What Are Cryptocurrencies?

To begin to explain what a cryptocurrency is, we must go back to 1982 when a paper was written about a technology that would allow you to perform transactions online with complete anonymity.

This would be the beginning of the cryptocurrency age, even they didn’t know it at the time. David Chaum, the author of the document, would later take this and make it a reality in a company called DigiCash.

The technology was the first to utilize cryptography to send and receive money, which would be the precursor to how cryptocurrencies were built on. DigiCash wasn’t able to scale quickly enough and later filed for bankruptcy, but not before being accepted by multiple banks around the world. ​Following the break-up of DigiCash, there was a lull in the development of cryptocurrencies. 2008 would be the year that would change the landscape of the financial world, both for cryptocurrencies and traditional banking systems. During and after the collapse of the financial institutions, trust in the system was permanently scarred and people wanted answers to why this happened, but more importantly why it was allowed to happen in the first place.

There were supposed to be measures in place to prevent conditions that created the collapse, but even those were not enough to stop it from happening. ​The blame turned on the people in the institutions for the housing crisis that took down the banks and lenders, and with that the traditional trust-based banking was analyzed by people who began to talk in chatrooms across the internet. We trust that the banking institution and the people within them are verifying transactions properly so that the money is sent in the proper manner, which is why we have them. That is the system that makes it possible to send money from one place to another.

The chatrooms became highly active, creating chatter about ways that this could be changed so that money could be sent outside of the hands of the banks, ultimately materializing the idea of a cryptocurrency. ​A person or group of people named Satoshi Nakamoto became the pioneer of this revolution, ultimately creating the cryptocurrency that changed the world; Bitcoin. Satoshi wrote paper after paper and code after code to create his system that enabled people to send money anonymously to any location in the world through the internet. To do this, you need another currency so that banks cannot track where the money is being moved, thus the need for the cryptocurrency. Other services were out there such as PayPal that can send money to anyone who has the service, but those services were not anonymous, creating a record of who sent what to whom. ​

Even though the transactions through the cryptocurrencies are anonymous, they are still verified through a specific address that you create for that single transaction, meaning that it creates a code that represents the transaction that both parties are attached to. The reason that this must take place is for verification of transactions. If verification doesn’t take place, anyone can claim to have any amount of bitcoin or another cryptocurrency without a way of backing up that claim and as we know from the story on the creation of Bitcoin, trusting another’s word is why a change was in order. ​Many people, especially the early adopters of this technology, are convinced that this new system will be the downfall of traditional banking establishments and government monetary systems. Some cryptocurrencies are not convinced that this will be the case, such as Tether (USDT), which states that it is backed by the US Dollar. So at this point in the lifespan of cryptocurrencies, you have some that are convinced of the collapse of the traditional monetary system by separating themselves from those systems and others that are using the current systems to grow. Deciding which pool of ideas you are in agreeance with can help your investment efforts so that you can invest in something that you believe will be around ten, twenty, fifty, or even hundreds of years from now. ​As we will discuss more in depth later on, most of the cryptocurrencies have a finite amount of coins available, with zero possibility of creating new coins. This was an intentional measure set into many of the cryptocurrencies make up because of the fear that traditional governments can print as much money as they would like. Zimbabwe is the perfect example of how governmental printing of funds can ruin a country and financial system. Following the Independence of Zimbabwe in 1980, the country introduced their own currency that was initially stronger than the US Dollar, but due to hyperinflation, the currency started losing its value very quickly. Fast forward to 2008, the government began printing very high denominational bills with the largest being worth 100 billion Zimbabwean dollars. ​With a finite number of coins in most cryptocurrencies, you cannot run into the issue of the cryptocurrency creating extra coins to devalue the coins already in existence.

There are exceptions to this rule depending on how the creators of the coin coded the blockchain, but the vast majority of currencies follow this rule. Now that we have a decent understanding of why cryptocurrencies came about, let’s get into the more technical side of the cryptocurrency world.

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