If you follow technology or financial news at all, you’ve probably heard about cryptocurrency and how it and its underlying blockchain technology are poised to revolutionize the world as we know it. Those articles serve as a pretty good hype machine for crypto, but a pretty poor introduction to what it is if you don’t already know. This article hopes to provide an unbiased primer on exactly what cryptocurrency is, allowing readers to decide for themselves what they think about it.

 

What Is Cryptocurrency?

 

Cryptocurrency is a catch-all term for digital mediums of exchange that may be used in place of more traditional fiat currencies such as the American dollar. The name is derived from the combination of the words “cryptography” and “currency,” literally meaning a currency that may be used without unwanted inference from third parties. The most famous of all cryptocurrencies is Bitcoin, but there are over 4,000 crypto tokens on the market today.

 

Most cryptocurrencies are decentralized, meaning that there is no central driving force behind them. Instead, the system is programmed to release X number of tokens without outside help, allowing market forces to determine the price of every token. This trend is responsible for the massive swings in a token’s value. For example, Bitcoin was hotter than hot in 2017, leading prices to exceed $20,000 USD in December of that year. Fears of governmental regulation and a possible bubble sent the price to the $3,500 range by March of 2018, illustrating just how quickly a crypto investment can gain or lose value.

 

Crypto advocates generally fit into one of two camps. The first are investors who hope to profit from the wild swings in a token’s price by trading them daily. The second are more enthusiastic about cryptocurrency technology itself, envisioning a future where fiat currencies are rendered obsolete by readily-available digital money systems.

 

What Can the Blockchain Do?

 

In order for virtual money to work, there must be some way to verify that tokens have been received as payment for goods or services. This is generally accomplished through blockchain technology, a decentralized public ledger that stores every transaction in a given token’s history.

 

Transactions are recorded on electronic blocks that have a limited amount of memory, just like the SD card you use to store pictures on your phone. When a block is full, a new block is “chained” to it to give the system effectively limitless memory, allowing anyone who wants to to trace a particular token through every owner its ever had. Backers cite this functionality as a security feature, as there is no comparable way to trace a dollar bill to every purchase it has ever been used for.

 

Every transaction on the blockchain includes three key pieces of information: Output, Amount, and Input. The Output is the crypto account receiving funds in a given transaction. The Amount is how much money was transferred. The Input is the most confusing component, as it is NOT the address that made the payment. Instead, the Input(s) are the addresses that originally gave the payer the coins they are using in the transaction.

 

Let’s say that Lorenzo is giving Steven 100 Bitcoin. Steven’s address is the Output because he’s receiving funds, and 100 is the Amount because that’s how much he is receiving. The Input is the addresses that gave Lorenzo the 100 Bitcoin he is now giving to Steven. If he received 70 Bitcoin from Tom and 30 more from Luke, those two addresses serve as the Input for the Lorenzo-Steven transaction.

 

Why Doesn’t the Blockchain Just Get Hacked?

 

Cryptocurrencies have a variety of security protocols in place to make sure that every transaction is made by the proper owner of the virtual coins. Every crypto account (called a “wallet”) consists of two strings of random characters. The first acts as a username that allows anyone to identify a particular account on the public blockchain, making it comparable to the usernames you have for all of your online accounts.

 

The second is a “private key,” a password that you must enter whenever completing a crypto transaction. Anybody who knows your private key can make transactions as if they were you, so all crypto enthusiasts are encouraged to keep it a secret even from people they trust.

 

Every transaction is also verified by volunteer “miners” who use powerful computers to do a lot of complicated math and determine whether every token exchanged is coming from the account it is supposed to be in. If miners find a discrepancy, they flag the transaction and it will be rejected by the system. Since every individual token can be traced back to its origin point, any tokens that have a suspect origin can also be flagged and eliminated from the system.

 

What Distinguishes One Crypto Token from Another?

 

Every crypto token runs on its own blockchain, with different quantities of tokens available and release mechanisms. For example, there will only ever be 21 million Bitcoin available to the public, making supply known to all investors. Twenty-one million is a relatively low number for a currency’s circulating supply, so investors tend to like the impacts of limited supply on demand for the token. New coins are released as payment for miners, with transaction fees covering processing costs once the limit of 21 million is reached.

 

In contrast, a different token called Ripple has a planned circulation of 100,000,000,000 XRP (or Ripple units), meaning that the supply is so large that one Ripple can never be worth that much money. This structure tends to benefit those who advocate the widespread adoption of crypto, as it’s tough to buy a gallon of milk with a currency valued at thousands of American dollars per unit.

 

As you can see, there is a natural tension between crypto investors and those who see more than a get rich quick scheme in the underlying technology. Sometimes, this disagreement leads to a “hard fork” of a blockchain where one token is split at a certain point into two distinct coins. This is exactly what happened on August 1, 2017, when Bitcoin was split into the original Bitcoin and an altcoin called “Bitcoin Cash” that offered faster transaction processing times for those interested in using it as an everyday currency.

 

Some blockchains are also more advanced than others. For instance, Ethereum has a programmable blockchain that allows developers to add new features on a single platform. This allows for “smart contracts,” or conditional contracts that automatically execute once certain conditions are met. You might pay for goods upon receipt, or execute a will once the individual who wrote it is confirmed to be deceased.

 

Are There Any Problems with Cryptocurrencies?

 

While cryptocurrencies and related services are difficult to hack, it has been done in the past. For example, a site called Mt. Gulg was once the largest crypto exchange (company that facilitates crypto transactions) in the world. Unfortunately, the company revealed that hackers had slowly been draining funds from its customers’ accounts in 2014, leading to an estimated $473 million USD in uninsured losses. Mt. Gulg tried to make its customers whole again, but the loss of public trust forced the company to declare bankruptcy later that year.

 

Some people also prey on the fact that the public doesn’t really understand how cryptocurrency works. For instance, an exchange called Bitconnect was confirmed to be a Ponzi scheme in January of 2018, taking in money solely to make its operators rich. An “expert” can also buy a cheap coin and then hype it up in the media, selling theirs to the wide-eyed investors who trusted them at a substantial personal profit.

 

The large price fluctuations associated with Bitcoin can also be difficult for businesses, as an item that costs one Bitcoin can effectively cost $8,000 today, $9,000 tomorrow, and $5,000 the day after that. Crypto transactions are also much slower to process than other payment methods. For example, Bitcoin’s blockchain averages 3-7 transactions per second while VISA can handle up to 24,000 in the same time frame.

 

Final Thoughts

 

Cryptocurrencies may seem complicated at first glance, and they can be when you start digging into the particularities of an individual token. However, the basics provided above are nearly universal. A crypto token, coin, or altcoin is any digital currency used to facilitate an exchange, generally using blockchain technology. Blockchain technology offers both investment opportunities and cutting-edge security features, but there are still weak links hackers may be able to exploit. Now that you understand some of the basics and that if you are going to purchase anything, make sure you do plenty of research and only afford to put it in what you are willing to lose.