What is cryptocurrency?
You've probably heard of Bitcoin and Ethereum before, but if you want to go a little deeper; What exactly is a cryptocurrency, and do cryptocurrencies really have any value?
A cryptocurrency can be described as digital currency built on blockchain technology.
Why are they called "crypto"-currencies?
The word "crypto" comes from using encryption to protect information and secure the network. Crypto means "hidden" or "secret" in ancient Greek, and cryptography is the science of principles and techniques for hiding information in various communication situations.
Encryption is basically an old method that involves changing information with a secret encryption key so that it can only be read by those who hold the key. You may have seen spy movies (such as "The imitation game" from 2014) where you try to decode secret messages? Encryption is used in many different contexts to protect information on the Internet - so that, among other things, your privacy and security are safeguarded.
If you take it back to crypto, for example, only you, who hold the key to your Bitcoin wallet, can access the contents of this.
The asset, which is always virtual, is thus secured with the techniques called cryptography. Cryptocurrencies then run on decentralized networks based on what is called blockchain technology. A blockchain is a kind of digital "accounting book", a socalled "digital ledger", that gathers all the information about the transactions to the network. Here you can register, track and make visible all digital transactions. A blockchain collects and stores data in blocks that are linked to each other. You regularly collect these transactions and "approve" that the information in them is correct, before proceeding. This is so that the information contained therein cannot be manipulated. Such a collection of transactions is considered a "block", and each new block is linked to the previous block. It is agreed that all approved blocks contain secure information.
This means, simply explained, that one can transfer money, ie cryptocurrency, to a recipient electronically, without going through a reliable third party, such as a bank.
We are talking about decentralization, and this is one of the most important characteristics of cryptocurrencies - that they are usually not governed by a central authority. This is a stark contrast to traditional currency, or fiat as it is also called, and means that cryptocurrency is theoretically immune to manipulation by, for example, the authorities.
The reason why it can be said that a cryptocurrency, such as Bitcoin, is decentralized is that the job of storing, managing and securing the information on the network is spread over participants all over the world. Then you can not influence the network by attacking one of the players, but you must in theory control the majority of the participants, all at the same time, to be able to control this.
The cryptocurrencies have then created economic models that make it unprofitable to try this. For example, by having to control an enormous amount of computing power to manipulate the Bitcoin network, and this will cost more than you can earn from carrying out an attack.
To learn more about how to trade crypto, read this article on how to buy cryptocurrency here.
Why can a cryptocurrency have value?
There are a bunch of myths and misconceptions about cryptocurrency, and one is that bitcoin is not a real currency with value. Cryptocurrency is, as I said, a virtual currency that can be exchanged electronically, but for a currency to be successful and have some value, it should have some specific characteristics:
- There must be a limit to how much of this currency exists. Too much money in circulation can lead to inflation and economic collapse. When bitcoin was launched in 2009, the developers decided that it would not be possible to extract more than 21 million bitcoin.
- It must be possible to divide the currency into smaller parts. This can be compared to, for example, cents or pennies. It must be possible to exchange parts of the currency into larger or smaller units, and it must be possible to buy all possible goods with the currency. In the same way that it is 100 øre in a Norwegian krone, so is 100,000,000 satoshi in a bitcoin.
- People must be able to use the currency, for example when trading. Bitcoin is decentralized, which means that people can spend money without needing a reliable third party, such as a bank, as an intermediary and that it can be used by anyone who has a bitcoin wallet.
- It should be easy to transfer currency from one person to another. Bitcoin can be easily transferred between people in minutes. This is done, for example, directly between wallets or at stock exchanges such as Firi.
- The currency must be durable and withstand a shock. Bitcoin can not be destroyed in the same way as, for example, a hundred note can be, since it is not a physical device. Still, it is possible to lose bitcoin if you do not have control over your passwords and keys.
- It is not affected by the ravages of time and can survive major societal upheavals, similar to gold. Thus, Bitcoin is suitable for storing value over time. National currencies, for example, are closely linked to a particular regime or a specific nation-state. History has shown countless times that such currencies can lose their value after political changes are made. For example, how much do you think Soviet rubles are worth today? Or what about Spanish pesetas? If not to mention russian rubles after the attack on Ukraine in 2022. Russian rubles has lost over 70% of its value!
- It should be difficult to counterfeit the currency. Bitcoin is virtually impossible to counterfeit due to the use of advanced cryptography and blockchain technology.
- Fiat money has an inflation that eats up some of the value every year. On the other hand, Bitcoin has a very low inflation that decreases over time and will stop completely on the day you have made 21,000,000 Bitcoin. Bitcoin meets all the above requirements, and can thus function as money, but not least, Bitcoin works to store value over time.
It is nevertheless worth noting that other cryptocurrencies may have similar characteristics, or different characteristics such as inflation. Some may even be deflationary. Namely that there will be fewer of them over time. One should keep in mind that not all cryptocurrencies work exactly like Bitcoin, and that not everyone has an inherent value other than people speculating in them. By learning more about crypto and blockchain, you will be able to more easily assess the individual cryptocurrency. Here at Firi, we are fortunately careful about which currencies we offer, and only list currencies from serious projects.
Here you can read more about why Norwegian crypto researchers believe that bitcoin has value.
The world's first cryptocurrency - Bitcoin
To understand what cryptocurrency is closer, we recommend starting to read about what bitcoin is. There have been other attempts at digital currencies, but Bitcoin was the world's first cryptocurrency based on blockchain technology. In short, bitcoin is a digital currency that can be stored and transferred directly to anyone, anywhere in the world, without going through third parties. This sounds almost exactly the same as the definition of cryptocurrency, and that is because Bitcoin has set the standard for this type of digital asset.
Both the Bitcoin network and the cryptocurrency bitcoin were revolutionary when the project was first described by the founder (s) Satoshi Nakamoto in a so-called white paper in 2008, and launched shortly afterwards. Today, Bitcoin has grown to become a worldwide financial network for safekeeping and payment, but we still do not know who Satoshi Nakamoto is.
Feel free to check out our article on the development of Bitcoin here. Did you know, for example, that the first time bitcoin was officially used as a means of payment was when a man from Florida bought two pizzas for 10,000 bitcoin in 2010? At today's value, this corresponds to billions of NOK! The day this happened has since become known as "Bitcoin Pizza Day" and a "meme" that is marked annually by many in the crypto community.
Other cryptocurrencies
Another term that is often used about cryptocurrencies is "programmable money", ie "programmable money", because you can program cryptocurrencies to do a number of things. There are countless cryptocurrencies today, and anyone who is not bitcoin is called altcoins. These can have different properties and characteristics, and are used for very different things. These can be, for example, blockchain-based variants of things found in traditional finance. They can be digital art (as in NFTs). They can be the "oil" that drives digital networks.
Ethereum is, for example, a decentralized network on which you can build other things. You can build apps using so-called "smart contracts" which are basically computer programs that live on the blockchain. These decentralized apps (dapps) will be able to perform functions from traditional industries such as loans, insurance, banking, gaming, secure data storage, digital identity, streaming and much more. What they have in common is that they are built with smart contracts and stored on the blockchain.
Some cryptocurrencies can be versions of pre-existing currencies such as dollars, pounds and the like, only that they are built on blockchain. We call these stablecoins (link to the stablecoins article)
Some cryptocurrencies can be compared to stocks, others can be compared to derivatives and other different securities. If you are well versed in finance, you will probably quickly recognize a number of concepts.
We hope you have a better understanding of what cryptocurrency is and will encourage you to read and learn more. Practice makes perfect, of course. You can read and learn more about the different cryptocurrencies Firi carries here:
What is Dai? And what is a stablecoin?