Cryptocurrency, or cryptos, is a decentralized peer-to-peer digital form of monetary exchange. In that sense, it serves as cash where you can pay it to whoever accepts it in exchange for their goods or service. You can also exchange it for another cryptocurrency, or another currency called fiats.
Cryptocurrency is a name derived from two terms; one mathematical, and the other financial. Cryptology is the reference made to codes and ciphers that are virtually impenetrable. It is the stuff of spy films and intrigue. But really, it is about math. There are certain concepts in math that make cryptography a complex science. In essence, it is about coding something for transmission that cannot be deciphered if and when intercepted, nor can it be altered or mimicked. It is almost like a thumbprint of the element or message or underlying content that it is carrying.
Cryptography exists in many forms. If you are using a computer that communicates online in a secure way, the message is encrypted so that only the person transmitting and the person receiving know the necessary code to decipher the transmitted content. The encryption uses cryptography to make sure of that.
The second part of the term is currency. Currency has just come to mean the concept of exchange that is fungible. That means you can exchange it for anything. You can buy a car with it one day, and tomorrow make a donation. The use across almost every area of human living makes the currency the most efficient way to conduct transactions. Although people still transact in the barter system where one set of goods is exchanged for another, they inevitably come back to using the value of that transaction in currency. So currency, aside from the convenience of being printed on paper that can be carried or stored as a value in a debit or credit card, has the ability to be an assignment of a value for anything from cars to bridges, and services to ice cream.
When you put them together, what you get is a system that uses cryptography to encapsulate a transaction and give it a value. By encapsulating it and giving it a value, it can be widely distributed for consumption and it makes the effort to sell it or buy it much easier. But in the execution of this fact, the old model of currency has been found lacking in that the value of that currency could be manipulated by governments.
What could buy one ream of paper today, may only be able to buy half a ream tomorrow because the government that is issuing the currency has decided to print more money and thereby dilute the value. One of the things we needed was a way that no single authority could manipulate the currencies of the world and thereby keep things stable and totally based on market forces of supply and demand.
In today’s currency market there are arbitrary pegs and moves to keep a certain currency at artificial levels. There are monetary and fiscal policies of one country that could affect someone two continents away. Decentralized currencies that are used to transact business all over the world do not have that drawback. Something like a bitcoin cannot be printed, nor can the circulation be increased just because some government needs to do so.
That is another feature of the cryptocurrency based on the guidelines and practices set by the founder and creators of Bitcoin (we still are not entirely sure who that is); it was designed so that it cannot be increased beyond a certain number in circulation.
Think about that for a minute. You have a currency that is never going to increase the number of coins in circulation. The only thing that can happen to it is that it is broken up into small fractions of itself. So if 1 BTC today is at $58,000, then 0.1 BTC would be $5800. This has two effects. The first is that no one can manipulate the BTC and change the value adversely by pumping in more BTC. The second is that the demand for BTC will eventually exceed the supply, and that would mean that BTC itself would be valued consecutively higher in time and be fractioned lower and lower.
So for instance, we could end up breaking 1 BTC, into a thousand fractions and that would mean that each fraction would consequently be valued at $58. This sounds a lot like a stock split. And that is exactly what it is when you think about it. The underlying asset can change in price to reflect the new reality at that point. At the moment, the smallest fraction, or unit, of Bitcoin ever transacted is for 100,000,000th of a BTC or 0.00000001 BTC. In equivalent dollar value at an exchange rate of $58,000, that works out to be .058 cents.
But the benefit you may realize is then lost because fractionating the currency is the same as printing more money. It actually is not. Printing more money is a decision made by a sovereign. The price of BTC is totally market-driven. If the market gets large enough, it is not possible to sway it unless there is a concerted, global effort to sway the market.
All these factors make cryptocurrencies and the likes of Bitcoin perfect assets for speculative trading. The speculative trading market, whether it is for FX or cryptocurrency, is a mutually beneficial situation, for the main reason we highlighted earlier. Speculative players give the market the liquidity it needs to function as a sound base, while also giving transactional uses the liquidity they need.
Without a central authority and the force of law to safeguard the transactions, things come across as unsafe and risky. But that is exactly what Satoshi was thinking of when he designed the currency. Without the interference of agencies and central banks, as well as treasury departments that are typically held to political vagrancies, the Bitcoin market is undeterred by short-term and shortsighted manipulation.
This brings to question the records that need to be kept. There is no need for trust, and of course, the trust that is typically handed to public officials to do the right thing is usually enforced by law. But all those effects come after the crime when it’s too late. So the Bitcoin system does not include trust as part of the system. Instead, it is all driven by records. The records of each transaction, from the first block of BTC to the last one traded a few minutes ago, are all preserved.
Where is it preserved? Each transaction of each bitcoin is stored on every node. A node is every computer that connects to the BTC network. It follows the P2P concept. In the P2P system (the peer-to-peer system), everyone who is on the network or using the service forms part of the group. In this case, every single node is a computer that is logged on to the system. On each computer, there is a client loaded and that opens a channel to the network making that computer a node.
The node also has the ability to store transaction information. Each and every transaction that is conducted leaves a record that is recorded in each node within a ledger. So there isn’t a single repository of ledger information; there are hundreds and thousands stored across millions of computers worldwide. Erasing this ledger is simply not viable, and this record of every transaction is kept, which gives legitimacy to each and every subsequent transaction. That’s because the record cannot be forged, unlike fiat currency. And it can’t be printed to dilute the value.
The core of the cryptocurrency is the nodes that are within the system and the blockchain that keeps the ledger. It is what we call a distributed system, rather than a centralized system that the governments use to store value and manipulate it. This also makes it difficult for those who are speculating on currencies to get a good handle on the true value of the currency. It indeed increases the various dimensions of risk. That same risk is not present with cryptocurrencies.
So, here are some of the features of the cryptocurrency ecosystem you should know :
- Individual coins that cannot be created
- No centralized record of the coin
- Distributed functionality
- Market-driven
- Can’t be counterfeited
- Easily transmittable
- No records of transactions
