What is it?
A cryptocurrency is a medium of exchange, Australian Dollars for example, however it is designed for the purpose of exchanging digital information using the process of cryptography to secure transactions and to control the creation of new coins. Cryptocurrency is essentially digital, or virtual currency.
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Normal, centralised banking is where governments control the value of their currency by printing fiat (paper) money. Cryptocurrency, on the other hand, is fully decentralised, so governments have no control over it.
Cryptocurrencies generally decrease in production over time, which creates a cap on the total amount of currency that will ever be in circulation, however governments can always print more fiat money, which is when inflation occurs.
The mathematical principles that cryptocurrencies are based on were created by Satoshi Nakamoto. To this day, no one knows who Satoshi is, and whether it is one person or a group of people.
All cryptocurrencies are produced by a community of Cryptocurrency Miners, who are simply members of the public who have set up their computers to run software which can decrypt extremely challenging hashing algorithms. When a hash is decrypted, the user is rewarded with coins. The process of solving the algorithms is often referred to as ‘finding blocks’. Cryptocurrency mining power is rated by hashes per second. A machine with mining power of 1kH/s is mining 1,000 hashes per second (1MH/s = 1 Million Hashes per second and GH/s = 1 billion hashes per second).
Bitcoin was the first decentralized cryptocurrency created in 2009 by Satoshi Nakamoto. Bitcoin uses SHA-256, which is a cryptographic hash function designed by the NSA, as its proof-of-work system. At first, individuals were able to mine Bitcoin from home using their computers’ Graphics Processing Units (better known as GPU’s or Graphics Cards), however it required a large amount of energy and it proved to be costly for members of the general public to leave their computers running all day at maximum speed (think of an average car constantly going 200KM/h), continuously mining Bitcoin. As Bitcoin became more popular, ASIC SHA-256 machines were built, effectively shutting down GPU mining. These ASIC machines are extremely powerful. Compared to a small mining rig running 4 GPUs that would have a hash rate of approximately 3.4 MH/s and consume 3600kW/h of energy, an ASIC machine could mine 6 TH/s whilst only consuming 2200kW/h.
Since the release of Bitcoin, numerous cryptocurrencies have been created. These are frequently called altcoins (an abbreviation of bitcoin alternative). In April 2011, Namecoin was created to decentralise DNS and make internet censorship more difficult. Then in October 2011, Litecoin was released. This was the first cryptocurrency to successfully use the script hash function, instead of SHA-256. This enabled the general public to mine for litecoins without needing to buy special hardware, like the ASIC machines required to mine bitcoins. Ripplecoin is another cryptocurrency that was created in 2011. It worked on the same protocol as Bitcoin, however is a payment system, a bit like Paypal for cryptocurrencies, which caters for any fiat currency, cryptocurrency, commodity or even loyalty points. In 2014, the UK Treasury commissioned a study into cryptocurrencies and what role they could play in the economy. The study also reported on whether regulation should be factored in.
So what are consumers using cryptocurrency for? Cryptocurrencies are used for the same things regular money is used for – making transactions to purchase digital or physical goods and services. Some retails stores have even started accepting Bitcoin as a payment type. To obtain coins, you either need to mine the coins yourself, or purchase them from an exchange, such as BTC Markets.
The “going price” of a cryptocurrency is determined by supply and demand, much like the stock exchange. If demand for a cryptocurrency is high, the price will go up. Visa-versa, if the supply is higher than the demand, the price will fall. A simple Google search will tell you what the exchange rate of a cryptocurrency is, compared to any given fiat currency. For example, at today’s rate, 1 Bitcoin will cost approximately $ 803.08 AUD (or $614.61 USD) whereas 1 Litecoin will cost $4.996 AUD (or $3.80 USD).
Tune in next week, for a more in-depth look at the most popular Cryptocurrency, and the one that started it all, Bitcoin.