A cryptocurrency is a type of digital currency created from code. They function outside of traditional banking and government systems.
Cryptocurrencies use cryptography to secure transactions and regulate the creation of additional units. Bitcoin, the original and by far most well-known cryptocurrency, was launched in January 2009. Today there are over 1,500 cryptocurrencies available online.
Cryptocurrencies differ significantly from traditional currencies as they use blockchain technology to create a distributed ledger. Nonetheless, you can still buy and sell them like any other currency and can also trade on the price movements of various cryptocurrencies via CFDs.
Cryptocurrencies were initially designed to provide an alternative payment method for online transactions. However, cryptocurrencies are not yet widely accepted for all transactions as some consider them too volatile to be suitable as methods of payment. As a decentralised currency, it was developed to be free from government oversight or influence, and the cryptocurrency markets are instead monitored by peer-to-peer internet protocol.
Bitcoin is credited with being the first mainstream decentralised cryptocurrency. Like all cryptocurrencies, it’s controlled through a blockchain transaction database, which functions as a distributed public ledger. Bitcoin was created by Satoshi Nakamoto – whether the name refers to an individual or a group is unknown.
A feature of many cryptocurrencies is that their issuance is governed by predefined protocol rules. In some cases, the rate at which new coins are created decreases over time, and certain cryptocurrencies have a maximum supply cap. However, supply mechanisms vary between projects and are subject to the specific design of each network.
Key features of cryptocurrencies
There are a number of key principles that govern cryptocurrency use, exchange and transactions.
Cryptography
Cryptocurrencies use advanced cryptography in a number of ways. In today’s digital world it’s based primarily on computer science and mathematical theory. It also draws from communication science, physics and electrical engineering.
Two main elements of cryptography apply to cryptocurrencies – hashing and digital signatures:
Hashing verifies data integrity, maintains the structure of the blockchain and encodes people’s account details and transactions. It also generates the cryptographic puzzles that makes block mining possible.
Digital signatures allow an individual to own a piece of encrypted information without revealing that information. With cryptocurrencies, this technology is used to sign monetary transactions and demonstrates ownership.
Blockchain technology
A blockchain is the decentralised, public ledger or list of a cryptocurrency’s transactions. Completed blocks, comprised of the latest transactions, are recorded and added to the blockchain. They are stored in chronological order as an open, permanent and verifiable record. An ever evolving network of market participants manage blockchains, and they follow a set protocol for validating new blocks. Each ‘node’ or computer connected to the network automatically downloads a copy of the blockchain. This allows everyone to track transactions without the need for central record keeping.
Blockchain technology creates a record that can’t be changed without the agreement of the rest of the network. The blockchain concept is attributed to bitcoin’s founder, Satoshi Nakamoto. This concept has been the inspiration for other applications beyond digital cash and currency.
Block mining
Coin mining is the process of attaching new transaction records as blocks to the blockchain. In the process – using bitcoin as an example – new bitcoins are credited to the miners, adding to the total number of coins in circulation. Mining requires a specific piece of software that is used to solve mathematical puzzles, and this validates the legitimate transactions which make up blocks. These blocks get added to the public ledger (blockchain) at regular intervals. As the software solves transactions, the miner is rewarded with a set amount of bitcoins. The faster a miner’s hardware can process the mathematical problem, the more likely it is to validate a transaction and earn the bitcoin reward.
The main cryptocurrencies
Bitcoin
Bitcoin is credited as the original and most well-known cryptocurrency. Satoshi Nakamoto, a person or group of people under the name created it in 2009. As of December 2017, there were around 16.7 million bitcoins in circulation (there may be a finite number of 21 million available). Traders can purchase Bitcoin through an exchange and speculate on its price movements via CFDs. Learn more about Bitcoin and how to trade it.
