A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions and control new units of a particular cryptocurrency. Public and private keys are often used to transfer cryptocurrency between individuals. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled. As a counter-culture movement that is often connected to cypherpunks, cryptocurrency is essentially a fiat currency. This means users must reach a consensus about cryptocurrency’s value and use it as an exchange medium. However, because it is not tied to a particular country, its value is not controlled by a central bank. With Bitcoin, the leading functioning example of cryptocurrency, the value is determined by market supply and demand, meaning that it behaves much like precious metals, like silver and gold.
Cryptocurrency transactions are anonymous, untraceable and have created a niche for illegal transactions, such as human trafficking, drug trafficking, and black-market illegal weapons. Because the currency has no central repository, law enforcement and payment processors have no jurisdiction over bitcoin accounts. For cryptocurrency supporters, this anonymity is a primary strength of this technology, despite the potential for illegal abuse, as it enables a shift in power from institutions to individuals.
Crypto – is short for “cryptography,” and cryptography is computer technology used for security, hiding information, identities, and more.
Currency – means “money currently in use.”
It is a cryptographically encrypted currency. All cryptocurrency transactions are recorded on a public ledger system called ‘blockchain.’ Blockchain technology has multiple uses, out of which recording cryptocurrency transactions is one.
To prevent fraud and manipulation, every cryptocurrency user can simultaneously record and verify their own transactions and the transactions of everyone else. The digital transaction recordings are known as a “ledger,” and this ledger is publicly available to anyone. With this public ledger, transactions become efficient, permanent, secure, and transparent.
With public records, cryptocurrencies don’t require you to trust a bank to hold your money. They don’t require you to trust the person you are doing business with actually to pay you. Instead, you can actually see the money being sent, received, verified, and recorded by thousands of people. This system requires no trust. This unique positive quality is known as “trustless.”
Cryptocurrencies are the only type of currencies with the following three features:
- Ensuring pseudo-anonymity
- Independence from a central authority
- Double spending attack protection
Cryptocurrencies are considered decentralized digital currencies. The decentralization is achieved by the p2p architecture. Cryptography is used for decentralized confirmation of transactions. New cryptocurrency units are usually (but not always) put into circulation as a reward for using the computer’s computing power to solve complicated mathematics problems used by participants on the system to confirm new transactions among participants. The speed of issuing new money is defined for each cryptocurrency upon creation. Although the speed of issuing can be changed by consensus of the community, it happens very unlikely. e.g. Dogecoin (Borchgrevink, 2014).
Because of its lack of central authority, a cryptocurrency cannot be abolished or regulated by force; a cryptocurrency can only cease to exist by itself when users of the cryptocurrency lose confidence in it (e.g., technical attacks, hacks). Nevertheless, individual users of a cryptocurrency can voluntarily decide on regulating the transactions executed by them.