There’s no doubt that if you take a look at the cryptocurrency historical data, you’ll find that all cryptocurrency types, especially the more popular ones, were subject to huge swings in value. It’s the nature of the beast and something you’ll understand with cryptocurrency explained adequately to you.
In this post, getting cryptocurrency explained is exactly what we are aiming at. There’s a lot of conflicting information out there at the moment, and we’ll cut through that here today. Among other topics, we’ll cover.
Future of the cryptocurrencies and blockchain;
Cryptocurrency historical data.
Our goal is to have cryptocurrency explained as thoroughly as possible. We’ll look at the actual cryptocurrency definition and then see what we can glean about the cryptocurrency future based on cryptocurrency historical data. We’ll also cover different cryptocurrency types so that you know exactly what you are getting yourself in for.
Are you ready to learn more? Then let’s get started.
The definition is actually a pretty simple one. Basically, cryptocurrency is a currency where funds are generated using encryption techniques, and where the transfer of those funds is verified through encryption. This also means, at the most basic level, that the currency operates independently of any central bank.
So, what exactly does that mean? To understand that, we need to go into a bit more detail on what is blockchain tech, the underlying tech that powers the system, and how it operates.
Think of it this way. Bitcoin, or whatever crypto you prefer, is a car, and blockchain is the engine. Now, engines can power a number of different vehicles and appliances. So, you don’t need a vehicle for the engine to be useful. By contrast, the car itself must have an engine to power it.
In the crypto world, cryptos would not be able to run without the underlying blockchain tech. On the other hand, the tech itself can be applied to many different areas.
Take Ethereum, for example. Sure, it’s crypto that is doing quite well. But the main reason that it has reached its current market cap of over $21 billion is that it’s a lot more useful than just straight crypto.
In this case, the blockchain tech has a programming language built into it. The tokens that the network generates are primarily used to pay for using the system. So, if you’re a developer using the Ethereum network, you have to use Ether to pay for the services. If you want to create a smart contract on the system, you’ll pay for it using Ether as well.
So, to have the cryptocurrency explained, it must be understood that there are different cryptocurrency types.
Cryptocurrency Explained – The Different Cryptocurrency Types
This is the first ever crypto. Its purpose is simple and straightforward – it’s true crypto in the sense that it is only used to fund transactions. You earn or buy Bitcoin and then use it to pay for goods or services.
Every coin other than Bitcoin falls under this category. It means alternative coins, as in choices other than Bitcoin. Not all of these coins work the same way as Bitcoin. Some are used to fund transactions outside of the network or may be issued as a pure investment vehicle.
All coins are basically tokens, but not all tokens have the same function. There are three broad categories that tokens fall into:
Pure crypto – the focus is on the economic functions that can be performed using the token. These cryptos will have their own dedicated blockchain.
Securities tokens – these are similar to securities in the real world. They represent a stake in the company and may or may not come with voting rights, etc. In the crypto world, these are the closest thing to actual shares.
Utility tokens – these are introduced to pay for using the system. This is where it gets confusing for a lot of newbies – we tend to think of tokens as being the same as stocks. If it’s a security token, this is somewhat true. In the case of a utility token, however, it’s not. You might use these tokens as payment for voting rights in exchange for the use of services that the project provides, etc. Think of them more as a store credit.
Now that we understand a bit more about the different types of cryptocurrencies and tokens let’s have a look at how the system works.
How Blockchain Tech Works
Blockchain tech can seem confusing at first. But here’s how it works in a nutshell. Let’s say that we decide to start our blockchain. To start with, there are two of us in the network. Each of us keeps a copy of the system file on our computers.
Now let’s say that Steve from accounting wants to join in as well. He downloads the chain, and so the information is now stored on three computers. It’s the same information, copied over onto each computer. Each successive person who joins the network also downloads the chain, and so the data is duplicated many times over.
Why all the duplication? It is this duplication that makes the system a lot more secure. It seems a little crazy, doesn’t it? Especially since we’re told to lock up our data behind a secure firewall on a secure server to protect it from attack.
The principle here, though, is to make sure that the data is copied over onto many different computers. It is actually a genius solution if you think about it.
Let’s say a hacker wanted to attack our new blockchain. She would have to hack all three computers within the system simultaneously to crash the system. Even if she managed to hack Steve’s computer and put it out of commission, our computers would still be able to function as normal.
But wait, there’s more. The way the tech is set up further protects the integrity of the data. The information is stored in blocks. Each new block is time-stamped and contains a little information from the previous block. Each block is thus linked to the block before it, and the one after it.
You could not delete or change the information held in one block without deleting all the blocks that came after it as well. What’s so hard about that? Let’s explain.
When a transaction is added to the network, the author of the transaction signs it digitally and the system encrypts it. It doesn’t become part of the chain until the transaction is verified.
Verification is completed by someone else on the network solving a pretty complex equation. During this process, the digital key used during signing is verified. But we’re not quite done yet. The solution needs then to be confirmed by at least 51% of the computers on the network.
So, if I wanted to send Steve 10 coins, I would initiate the transaction and digitally sign it. This transaction would then be submitted to the network and Steve’s and your computer would work at solving the equation that will unlock the data. (This is known as mining.)
Let’s say that Steve’s computer is a bit faster, so it comes up with the right solution. For the transaction to be processed, your computer would need to agree that the solution was correct and so verified. If your computer doesn’t confirm that the answer is correct, Steve doesn’t get his money.
That’s a pretty simplified explanation, but it gives you the general idea. The bigger the network, the harder the encryption is to solve and the more computing power it takes to verify transactions.
What’s The Advantage of This Kind of System?
Aside from the security aspect, there’s a significant advantage to this system in that you don’t need a third party to process the transaction for you. In traditional banking, you pay the money into your bank account and then request that they transfer it for you.
This isn’t a problem if the other person uses the same bank, but becomes a problem when more banks are involved. The bank then has to transfer the funds to a clearinghouse, who then has to transfer it on to the other person’s bankers.
The problem is that all of this delays the actual transfer of the funds. Cross-border transactions can take a few days as a result. With blockchain-based tech, it just depends on when the transaction is verified. With Bitcoin, for example, this could be as quickly as 15 minutes, though transaction times will depend on how congested the system is and how many miners are active at the time.
What’s The Disadvantage of This Kind of System?
At the moment, the verification issue is something of a sticking point. There are two most employed types of verification models at the moment – proof of work and proof of stake.
Proof of Work
Proof of work is the method used by Bitcoin and a good many other cryptos. Essentially, whoever solves the equation first has to provide how they came to that solution, and the other nodes within the network verify that the work is correct.
It’s good in principle because it provides a thorough way to check that transactions are valid. When it comes to practical application, though, how useful it really depends on how big the chain is. Before Bitcoin made its rockstar shoot to fame, everything worked smoothly.
But when it started to get a significant following, the proof of work method started to become onerous. The coin supply is limited, and suddenly you had significantly more miners wanting to earn them. It became a race to see who would get the solution first as only one miner would take the prize.
So, you could expend resources mining coins and still not get a reward. Nowadays, it takes a lot of computing power and electricity to do the mining. However, with the amount of competition and the increased computer power required, it has become a lot less profitable.
This, in turn, highlighted the scalability issues with the system. Bitcoin is set up in such a way that a block is mined every 15 minutes. In theory, this means that it shouldn’t take longer than 15 minutes for a transaction to be verified.
However, in practice, the size of each block on the chain is limited. It means that only so many transactions can be processed at a time. If fewer miners are online, there will be a delay in transaction verification time.
As a way of combating this issue, transaction fees can be charged. But this could increase the overall costs, as it has been shown with the Bitcoin network. The increased costs for those transacting make the system less attractive as well.
So, while in theory, your transaction should only take around 15 minutes, in practice you could wait for hours, depending on system congestion and the number of miners available. Proof of work has proven to be expensive to run on a more mature, larger blockchain.
Proof of Stake
The alternative method, called proof of stake, works on a very different principle. With this system, mining “rights” are assigned to those who have the most significant investment in the chain. So, if I had five coins and you had ten, you would be allowed to mine transactions before I would.
This system is less costly than proof of work because there is no redundancy, but it brings up the issue of the system being controlled by one group or person. It is presumed that the leading miners will not abuse the system since it is in their interest not to devalue own coins.
However, this method opens up a question of whether such a system is centralized and to which extent. We said at the beginning of this article that decentralization is one of the most significant features of crypto coins and transactions.
Both methods are continually being improved, but at the moment, neither option is really ideal.
Cryptocurrency Explained – A Brief History
We’ve already told you that Bitcoin started everything, but let’s go through a brief history just so that you understand how cryptos have developed.
The original Bitcoin blockchain was started in 2009. The developer(s) called themselves Satoshi Nakamoto. Up to this point in time, no one knows for sure who Satoshi really is or are, though there have been a lot of speculations. Perhaps the mystery is part of what fueled the interest in Bitcoin in the first place. Anyway, that doesn’t really matter. What is important is the fact that the tech was pretty far ahead of its time.
Nakamoto created the tech as a way to transfer funds securely and inexpensively online, and it was utterly different from anything that had come before. It was a concept that few people outside of the tech industry knew or cared anything about.
So, for the first few years of its existence, this crypto languished in obscurity. It became notorious as a means for paying for illicit goods and services on the Silk Road – a marketplace on the dark web. This marketplace was closed down, but the taint remained for quite a while afterward.
The appeal for criminals was mainly that the transactions were anonymous. Even now, all that you see on the Bitcoin ledger are the public addresses of those transacting. The idea that transactions are completely anonymous is a misnomer though, as the FBI proved when cracking down on the Silk Road.
The first period of real growth for the crypto was during the 2013-2014 period. This showed that there was potential in the currency, but no one could have predicted the massive leap in value that we saw from 2016 to 2017.
In August 2016, a coin would have cost you just over $570. By December of 2017, that figure was close to reaching $19.783,06.
Since then, the BTC price dropped to just over the $6,500 mark, and the price seems to have settled there for the moment.
Don’t Forget the Rest
We’ve focused on Bitcoin here because it is the most well-known crypto, but as you know, there are many other players in this industry. Ethereum was among the first alt-coins and was developed by Vitalik Buterin. It was released in 2015.
Buterin believed that the Bitcoin app was too limited and felt that there was a better way to do things. Therefore, he created Ethereum – which became widely recognized as the next evolution step in the blockchain tech.
Of course, understanding how things work and how we got to this place is important, but what most people are more interested in is the future of cryptos. Why don’t we move on and see what the future might hold?
Cryptocurrency Explained – Cryptocurrency Future
There are two distinct camps when it comes to the future of cryptos – those who say they’ll endure and reach astounding heights, and those who say that they’ll tank completely. At the moment, the jury is out – it’s hard to say for sure which way we’ll go.
However, if we look at the useful applications that the tech is capable of and how far we have come in less than a decade, it’s hard to believe that cryptos are entirely doomed. But will they become the investment vehicle of choice?
Bitcoin fervor aside, most cryptos have no real-world value. There are no assets to underpin these currencies in most cases. This means that when the craze dies down, we are facing a crash in value. It will come – that much is certain.
Proven Value of the Cryptos
However, cryptos that have proven value in terms of utility should survive and even possibly thrive after this setback. Cryptos based purely on the investment value are likely to crash and burn.
Bitcoin is probably the exception in this regard – while it will no doubt drop in value, there will always be market sentimentality that should aid its recovery. Cryptos like Ethereum and Ripple, that are more established and that have a functionary purpose aside from investment value, should also pull through.
Many won’t be as lucky, which makes it even essential to consider your investments in this field wisely. Once the hysteria is over, the companies that do make it through will probably be able to rise to the level of industry giants like Microsoft and Apple. But the face of the crypto market will change.
What we will no doubt see is a big shift in the way the industry is regulated. Stricter regulations will do more to boost the industry than harm it as the industry is cleaned up. More stringent regulations will help to clear the field of the more unsavory aspects.
At the moment, it is still something of a free-for-all. This is not the best news for investors as there is little protection against unscrupulous or simply inept companies.
Summing It Up
Also, at the moment, we are still in uncharted territory. As the industry matures, the wrinkles should start ironing themselves out. With the maturation of the industry and better regulatory processes, the volatility in the market should smooth out.
Which in turn should boost the confidence of more serious investors and see cryptos moving from the field of highly speculative to a steadier investment. Will the transition be smooth? That’s highly unlikely – if anything, we can expect a good few upsets for the foreseeable future.
On the whole, though, we’re really only at the start. It will be exciting and nerve-wracking going forward, but there is a spot for cryptos in the future.
Stefan Ateljevic, Head of Content and Casino Auditor at BitcoinPlay. With an extensive background in content creation and love for online gambling and all things crypto, Stefan aims to improve the current state of the crypto gambling industry by creating casino case studies and other valuable content. Outside of work, Stefan enjoys a glass of whiskey and late night poker sessions.
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