What is Cryptocurrency?

Written by Rick Welch

Cryptocurrency is best defined “as a digital or virtual currency designed to work as a medium of exchange. It uses cryptography (which is the use of private or secret keys to encrypt and decrypt data) to secure and verify transactions as well as to control the creation of new monetary units.”  Cryptocurrency has no intrinsic value, no physical form (it exists only within a network) and its supply is not determined by a central bank, like the Federal Reserve. The concept of digital currency is not new.  The earliest attempts in the 1990s employed centralized controls which verified and facilitated all network transactions. In time, these unwieldly systems would meet failure.  It was not until 2009 that the first viable platform was introduced by an anonymous programmer using the pseudonym Satoshi Nakamoto. This system, Bitcoin, was a decentralized or peer-to-peer network constructed using the first blockchain database.

Think of the blockchain as a ledger or spreadsheet that is duplicated many times across a network of computers. This ledger can be used to record not only financial transactions, but virtually anything of value (examples include file storage, identity management and land title registration).  Eastman Kodak recently launched KodakCoin which it sees “as the backbone of a new platform that will help photographers license their work and track the unlicensed use of their images.”  Information held on a blockchain exists as a shared and continually reconciled database that is not stored in any single location. The records are public and easily verifiable. Cryptocurrencies are not really stored, instead they are accessed using a private key that is used to sign for or verify transactions.   It is important to understand that blockchain is the technology (or cryptographic standard) for the digital ledger and Bitcoin is simply one implementation of it.  Today, there are over 1,400 different cryptocurrencies used worldwide. With a current market cap over $250 billion, Bitcoin represents over 1/3 of the total market cap for cryptocurrencies.  Other leaders in the field include Ethereum, Ripple, Litecoin, Monero, Dash and Waves.

Cryptocurrency can now be used by consumers to purchase goods both on and offline.  As an example of its growing acceptance, last summer Apple approved Dash as a digital currency which means that Dash can now be used for most applications within the iOS Apple Store, including Dash’s wallet (where a private key would be saved). Crypto-ATM machines can now be found in over 60 countries.  In the business-to-business arena, cryptocurrency is now becoming another way to settle an account with vendors.  As blockchain evolves, it may very well change the way businesses deal with their supply chains. As cryptocurrencies become more mainstream, a clearer focus will be gained as to their advantages. In our view, cryptocurrencies are about freedom – no government authority and complete portability. Almost any sum of money can be carried on a flash drive or online wallet and then used quickly, securely and without the permission of a third party. Transactions are processed instantly in the network and then confirmed in a few minutes.  Neither transactions nor accounts are connected to real world identities and after receiving confirmation, a transaction cannot (under any circumstance) be reversed. The lack of government oversight opens the entire concept of cryptocurrency to many questions and, in some cases, countries have chosen to prohibit or greatly limit their use.  While the dramatic price volatility of cryptocurrencies may offer speculative investment opportunities it does little to support the notion of dependable stored value, which is “the function by which an asset can be useful in the future with some predictability.”

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