Cryptocurrency – meaning and definition

Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that

exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies
don't have a central issuing or regulating authority, instead using a decentralized system to
record transactions and issue new units.

What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions.
It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments.
Instead of being physical money carried around and exchanged in the real world,
cryptocurrency payments exist purely as digital entries to an online database describing
specific transactions. When you transfer cryptocurrency funds, the transactions are recorded
in a public ledger. Cryptocurrency is stored in digital wallets.

Cryptocurrency received its name because it uses encryption to verify transactions. This
means advanced coding is involved in storing and transmitting cryptocurrency data between
wallets and to public ledgers. The aim of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best
known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators
at times driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all
transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using
computer power to solve complicated mathematical problems that generate coins. Users can
also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that
allows you to move a record or a unit of measure from one person to another without a
trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of
blockchain technology are still emerging in financial terms, and more uses are expected in the
future. Transactions including bonds, stocks, and other financial assets could eventually be
traded using the technology.

Cryptocurrency examples
There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin:

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded.
The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for
an individual or group of people whose precise identity remains unknown.
Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called
Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to bitcoin but has moved more quickly to develop new
innovations, including faster payments and processes to allow more transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track
different kinds of transactions, not just cryptocurrency. The company behind it has worked
with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from

the original.

How to store cryptocurrency

Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks
or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or
online software used to store the private keys to your cryptocurrencies securely. Some
exchanges provide wallet services, making it easy for you to store directly through the
platform. However, not all exchanges or brokers automatically provide wallet services for
you.

There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet”
are used:

Hot wallet storage: "hot wallets" refer to crypto storage that uses online software to protect
the private keys to your assets.

Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely
on offline electronic devices to securely store your private keys.

Typically, cold wallets tend to charge fees, while hot wallets don't.

The advantages of cryptocurrencies include cheaper and faster money transfers and
decentralized systems that do not collapse at a single point of failure.

The disadvantages of cryptocurrencies include their price volatility, high energy

consumption for mining activities, and use in criminal activities.
Tokens
Tokens are a representation of a particular asset or utility, that usually resides on top of
another blockchain.

Tokens can represent basically any assets that are fungible and tradable, from commodities to
loyalty points to even other cryptocurrencies!

Creating tokens is a much easier process as you do not have to modify the codes from a
particular protocol or create a blockchain from scratch.

All you have to do is follow a standard template on the blockchain - such as on

the Ethereum or Waves platform - that allows you to create your own tokens.

This functionality of creating your own tokens is made possible through the use of smart
contracts; programmable computer codes that are self-executing and do not need any third-
parties to operate.

Tokens are created and distributed to the public through an Initial Coin Offering (ICO),
which is a means of crowdfunding, through the release of a new cryptocurrency or token to
fund project development.

It is similar to an Initial Public Offering (IPO) for stocks, with critical distinctions which are
explained in this article. Many are crazy over ICOs as they represent a great way of
identifying interesting projects that can provide great financial returns.

The main difference between altcoins and tokens is in their structure; altcoins are separate
currencies with their own separate blockchain while tokens operate on top of a blockchain
that facilitates the creation of decentralized applications.

A cryptographic token is a digital unit of value that lives on the blockchain. There are four
main types:

 Payment tokens
 Utility tokens
 Security tokens
 Non-fungible tokens

PAYMENT TOKENS
Payment tokens are coins. Their main purpose is to serve as a medium of exchange, store of
value, and unit of account. Major cryptocurrencies like Bitcoin and Litecoin are payment
tokens.

Like fiat currencies, payment tokens gain or lose value based on the laws of supply and
demand. Greater demand and lower supply increase value, while lower demand and greater
supply decrease value.

The twist is that some cryptocurrencies have a finite supply. Only 21 million Bitcoin can
ever be mined, for instance. This means that, as more people start paying for goods and
services with cryptocurrencies and the supply of new coins dwindles, their value should rise
sharply, at least in theory.

UTILITY TOKENS

These are tokens that give the holder access to a blockchain-based product or service.

For example, you can use Ether to access dapps or to pay for smart contracts to be executed
on the Ethereum blockchain.

Similarly, Gas coins give you access to the NEO network.

SECURITY TOKENS

Security tokens are traditional assets like stocks and shares that have been converted into a
digital token on the blockchain.

Like traditional securities, security tokens give the holder ownership rights. For this reason, a
growing number of regulators are controlling how they’re to be issued and traded.

Most regulators determine whether a token is a security token using some version of the
Howey test — a test developed by the US Supreme Court in a case brought by the Securities
and Exchange Commission.

According to this test, a token is a security token if it meets three criteria:

 The holder has received the token in exchange for money that has been invested in a
common enterprise
 They expect to make a profit
 They won’t do any of the work required to generate that profit.

NON-FUNGIBLE TOKENS

A non-fungible token is a digital representation of something unique.

Each token represents a specific asset, so there’s no standard value. This means you can’t
exchange one non-fungible token for the other directly.

That said, because data that lives on the blockchain can’t be duplicated or altered, non-
fungible tokens are ideal for proving ownership rights, identity, and authenticity.