So… what exactly is a cryptocurrency, then?

In recent years, cryptocurrency’s popularity has skyrocketed. All over the place, not just the internet.

Perhaps you’ve even seen adverts proclaiming cryptocurrency to be the future of money. And perhaps even a celebrity you esteem is endorsing them.

Sure, but what’s the big deal about them?

What makes them unique from more conventional forms of currency? So, why are they so exceptional?

What are cryptocurrencies?

The word “cryptocurrency” (or simply “crypto”) refers to a broad category of decentralized “digital money” that operates independently of governing bodies and traditional financial institutions.

Cryptocurrencies are digital.

Bitcoin and other cryptocurrencies are not tangible. There are neither paper dollars nor metal coins are in circulation.

Cryptocurrencies are purely digital in the sense that they are nothing more than lines of code.

Cryptocurrencies are borderless.

It does not matter where you live or who you are: You can send it almost instantly to other people in any part of the world, regardless of the distance between you and them or boundaries between countries.

There are no geographical limitations on the use of cryptocurrencies. An internet-capable device such as a smartphone or PC – This is all that’s required.

Cryptocurrencies are permissionless.

Everyone can send and receive cryptocurrency. There is no requirement for creating an account or submitting an application. To put it another way, cryptocurrencies don’t require any “special authorization” to use.

There’s no requirement for a name or even an introduction. A computer-generated string of letters and numbers referred to as “address” is all that’s required, in place of a name or account number.

Since this “address” isn’t related to anything personally identifiable, cryptocurrency can easily be sent between parties who have never met, and have no need to reveal their names.

Since no identifying information is required to transmit or receive cryptocurrency, this gives users an extra-measure of anonymity. And in an era where privacy is becoming more of a luxury and constitutional freedoms cannot be taken for granted, this comes as a much appreciated convenience for many people.

Cryptocurrencies are decentralized.

Cryptocurrencies, in contrast to “fiat” currencies like the U.S. dollar, are not backed by any central bank or government.

The Federal Reserve (“Fed”), the European Central Bank (“ECB”), and the Bank of Japan (“BOJ”) are all examples of central banks that issue and manage their own currencies.

This means that cryptocurrencies, unlike fiat currency, are not managed by any one institution. They are not backed by any bank, or government. And decentralization is thus the name of this defining feature of cryptocurrencies.

Then, if no institution issues or creates cryptocurrency, who does then? Who generates cryptocurrency without a central bank or government?

Well, in very simple term: Each bitcoin unit is created automatically by software, according to a set of predefined rules.

Cryptocurrencies are created and destroyed according to predetermined rules and principles outlined in the software’s code. For some digital currencies, the maximum amount of units that will ever be in circulation is known in advance (thus the term “finite supply”, which you may have already heard).

Some cryptocurrencies are launched with infinite supply, and this means there is not maximum cap, and they could – in theory – keep expanding infinitely! (Although there is usually a cap on how many new units can be made in a given period of time, like a year.)

The supply of a cryptocurrency is a crucial factor in assessing its value and utility, and variations in price can also be related with differences in supply.

Cryptocurrencies are counterfeit-proof.

In addition, cryptocurrencies are made to be counterfeit-proof.

This is where cryptography comes in — as it is used for the secure recording and storage of transactions, in an encrypted format.

The word “cryptography” derives from the combination of:

• The prefix “crypt” (meaning “hidden”)
• and the suffix “graphy” (meaning “writing”).

Historically, cryptography can be traced back to ancient times – long before before computers (duh) – when it was used to research and uncover methods for protecting confidential documents.

• Julius Caesar was known to use cryptography to communicate with his generals.
• In the modern age, Cryptography protects computer data using nerd math.

And this is where the “crypto” in “cryptocurrencies” originates from, as their inherent security is ensured by the use of cryptography.

What makes cryptocurrencies special?

Cryptocurrencies are decentralized digital currencies that operate outside of the control of any government or central bank.

In a nutshell cryptocurrencies stand out due to:

• They are digital. Cryptocurrencies do not have a physical, tangible dimmension to them. Everything is done from phones and computers.
• They are borderless. Cryptocurrencies are digital currencies that may be sent and received electronically by anyone with an internet connection, regardless of where they are located.
• They are permissionless and available to everyone. They require no special access or authorization to use. To use a cryptocurrency, you don’t need a bank account or to be approved by a bank. There is no requirement for an intermediary (like a bank) to verify and approve financial dealings.
• They provide some degree of privacy, which means they allow you to conduct business without having to reveal your true identity because of the anonymity they afford. When it comes to privacy, several cryptocurrencies give varying levels of protection.
• They are decentralized, making them immune to interference from central authorities. They are not owned by or under the control of a single entity, government or institution. Users can do business directly with one another, eliminating the need for a third party (a bank, in the case of fiat currency) to process the transaction.
• They are created by software. Cryptocurrencies are decentralized from a centralized authority and instead follow a set of instructions and rules that are pre-written into their code. Therefore, the role of the central bank is taken over by software.
• They are counterfeit-proof. It would be impossible to forge them. This is because of the format in which financial data is recorded and kept.

Due to these special characteristics, cryptocurrencies provide the potential to give people total control of their money with zero involvement from a third party, and the ability to liberate people from reliance on any central authority to manage their finances.

It remains to be seen if crypto can actually deliver on all of these promises. An increasing number of investors are beginning to view it as an emerging asset class.