Cryptocurrencies are, in layman’s terms, digital money which can be used, often anonymously, to buy goods and services online. They are stored either on Bitcoin/cryptocurrency exchange websites or in digital wallets and can be withdrawn, deposited and transferred, as required, using cryptocurrency addresses. Whether funds are being stored in a wallet (hardware-based, software-based, or paper-based) or on an exchange site, all digital locations that house cryptocurrencies have a unique address. It is these which allow for the sending and receiving of funds.
Cryptocurrency addresses are unique strings of numbers and letters, with accompanying QR codes, that look something like this: rhCaG1ivJaYYLighGsx1U7WPb6MWhTDMF5 (see below for XRP address example)
These are fine to share publicly because they are used only as a reference to receive funds from another digital location. Sending coins simply requires users to log in in to their Bitcoin exchange site or digital wallet, type the destination address into the appropriate dialogue box, choose the currency and the amount they wish to send, and approve the transaction; it’s a very straightforward process which takes place on the blockchain (more on this later) but obviously varies slightly depending on which interface you’re using.
Technically speaking, cryptocurrencies are what are known as digital assets and they rely on cryptography for security; hence the name. FYI, cryptography is the art of writing or solving codes. Before getting into specifics regarding the various cryptocurrencies on the market and the differences between them, it is important to gain a basic understanding of the underlying technology which makes all this possible; this is called blockchain technology but is commonly referred to as simply ‘the blockchain’ (even though many different blockchains exist). Some currencies share the same blockchain but each currency only uses one specific blockchain; unsurprisingly, Bitcoin has its own.
So, what is blockchain technology?
Blockchain technology is essentially a digital method of keeping records and exchanging data in an open, decentralized and allegedly incorruptible manner. Think of a blockchain as an open ledger which records the transference of goods, services and of course currency. Described officially as a type of ‘distributed database’, the blockchain maintains a continuously growing list of records called ‘blocks’ (more on these later). Put simply, it’s an ever-expanding, ‘peer-to-peer’ digital record of every transaction which has ever taken place.
The advantage blockchain technology has over more traditional forms of ledgers, along with other methods of recordkeeping, is that it is completely transparent and, for all intents and purposes, pretty much autonomous. All parties contributing to the blockchain retain an up-to-date, synchronized version of the database (hence the name, distributed database), eliminating the possibly of corruption or fraud. Each transaction must be approved by usually five or six (unless otherwise specified for added security) ‘nodes’ (other participants or traders on the blockchain) to guarantee authenticity and to guard against duplicate transactions.
But, where do new coins come from? Well, in the case of Bitcoin, along with many other cryptocurrencies (not including Ripple), new coins must be mined. This involves many nodes (people who want to earn Bitcoin) using their computers (often vast setups of many linked computers – see images below) to solve complex algorithms – hence the ‘crypto’ in cryptocurrency.
The blockchain is simply a continuous chronological record of every transaction that has ever been successfully executed. It is constantly growing as completed ‘blocks’ (like pages in the ledger; the ledger being the blockchain itself), containing all the most recent transactions, are added to it with a new corresponding set of recordings.
Now, the number of Bitcoins generated per block discovered started at 50 back in 2009 when the system was first invented but has halved every 210,000 blocks (four years, roughly) since then. The system was designed this way to guard against super inflation which would occur if too many coins appeared too quickly as more began mining.
With Ripple, 100 billion XRP tokens were created; approximately 50 billion are in circulation, and Ripple has the rest. This is why Ripple is not seen as decentralized, in the truest sense of the word; the creators control the release of the tokens and retain the lion’s share of XRP (for the time being, at least).
Checks & Balances
Cryptocurrency creators modeled these virtual coins on finite natural resources such as oil, gold and diamonds – their value being largely attributed to their growing scarcity. The only notable difference between Bitcoin et al, and these finite, physical resources is that Bitcoins have no practical use – they can’t be burned for fuel or sold as jewellery, and yet they retain their value so long as people continue to ascribe a value to them. Most other altcoins on the market function similarly.
Bitcoin was the world’s first successful cryptocurrency. Invented in 2008 and launched in 2009 by an unknown developer or group of developers under the pseudonym Satoshi Nakamoto, Bitcoin was seen by many early adopters as a way of preserving the freedom and anonymity of the World Wide Web. Having said that, in the beginning, the coin was mainly used for novelty purchases, such as the now infamous purchase of a pair of Papa John’s pizzas using BTC.
Fast-forward eight years, though, and Bitcoin is the world’s number one cryptocurrency in both value and popularity. Indeed, with a market cap of approximately $70 billion USD and a circulating supply of roughly 16.5 million coins, Bitcoin dwarfs all competition considerably.
According to CoinMarketCap, Bitcoin still accounts for 46% of the entire cryptocurrency market, despite the recent onslaught of new altcoins. At time of writing, CoinDesk values one Bitcoin at $4,276 USD, up about 35% in August alone and still going strong.
Cryptocurrencies have been around for quite some time now and, as such, it has become increasingly difficult for traditional institutions such as banks and brokerage firms to dismiss them as a passing fad or worse, a bubble waiting to burst. Bitcoin was of course the first of these virtual coins to gain international attention and remains the largest with by far the strongest brand recognition.
However, many so-called ‘altcoins’, i.e., any coin other than Bitcoin, have, in 2017, experienced the kind of exponential growth that puts even the likes of Bitcoin to shame; Ethereum, Litecoin, and of course Ripple, for example, have all enjoyed fantastic gains in 2017. Success stories such as this have forced investors to take heed with many likening the current lucrative state of the cryptocurrency market to the Dotcom boom of the late 90s and early 2000s (although, hopefully a happier ending awaits us – or better still, no ending at all!).
Cryptocurrencies seem to grow in popularity with each passing week. Hardly a day goes by without one major news outlet or another running a story about Bitcoin, blockchain technology or some other up-and-coming altcoin or looming ICO (Initial Coin Offering). In fact, Netflix is currently screening a documentary about Bitcoin named ‘Banking on Bitcoin’ which is sure to raise the coin’s profile (and, by extension, the entire market’s) even more.
While most, it must be said, are yet to fully grasp the concept of cryptocurrency and the blockchain technology which underpins it, many will at least be familiar with the name Bitcoin – the original virtual coin and reigning market champion. The buzz surrounding cryptos is slowly but surely beginning to enter the mainstream; banks and governments, the world over, have given up fighting the disruptive market, which is valued at around $150 billion USD, and are instead busy masterminding schemes to get in on the action. And who can blame them?
With its manic highs, along with the occasional crushing low, it isn’t hard to see why a growing number of businesses, institutions and wide-eyed chancers have allowed themselves to be seduced by the lucrative call of the crypto.
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