What is a Cryptocurrency?

Cryptocurrencies are all the hype with the likes of Elon Musk as well as celebrities such as Reese Witherspoon getting involved - but what are they, and how do they work?


Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken June 29, 2021. REUTERS/Dado Ruvic/Illustration/File Photo
Representations of cryptocurrencies Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin are placed on PC motherboard in this illustration taken June 29, 2021. REUTERS/Dado Ruvic/Illustration/File Photo
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LONDON (Bywire News) - Cryptocurrency is a digital form of money which can be exchanged for goods and services, or traded in much the same way as traditional, government-issued (also known as “fiat”) currencies. There are thousands of different cryptocurrencies around, but only a few have a real chance of catching on. 

Bitcoin and cryptocurrencies 

The first and most famous cryptocurrency is Bitcoin. It was created in 2008 by either a person or group of people under the name Satoshi Nakamoto, who produced a technical definition (known as a “white paper”) on cryptocurrency and set up open-source software to implement it.  

Bitcoin is an entirely digital currency which has no central bank or single administrator. Instead, it is sent across a decentralised peer to peer network of computers known as a blockchain. This removes the main impediment to digital currencies by eliminating the need for a centralised authority to control everything. 

Why use a decentralised system? Because the problem with a centralised system is that in a centralised system, how could you trust the central administrator not to award themselves an unlimited supply of the currency or steal everyone else’s? Therefore, the decentralised approach means all transactions have to be verified by all computers in the network, creating a transparent, trustless and secure foundation for currencies. 

How much is a Bitcoin worth?

Bitcoin can be exchanged with fiat currencies or used to pay for goods or services where companies accept it as payment. However, its value has fluctuated considerably due to demand. At the time of writing, one Bitcoin is worth slightly less than £33,000. Because of this high price, Bitcoins are usually sold and traded in fractions, each of which have their own names. These include Satoshi, the millibit and microbit - each of which are worth a fraction of a single Bitcoin.   

What are the leading cryptocurrencies? 

Bitcoin’s success spawned a wave of other cryptocurrencies, each of which operates in a similar but slightly different way. These include the likes of Libra, Ripple, Cardano and Ethereum, which have grown to become the main rivals to Bitcoin. Each of these claim to address something which was previously missing and fix a supposed weakness in existing cryptocurrencies. 

These new cryptocurrencies are also called “altcoins”, a term used to designate any cryptocurrency which is not Bitcoin. Some have become extremely popular, while others have sunk without a trace. However, Bitcoin remains dominant in the market space, with almost two thirds of the market. 

Government and central bank cryptocurrencies

Governments and the traditional financial sector have struggled to adopt a position towards Bitcoin. Some see it as a threat to traditional currencies and an opportunity for fraudsters and criminals. 

Others see it as an opportunity for the future. A number of corporations and governments have worked to produce their own cryptocurrencies. JP Morgan was the first financial institution to announce its own cryptocurrency, while the Bank of England is considering producing its own digital currency.

China has also recently launched its own cryptocurrency, as well as Singapore, Ecuador, Senegal and Tunisia. Meanwhile, countries such as Russia and Sweden are working on their own. 

Investors and leading business figures are also jumping on board. With the turmoil of the pandemic many see trading in Bitcoin as a way to hedge against market volatility. A report from Citibank described Bitcoin as the ‘new gold’, saying its value could hit $318,000 over the course of 2021, which would represent a 19-fold increase. 

With interest coming from all sides, cryptocurrencies are hitting the mainstream. New currencies are coming to market and, while many will disappear over time, others will thrive. Whatever the future holds, one thing is clear: cryptocurrencies are here to stay. 

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