all – this allows developers to suggest improvements. If the community accept the improvements, they get added to the code base and Bitcoin evolves.
Bitcoin Cash – Created in August 2017, Bitcoin Cash is a fork of the original Bitcoin protocol. Some developers believed that improvements could be made to the way Bitcoin handles transactions, for example increasing the block size to speed up transaction times and decrease delays. Changes to the original Bitcoin code require consensus from the other developers, consensus has not been reached on this increased block size so an alternative code base and blockchain were created, this alternative is called a ‘fork’ because it goes in a new direction.
Bitcoin Gold – Created in October 2017, Bitcoin Gold is another fork of the original Bitcoin protocol. It is seen as a competitor to Bitcoin Cash and uses a different mining method that makes it more difficult for larger commercial miners to mine the cryptocurrency using ASICs – Bitcoin Gold’s developers want to make it more profitable for users to mine using their home based PCs in the way they could in the early days of Bitcoin.
Ethereum – Ethereum was created by Vitalik Buterin, co-founder of Bitcoin Magazine. He saw an opportunity to take blockchain technology beyond online payments and created a platform that allowed developers to create other decentralised applications. In a little over 2 years, Ethereum has grown to become the second largest cryptocurrency behind Bitcoin. Once Bitcoin mining became unprofitable for the casual miner, Ethereum became the next big mining opportunity which led to it getting a lot of press and attention on the internet.
Ripple – While Bitcoin and most other cryptocurrencies release their coins and tokens over time by being mined, Ripple’s currency does not get mined – all the coins were created first, with some of them released into circulation and the rest being owned by Ripple itself. Like Bitcoin, Ripple uses blockchain technology, however transaction times are much shorter than Bitcoin’s because mining isn’t a requirement for verifying and adding transactions to the blockchain. Many financial institutions have an interest in Ripple as it is a more centralised blockchain. As Ripple is a centralised crypto mainly for use by banks many core crypto enthusiasts don’t consider it a ‘proper’ crypto, but as we all know the banks will definitely want their skin in the crypto game, Ripple stands a good chance of lasting over the longer term.
Litecoin – Litecoin is another Bitcoin fork which many people consider to be the silver to Bitcoin’s gold. While Bitcoin blocks are mined at the rate of one every ten minutes, Litecoin is mined every 2.5 minutes. The Bitcoin protocol allows 21 million Bitcoin to be mined into existence, with Litecoin, this number is increased to 84 million. Litecoin serves as a great test network for changes that could be applied to Bitcoin and so serves a useful purpose apart from for its own sake.
The smaller players (some other altcoins)
There are more than a thousand coins and tokens available, with new ones being launched all the time – here is a list of some of them:
IXC – Ixcoin
LSK – Lisk
OMG – OmiseGo
Doge – Dogecoin
ZCL – Zclassic
ETC – Ethereum Classic
WTC – Walton Chain
DIG – Dig Coin
NMC – Namecoin
ADA – Cardano
XMR – Monero
SIA – SiaCoin
XVG – Verge
BNB – Binance Coin
BAT – Basic Attention Token
DBET – DecentBet
FUN – Funfair
EMC2 – Einsteinium
ENJ – Enjin Coin
OK – OKCash
Some of these coins were created to be mined by ASICs, while some are specifically created to be mined by individuals from their home computers using the processing power of their graphics card (GPU).
A word of caution…
Once you’ve spent any time on the cryptocurrency scene you will quickly find that in some respects altcoins are like football teams – each one has its supporters and fanatics. This means that almost no matter what the actual utility or technology an altcoin has behind it, there will be some fanatical people running around the forums and on social media hyping it up, saying “it’s going to the moon, jump on board now so you don’t miss out”, “this coin is the next Bitcoin but better”, “Mr X is advising this team so they’ll definitely 100x their price this year” etc.
When this happens, you will see altcoins that have very flimsy propositions getting way more money thrown at them than they otherwise would, as misinformation and fanatical supporters lead others to believe that ‘this one is special’. This means that people who are new to crypto are jumping in and buying things they don’t understand on the basis that they heard someone say ‘it was a sure thing to get crazy price increases this year’.
With this kind of mania in the industry, it causes the general crypto information noise floor to be raised and due to this some of the crypto marketers feel they have to set increased expectations about what their coin will do and when.
For this reason, it is very important that you become comfortable doing your own research so you can see for yourself whether there is something behind the chatter. This will tell you whether a particular cryptocurrency is a solid long-term proposition, with a good team and a solid community of people that believe in it who won’t bail out on the coin if/when the price drops.
There are more than a thousand crypto coins, far too many for most of them to be long-term successes. While the rising tide of Bitcoin has carried many altcoins up, when the tide turns, the main factors that determine whether a coin will last will be the vision and strength of the team behind it and the reality of the coin’s value.
If you look at Bitcoin and Ethereum, the current top two coins, you will see that neither are making as much noise about all the work they are doing, but both have a huge community of people that really believe in their long-term value and purpose.
In short, expect there to be a lot of hype surrounding altcoins – many people look at what happened in 2017 with the huge price increases of Bitcoin and assume the same will happen in future with other smaller coins.
I’ve lost count of the number of people who have told me “there is nothing backing Bitcoin and therefore it has no ‘real’ value, so any current price is a bubble”. I completely understand the confusion, many of those people have heard those concerns elsewhere and are simply repeating what they’ve learned.
There is no company behind Bitcoin. The creator released the code and plan for Bitcoin into the world as open source, this means that anyone can see, copy and develop the code further, which is exactly what has happened since its inception.
Instead of a company that controls it, there is a community of developers, miners and investors who make up the system and for changes to the system to occur they must reach a consensus (agreement) before they can make them. This was always the plan behind Bitcoin – Satoshi Nakamoto wanted to create a community-driven system with no central control so no bank, company or government could take control away from the community.
This anonymous, distributed, censorship-resistant technology has been around for many years, gathering a large group of core developers and a loyal community. As time passes, the system evolves, improves and becomes more robust, more secure and harder to attack. With this comes value.
Network effect is another driver of the value of a cryptocurrency. The more people who get Bitcoin, the more value it has. Just like buying the first mobile phone – every new mobile phone owner and user makes the earlier one(s) more useful and therefore valuable. So as more people buy into the idea of Bitcoin, more people will accept it as payment, more people will invest in it and develop for it – as the network grows, the value grows with it.
Bitcoin is seen as the standard for a solid/safe store of value due to the security of its blockchain, its limited supply, its long term stability and its decentralisation. Other cryptocurrencies use different models and different consensus schemes, some have extra features or scalability, but are less secure and less distributed. As these other cryptocurrencies adapt and evolve, their adoption may increase along with their perceived value.
When you start watching the prices of cryptocurrencies, you will see some generic things that affect price – such as being newly listed on a popular exchange. When a cryptocurrency is newly listed on an exchange, the potential audience increases – in turn, some of those will be able to access the digital currency more easily and may invest in it: this influences the price.