What is Cryptocurrency?
Cryptocurrency is a type of digital currency created through code, operating autonomously outside the scope of traditional banking and government systems. As the name suggests, cryptocurrencies use cryptographic technology to ensure transaction security and regulate the creation of additional units, with Bitcoin being the most original and well-known cryptocurrency to date, created by Satoshi Nakamoto and launched in January 2009.
Even today, whether Satoshi Nakamoto refers to an individual or a group remains unknown. Bitcoin is considered the first decentralized cryptocurrency. Like all cryptocurrencies, it is controlled through a blockchain transaction database, which serves as a distributed public ledger. As of today, there are over 1,000 cryptocurrencies available for online trading.
Cryptocurrencies differ significantly from traditional fiat currencies. Nonetheless, they can be bought and sold like any other financial asset, and you can now also trade the price movements of various cryptocurrencies through contracts for difference (CFDs).
Cryptocurrencies fall into the categories of digital currencies, alternative currencies, and virtual currencies. They were originally created to provide a new payment method for online transactions. However, cryptocurrencies have not yet been widely accepted by businesses and consumers, and their significant price volatility currently makes them unsuitable as a means of payment.
As a decentralized currency, its development is not subject to excessive government constraints or influence, with the cryptocurrency economy monitored by peer-to-peer internet protocols. Each unit of cryptocurrency is encoded to represent a unit of encrypted data.
A common characteristic of most cryptocurrencies is their slow and scarce production process, resulting in a limited number of circulating currency units. This gives cryptocurrencies the same scarcity properties as commodities like gold and other precious metals.
For example, the number of bitcoins is expected not to exceed 21 million. On the other hand, cryptocurrencies like Ether operate slightly differently. The issuance limit is 18 million Ether per year, equivalent to 25% of the initial supply. Thus, while the absolute supply is fixed, the relative inflation rate decreases annually.
The limited quantity of Bitcoin gives it “scarcity,” which in turn gives it value. Some have even claimed that the creator of Bitcoin essentially mimicked precious metals by creating cryptocurrency. Therefore, mining becomes more difficult over time as mining rewards halve every few years until they reach zero.
Key Features of Cryptocurrency
Decentralization
All data information of cryptocurrencies is distributed across all computing networks, rather than being recorded on a single or a few computers. The storage method of cryptocurrency information is no longer a single or a few servers, but the entire computing network.
The advantage of decentralization lies in the difficulty of tampering with information and the high level of confidentiality. To modify data information related to cryptocurrency, one would need to gain the consent of at least 51% of the computers in the corresponding computing network.
Unregulated
In the cryptocurrency market, regulatory authorities can only see and estimate the approximate market stock of currency, without being able to see the flow of funds settlement and regulate it as regulatory authorities in traditional financial markets can do. This feature makes cryptocurrency transactions relatively safe and confidential.
Cross-platform, Open Sharing
In the world of blockchain, many related technologies are open source, and cryptocurrencies can be transferred between any platforms without platform restrictions. There are no third-party platform fees or restrictions imposed during the transaction process, significantly reducing the transaction costs of cryptocurrencies.
Main Technologies and Principles in Cryptocurrency
Encryption Technology
Cryptocurrencies use advanced encryption technology in various ways. Cryptography evolved from the need for secure communication methods during World War II, aiming to transform readable information into encrypted code. Today’s cryptography has undergone a considerable period of development and is primarily based on computer science and mathematical theory in today’s digital world, while also drawing on communication science, physics, and electronic engineering.
Two main elements of cryptography apply to cryptocurrencies – hash algorithms and digital signatures:
- Hash algorithms: Verify data integrity, maintain blockchain structure, and encode account addresses and transactions of individuals. It also generates cryptographic puzzles, making block mining possible.
- Digital signatures: Allow individuals to prove they own a piece of encrypted information without revealing it. In cryptocurrencies, this technology is used to sign currency transactions. It proves to the network that the account owner has agreed to the transaction.
Blockchain Technology
Blockchain is a decentralized public ledger or list of cryptocurrency transactions. Completed blocks consist of the latest transactions and are recorded and added to the blockchain. They are stored as open, permanent, and verifiable records in chronological order.
Market participants manage the blockchain through a peer-to-peer network and must follow the set protocol for validating new blocks. Every “node” or computer connected to the network automatically downloads a copy of the blockchain. This allows everyone to track transactions without the need for central record-keeping.
Blockchain technology creates a record that cannot be changed without the consent of the rest of the blockchain. The concept of blockchain is credited to Bitcoin’s founder, Satoshi Nakamoto, inspiring a series of other applications beyond digital cash and currency.
Blockchain Mining
Blockchain mining is the process of adding new transaction records as blocks to the blockchain. This process generates new cryptocurrencies while increasing the total number of tokens in circulation.
Mining requires specific software to solve mathematical problems, and the result, verified legitimate transactions, becomes a block. These blocks are added to the public ledger (blockchain) approximately every 10 minutes.
When the software solves transactions, miners receive a certain amount of Bitcoin. The faster the miner’s hardware processes mathematical problems, the greater the likelihood of verifying transactions and receiving Bitcoin rewards.
Main Cryptocurrencies in the Current Market
Bitcoin (BTC)
Bitcoin is considered the most original and famous cryptocurrency. It was created by an individual or group named Satoshi Nakamoto in 2009. It can be said that its characteristics resemble more of a commodity than a traditional currency. This is reflected in its current use more as an investment form than as a means of payment.
As of May 2024, there are approximately 19.59 million bitcoins in circulation. Traders can purchase bitcoins through exchanges or speculate on their price movements through contracts for difference (CFDs).
Ethereum (ETH)
Ethereum is relatively new in the cryptocurrency field. It was launched in 2015 and has become the second-largest digital currency to date. Its operation is similar to the Bitcoin network, allowing people to send and receive tokens representing value on an open network.
The token, called Ether, is used as payment on the network. However, Ether’s primary purpose is as a smart contract rather than a means of payment. Smart contracts are code scripts that can be deployed in the Ethereum blockchain. The limitations on Ether are also slightly different from Bitcoin. The issuance limit is 18 million Ether per year, equivalent to 25% of the initial supply. Therefore, while the absolute supply is fixed, the relative inflation rate decreases annually.
Cryptocurrency Exchanges
Cryptocurrency exchanges, as the name suggests, are places where various cryptocurrencies are bought, sold, and exchanged. Typically, cryptocurrency exchanges are websites that allow trading of different types of cryptocurrencies, with prices set based on the popularity of different types of cryptocurrencies and market conditions, and charge a certain percentage of fees.
Moreover, in addition to basic cryptocurrency trading, some exchanges also provide other types of services. According to statistics, the top three cryptocurrency exchanges in the world are Binance, Coinbase, and ByBit.
Operation Principles of Cryptocurrency Exchanges
The profit of the exchange mainly comes from charging transaction fees during the trading process, and the fee rates generated by the exchange between different types of cryptocurrencies also vary. In some exchanges, it is even possible to use fiat currency to purchase cryptocurrencies or exchange cryptocurrencies for corresponding fiat currency.
Each exchange holds a list consisting of cryptocurrencies and tokens and generates an address to prepare digital assets for customers of the exchange. Due to the decentralized nature of cryptocurrencies, differences in cryptocurrency prices across different exchanges occur, providing some investors with arbitrage opportunities to exploit price differences in cryptocurrencies across different exchanges.
Bottom Line
A fitting description of Bitcoin and other cryptocurrencies is potential currencies. As mentioned above, they have not been widely accepted as a medium of exchange to date. They have clear limitations that prevent them from developing into fully mature currencies.
There are also questions about whether cryptocurrencies are merely part of a financial bubble. However, while unlikely, it is possible that they may become more widely used as a medium of exchange in the future. The potential uses of blockchain technology behind cryptocurrencies are also an interesting question. This technology may be used for other purposes, including legitimate transactions, secure plans, and voting systems.
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