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A brief history and overview of cryptocurrency
In recent years there has been an exponential growth in alternative currencies - so-called cryptocurrencies. However, while most people may be familiar with the term ‘cryptocurrency’, far fewer understand how this new form of money works.
If you’re slightly confused by how the new currencies work and are interested to learn more about what many are calling ‘the future of money’, read on for a brief history and introduction to the wonderful world of cryptocurrency.
The beginnings of cryptocurrency
The roots of crypto trace back to 1983 when American cryptographer, David Chaum, invented an encrypted system of money called eCash. Chaum would later develop an additional secure transaction system named DigiCash twelve years later in 1995.
However, while the seed for an encrypted money system had been sown through Chaum, it would take a further three years and the work of a Chinese computer engineer, Wei Dai, before the idea of a decentralized cryptographic payment system would be borne. This payment method would subsequently be called ‘cryptocurrency’, although the concept failed to gain much traction at the time.
The notion of crypto payments remained mostly mothballed until the huge economic crash of 2008 that engulfed the world. Then, as the value of traditional paper money plummeted globally, it became clear that an entirely new form of money could fill the void that would be immune to the traditional ideas of centralization - one that could be used globally but independent of financial institutions.
In 2009, the first true cryptocurrency, Bitcoin, was created by the so-called Satoshi Nakamoto (whose identity remains a secret). While the idea was far from new, the popularity of Bitcoin exploded in uncertain times as a decentralized, international method of payment.
How does cryptocurrency work?
Cryptocurrencies are a form of payment used to pay for goods and services online. Many companies have invented their own cryptocurrencies that allow clients to buy their specific products, removing traditional money. These ‘tokens’ operate much like casino chips or fair ride tickets - good only for use in the particular establishment that issued them.
However, while the token system has indeed proved to be invaluable for firms, the interest for investors in cryptocurrencies lies more in the idea of trading these currencies - often for huge profit – a system similar to real-world trading currencies.
While Bitcoin might be the most famous of the cryptos, there are already over 10,000 different cryptocurrencies trading publicly - and the number is increasing as more firms offer Initial Coin Offerings (or ICOs), raising substantial sums in the process.
For example, one of the more prolific coins, dogecoin, frequently features in the top ten highest value cryptos - yet is perhaps less well-known than Bitcoin, which preceded it as many people aren’t sure how to buy dogecoin.
What is the appeal of cryptocurrencies?
For many investors, the biggest appeal of crypto compared to traditional money is the idea of decentralization - plus the added security offered by blockchain technology which powers these currencies. Blockchain is a decentralized technology used across computers to manage and record transactions with an online ledger secured by bulletproof cryptography.
While security is a prime consideration, there also are many other reasons why investors have flocked in their droves to crypto, including:
As mentioned earlier, many financial experts see crypto as the future of money. In our deeply uncertain economic times - and as more and more of us move away from using traditional paper notes, favoring cards and electronic payments - it seems likely online payment methods will become the preferred way to make transactions in the future. Consequently, there is a perceived notion that cryptocurrencies will increase in value, making them an attractive proposition for early investors. For some investors, the idea of decentralization is the greatest lure of crypto. Since these currencies remove banking institutions from the process, they can be seen as more reliable and stable. Banks have a history of reducing the value of money through inflation - but crypto remains stoically independent of this type of intervention. Other investors like the fact that cryptocurrencies have tended to increase in value - although it should be noted that prices can rise and fall just like any other financial investment. Consequently, before buying crypto, you should be aware of the potential risks and be well versed in how the processes work. For others, the biggest appeal of crypto is the technology that drives it - blockchain. Blockchain technology and its decentralized recording and processing are seen as being far more secure than traditional payment systems. The take away
There is little doubt that cryptocurrencies are here to stay, with more and more companies moving to create their own coins. However, it should be noted that, on their own, cryptocurrencies generate no money - they are merely a way of moving money. For investors to make a profit, someone has to pay more for the currency than they did - a fact that is also true when trading in traditional currencies.