The Basics: What is Cryptocurrency?

This article will cover the following:

-The three key components of cryptocurrency: decentralisation, blockchain, and cryptography.

-What a cryptocurrency does.

-The key characteristics of a cryptocurrency.

Bitcoin gold coin in galaxy with stars and nebula

Crypto: The Dawn of a New Economy

In 2009, an anonymous individual going by the alias “Satoshi Nakamoto” released the world’s first decentralised electronic cash, to be used as a medium of exchange away from government or institutional control.

This anomalous virtual money would go on to essentially act as the world’s first universal currency. Before we get onto what a cryptocurrency actually is, It is important to understand what it means to be decentralised.

Decentralised vs centralised vs distributed inforgraphic

What is decentralisation?

Decentralisation is an organisational structure in which control, maintenance, and delegation of a network is managed not by a central party, but instead from peer to peer interaction. An example of this is the US state governments, in comparison to the Federal government.

Centralisation vs Decentralisation with federal vs state government example

Much like US state governments, cryptocurrency is decentralised, meaning its network is managed from multiple geo locations or databases rather than a central power point, like the Federal government.

Now that we have touched on decentralisation, let’s crack on to what a cryptocurrency actually is.

Bitcoin coin ontop of trading graph

What is Cryptocurrency?

Cryptocurrencies, otherwise known as virtual currencies or digital cash, are in essence online money that can be used as a medium of exchange to buy and sell goods and services. Crypto can also be stored in an account, called a crypto wallet.

Bitcoin was the first and is still the largest cryptocurrency in existence, accounting for over 50% of the total value shared between all cryptos in the market, otherwise known as the market cap. Since then, over 2112 virtual currencies have spawned, all with a similar goal of revolutionising payments, each with their own unique way of accomplishing this goal.

various selection of alternitive cryptocurrencies

Notable competitors to Bitcoin include Ethereum, Dash, and IOTA, which are all decentralised and user run as well.

Cryptocurrency, by definition, is any system that uses cryptography as the framework to make internal payments, where funds are represented as entries into a distributed ledger.

distributed ledger or blockchain graphic with blue background

What is Distributed Ledger Technology?

A distributed ledger, otherwise known as a blockchain, is an open decentralised database that is synchronised and distributed over a variety of geolocations.

In cryptocurrency’s case, a distributed ledger plays the role as the foundational infrastructure for the network, to enable peer-to-peer payments without a central server or powerhouse.

Peer to peer graphic
Peer-to-peer (P2P) is a communications model where computers or individuals can connect and share resources directly between each other without having to go through an external server.

Cryptocurrency is just one of the many profound applications of blockchain technology, however, understanding how blockchains work is hardly vital to understanding the basics of cryptocurrency.

If blockchain is something you would like to learn more about, click here, however, more about blockchain and distributed ledgers later.

Now that we have lightly touched on what is decentralisation and what blockchain technology is, let’s crack on to where the ‘crypto’ comes from in ‘cryptocurrency’.

green ones and zeros with black background

What is Cryptography?

Whenever you want to send cryptocurrency on a blockchain, you’re required to use your digital signature. Your digital signature is made up of two parts, your Public Key and your Private Key.

Don’t let this intimidate you though, your wallet does this all for you.

Sending payments from your wallet is as easy as typing in your wallets’ master password, the amount you want to send, and then finally the send button.

cryptography graphic behind folder with lock on it

These two keys are generated whenever a new wallet is created. An easy way to think about it is that your public key is your PO Box, and your private key is the key to your PO Box.

Your Public key is the address that other people can send payments to, as it acts like your bank account number. Your private key is like your password to this account.

The keys role in cryptography graphic
Cryptos like Bitcoin use standard military grade AES-256 encryption, essentially making them bulletproof to hackers.

You can learn more about wallets and our recommendations on what one to go with here, but once again, understanding encryption in par with cryptocurrency is not essential to understanding the basics.

Now that we have a basic understanding of the three main components that make up cryptocurrency; Blockchain, Cryptography, and Decentralisation, let’s move onto some of the attributes of cryptocurrency itself.

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So what makes crypto so special?

Cryptocurrency has several stand out attributes that make it like no other form of money, however, there are also many similarities. we will use Bitcoin as a case study, although most cryptos share the same basic attributes.

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Fixed Supply

Due to the framework of Bitcoins blockchain, there can and will ever only be 21 million Bitcoins in existence.

There are currently only 17,593,250 in circulation at the time this was written, as the network itself holds onto a supply of its own to pay out the miners who run the system.

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Transaction speeds

Bitcoins are fast, very fast. Currently takes an average of 3 days to send money across borders using banks, whereas it takes Bitcoin an average of 30 minutes or less. Other Cryptocurrencies can be sent across the globe within a second.

Typically it’s faster to attach a $100 note to an anvil and send it on a plane to your recipient than it is to send it through your bank. If sending a written letter became ‘snail mail’ to emails, fiat currency has become ‘snail money’ to virtual currencies.

bitcoin being sent from man to woman with miner taking a small cut

Transaction fees

It is typically less expensive to send your Bitcoins from New Zealand to Russia than it is to send it through a bank. This is because the banks send your payments through a series of four intermediaries on average before your currency reaches its destination.

Bitcoin, on the other hand only needs to go through its own network, which minimises network fees and maximises transaction speeds. This is just Bitcoin though, some cryptos like IOTA do not have any fees at all.

bitcoin logo in front of mathematical problems matrix background

Portability

Crypto is digitally portable, as it only exists in as ones and zeros on a blockchain. This means you can access your crypto from anywhere that has wifi, essentially acting as a borderless universal currency.

If you are living a nomadic lifestyle on the road or if you are traveling overseas, providing you have access to Bitcoin ATM’s or the merchants you trade with are accepting crypto, you can theoretically meet all your payment needs just with cryptocurrency alone.

Man splitting rocks with a mullet

Divisibility

Bitcoin’s are divisible, meaning you can split a single Bitcoin down to the 0.00000001

This smallest part of a Bitcoin is called a ‘Satoshi’, and there are 100 million satoshis in a Bitcoin, in comparison to the 100 parts in $1 New Zealand Dollar.

This is how you can purchase a coffee without having to hand over $6000 dollars.

Steel jail bars

Durability

Bitcoins are durable, and there is nothing that can destroy them, but it is possible to lose them. You can learn more about keeping your crypto safe here. As long as one computer is running the network as they simply exist as code, your crypto will exist and be safe.

They have now even launched a crypto mining node satellite into space, so now your Bitcoin could even outlast the human race.

bitcoin coins infront of red and green lights

Fungibility

Bitcoins are fungible, meaning that one BTC is identical to another BTC, aside from the unique history of each Bitcoin.

Theoretically a unique transaction history makes Bitcoins less than fully fungible, but you can pay more for a ‘clean coin’ that has no history.

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Irreversible

Each transaction is totally irreversible, meaning that once a payment has been verified by the system, it’s set in stone and there is no going back.

There is also no company at the heart of Bitcoin to complain to if you send your money to the wrong address, so make sure you are very sure of your recipient’s address.

Some cryptocurrencies like New Zealand’s very own Navcoin feature a system where you can make a payment to a wallet by only inserting the recipient’s name.

hooded man in front of bitcoin logo with black background

Anonymous

Bitcoin wallet and transaction histories are pseudonymous, meaning neither transactions nor wallets are connected to real-world identities by default.

However, it is possible to track and associate a person to their wallet if their address is known to the public. Other coins like Monero are fully private.

connected world map gif with blue

Permissionless

Bitcoin is permissionless, meaning nobody can tell you if you can or can’t create a crypto wallet, or if you can and cannot make a transaction, you just do.

Nobody, even the network itself has the ability to stop you from keeping or using your money.

people standing on top of a politicians plank keeping his from falling down into a hole in the ground

Trustless

Bitcoin is trustless because you don’t need to place trust into any third party to carry out the events and execution of your monetary transfer.

Bitcoin’s autonomous network carries out all transactional maneuvers itself, and you can always rely on the network to get it right, every single time.

Money burning

Pretty damn magical stuff right?

This may all seem complicated from the outside, but the best way to wrap your head around it is to play with some cryptocurrency yourself.

To become an early adopter, Sign up with Easy Crypto Here, and in few minutes you will have created an account and crypto wallet, and purchased some cryptocurrency for your own – all at the best rates in New Zealand.