Wikipedia defines cryptocurrencies:
A cryptocurrency (or crypto currency) is a medium of exchange using cryptography to secure the transactions and to control the creation of new units. Cryptocurrencies are a subset of alternative currencies or specifically of digital currencies. Bitcoin became the first decentralized cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created. Cryptocurrencies typically feature decentralized control (as opposed to a centralized electronic money system, such as PayPal) and a public ledger (such as bitcoin’s block chain) which records transactions. The alternative cryptocurrencies launched after the success of bitcoin are frequently called altcoins.
Bitcoin is the first successful cryptocurrency (of which it is a subset):
Bitcoin is a payment system invented by Satoshi Nakamoto, who published the invention in 2008 and released it as open-source software in 2009. The system is peer-to-peer; users can transact directly without needing an intermediary. Transactions are verified by network nodes and recorded in a public distributed ledger called the block chain. The ledger uses its own unit of account, also called bitcoin. The system works without a central repository or single administrator, which has led the US Treasury to categorize it as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency, although prior systems existed. Bitcoin is more correctly described as the first decentralized digital currency. It is the largest of its kind in terms of total market value.
Bitcoins are created as a reward for payment processing work in which users offer their computing power to verify and record payments into a public ledger. This activity is called mining and the miners are rewarded with transaction fees and newly created bitcoins. Besides mining, bitcoins can be obtained in exchange for different currencies, products, and services. Users can send and receive bitcoins for an optional transaction fee.
Bitcoin as a form of payment for products and services has grown, and merchants have an incentive to accept it because fees are lower than the 2–3% typically imposed by credit card processors. Unlike credit cards, any fees are paid by the purchaser, not the vendor. The European Banking Authority and other sources have warned that bitcoin users are not protected by refund rights or chargebacks. Despite a big increase in the number of merchants accepting bitcoin, the cryptocurrency doesn’t have much momentum in retail transactions.
Bitcoin is a digital, decentralized, “trustless” (meaning that trust/security is provided by computing power), peer-to-peer, open-source, low-cost payment system which meets most criteria that traditionally have been used to define the idea of (a) currency. Six years into its existence, the only criterium it fails to meet is price stability (relative to the more stable currencies). The following video provides a concise introduction to the idea:
Bitcoin and the history of money
[Published on Jul 15, 2014] You’ve probably heard a lot about Bitcoin in the news lately. But what is it and why does it matter? Let’s take a look at the evolution of money to find out.
If cryptocurrencies are the future of money, those who adopt it last might unfortunately be left hanging. However, as cryptocurrency researcher Andreas Antonopoulos points out, somewhere around 6 billion people are “unbanked” — i.e. already not using banks in any way, and therefore are likely to be more willing and easily able to adopt cryptocurrency, particularly in places where smartphones are becoming easier to find than proper food. It’s also unfortunate that rich investors have more capability of buying bitcoins. However, the rich also have the greatest incentive to keep the debt-based fiat financial system afloat, and thus generally will approach cryptocurrencies, if at all, purely as an investment, and a risky one at that.
Decentralized digital money is made possible by a specific tecnhological breakthrough: Satoshi Nakamoto’s solving of the double-spending problem. Prior to this milestone in cryptographic technology, it was considered impossible to prevent double-spending, i.e. duplicating a transaction (using copy and paste) and sending funds to recipient A and B at the same time, without a centralized authority to determine which double-spent transactions are invalid/fraudulent. The solving of this fundamental problem — via the invention of the blockchain decentralized ledger technology — enables not only decentralized digital cash, but opens a whole new era of technological innovation.
The following chart is worth pondering…
Consider also: Why bitcoin qualifies as money while the dollar is just currency.
Investors love to say that “Bitcoin has no intrinsic value”, but are unable to explain why something requires “intrinsic value” to be valuable, or even what the parameters that define “intrinsic” are.