What is cryptocurrency, how does it work and why do we use it?

Crypto = Using Digital Encryption
Currency = A System of Money

Cryptocurrency is an encrypted, decentralized digital currency used to verify transactions on a distributed system with open source software between peers.

The transfer of funds operates on the internet, independently of central banking and governments.

Transactions are added to a public ledger – also known as the blockchain via nodes on the network with consensus (agreement) achieved through a proof-of-work system referred to as mining.

Cryptocurrencies are a subset of alternative currencies or specifically, digital currencies..

How do cryptocurrencies work?

Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.

Bitcoin

What is it?

A digital currency, used to make payments of any value without fees. It runs on the blockchain, a decentralised ledger kept running by “miners” whose powerful computers crunch transactions and are rewarded in bitcoins

Who invented it?

Satoshi Nakamoto, a secretive internet user, invented bitcoin in 2008 before it went online in 2009. Many attempts to identify Satoshi have been made without conclusive proof

What’s it for?

People see value in money free from government control and the fees banks charge; as well as the blockchain, to verify transactions. Bitcoin has been seen as a tool for private, anonymous transactions, and it’s the payment of choice for drug deals and other illegal purchases

Is it worth anything?

Yes. As of July 2017, there were around 16.5m bitcoins in circulation. In March 2017, the value of a Bitcoin, at $1,268, exceeded that of an ounce of gold ($1,233) for the first time.

What is Bitcoin Cash?

In August 2017, the blockchain forked to support another cryptocurrency, Bitcoin Cash, which is optimised slightly differently. People who held Bitcoin received an equal value of Bitcoin Cash following this ‘hard fork’.

Cryptocurrencies and applications of blockchain technology are still nascent in financial terms and more uses should be expected. Transactions including bonds, stocks and other financial assets could eventually be traded using the technology.

What are the most common cryptocurrencies?

Bitcoin: Bitcoin was the first and is the most commonly traded cryptocurrency to date. The currency was developed by Satoshi Nakamoto in 2009, a mysterious figure who developed its blockchain. It has a market capitalisation of around $45 billion as of July 2017.
Ethereum: Developed in 2015, ethereum is the currency token used in the ethereum blockchain, the second most popular and valuable cryptocurrency. Ethereum has a market capitalisation of around $18bn as of July 2017. However, ethereum has had a turbulent journey. After a major hack in 2016 it split into two currencies, while its value has in recent months reached as high as $400 but crashed briefly to as low as 10 cents.
Ripple: Ripple is another distributed ledger system that was founded in 2012. Ripple can be used to track more kinds of transactions, not just of the cryptocurrency. It has been used by banks including Santander and UBS and has a market capitalisation of around $6.3 billion.
Litecoin: This currency is most similar in form to bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions. The total value of all Litecoin is around $2.1 billion.
Why would you use a cryptocurrency?

Cryptocurrencies are known for being secure and providing a level of anonymity. Transactions in them cannot be faked or reversed and there tend to be low fees, making it more reliable than conventional currency. Their decentralised nature means they are available to everyone, where banks can be exclusive in who they will let open accounts.

As a new form of cash, the cryptocurrency markets have been known to take off meaning a small investment can become a large sum over night.

But the same works the other way. People look to invest in cryptocurrencies should be aware of the volatility of the market and the risks they take when buying.

Because of the level of anonymity they offer, cryptocurrencies are often associated with illegal actvity, particularly on the dark web. Users should be careful about the connotations when choosing to buy the currencies.