What is cryptocurrency?

physical representation of bitcoins resting on a steel chain

If you have followed any news lately, whether it be online, tv, or print, you have heard of cryptocurrencies. While many of us still don't use cryptocurrencies, or even fully understand what they are, more and more businesses, and even countries, are starting to utilize them. In fact, in June of this year, El Salvador became the first country to make Bitcoin a legal tender, with Cuba following suit a few months later. Cryptocurrencies, such as Bitcoin, Ethereum, and Dogecoin, are digital currencies that use cryptography to keep online transactions secure. As of April 2021, Sofi reports that there are over 10,000 different types of cryptocurrencies being used.

The first semblance of a cryptocurrency was conceived in 1983 by David Chaum, which he called ecash. In 1995, he used his initial idea to create Digicash. Digicash was a cryptographic electronic payment system which used software to designate encrypted keys for making transactions from a bank, making the digital currency virtually untraceable. In 1998, a computer engineer named Wei Dan published his idea for "b-money", which he described as an anonymous, distributed electronic cash system. The biggest advancements in cryptocurrencies though came in 2009, when the most popular and well known cryptocurrency, Bitcoin, was created by a person or group of people using the pseudonym Satoshi Nakamoto, which was introduced in a paper titled, "Bitcoin: A Peer-to-Peer Electronic Cash System".

Cryptocurrencies utilize blockchain technology and cryptography to make transactions nearly impossible to forge. Blockchains are an ever-growing list of records of transactions, which are called blocks, that are all secured with cryptography and distributed across many decentralized computers. This essentially creates a unchangeable record of all transactions, making forgery of transactions almost impossible. Not only are transactions more secure, they are also more anonymous. Rather than storing your funds within a typical bank, users of cryptocurrencies have a "wallet" for their funds, which is not tied to themselves, but to a private "key". This means that while all transactions are available publicly, which is what keeps cryptocurrencies so secure, the owners are not identifiable, therefore keeping your transactions anonymous.

These days to obtain cryptocurrency most people will make an account with a cryptocurrency exchange online such as Binance, Coinbase, or Kraken. On these exchanges, buyers and sellers can exchange standard currencies for cryptocurrencies. While it is that simple today, and it is so because of the appeal of potentially earning more money on the fluctuating value of cryptocurrencies, it was not always so. The way that cryptocurrencies are created is almost like real money. Real money is often backed by the value of gold, which has been mined. Cryptocurrencies are no different. Each unit of cryptocurrency is created when your computer does the work of validating other transactions, which is what keeps the transactions secure, and you are rewarded with the cryptocurrency. This is called "mining". In the early days of cryptocurrency mining, the value of these currencies such as Bitcoin, was much less, as everyone could compete for their share. Now though, with many more people mining for bitcoins, it is not so simple. The value of bitcoins comes from how difficult it has now become due to the price increase of computer technology required to mine. It has become almost impossible for the average user to mine for their own bitcoins, as there are now entire mining operations that utilize the best technology to mine for cryptocurrencies more efficiently. Just like the mining of gold, when everyone could obtain it and the mines were full, it was less valuable, but as it became more rare and less miners had the ability to mine for it, the value rose higher.

While there are many benefits to using cryptocurrency like anonymity, security, and less banking fees, there are also a few risks associated with using such a new form of currency. First and foremost, while cryptocurrencies are legal, the IRS does not consider them to be a form of money, but a financial asset or property. That means if you earn money with your bitcoin investments, you will have to pay taxes for it. Not only can you lose money in the form of owing taxes, the value of these currencies is simply very volatile. In December of 2017, bitcoins were valued at nearly $18,000, but in just a few months time the value had dropped to less than $8,000. While most of us don't want to take the risk of losing such a large investment to purchase bitcoins or other cryptocurrencies, and most of us don't have the resources to obtain cryptocurrencies from mining anymore, it still seems that they are here to stay. In October of 2020, Paypal, which if considered an actual bank would be the 21st largest bank in the world, gave users the ability to buy and sell bitcoins with their Paypal accounts, and today, bitcoins are valued at nearly $47,000. With that accessibility and, though it comes with risks, that potential for earnings, it is obvious that people will continue to consider cryptocurrencies in their future.

bitcoin mining