What is cryptocurrency?
Cryptocurrency is digital money that was created as an alternative to government-issued currency. It has major advantages over traditional money transfers—privacy, security, decentralization and speed—but like everything, also some disadvantages. Think of cryptocurrency as Money 2.0—the next digital wallet iteration—and a potentially useful financial-transaction tool when learning how to make a website or a digital art portfolio, and then monetizing that website,
How does cryptocurrency work?
Since the first and largest cryptocurrency, Bitcoin, launched in 2008, cryptocurrencies have proliferated. All use blockchain to operate a ledger, storing and sharing data across a large global network of computer servers. This data cannot be copied, but all users of a given network can update, view and access it in real time. Blockchain also powers NFTs and other web3 technologies, and metaverse platforms commonly accept cryptocurrencies.
Types of cryptocurrency
The first crypto was invented by an anonymous developer going by the name of Satoshi Nakamoto, whose identity remains hotly debated. Bitcoin was made available to the public in 2009, and is the most traded cryptocurrency worldwide today, accounting for some 40% of crypto’s total value. Some 19 million bitcoins are currently in circulation–creating a market capitalization of over half a trillion dollars–and only 21 million bitcoins will ever be created. Bitcoin has been so successful that it has spawned numerous forks—namely splits in the transaction chain that create new rule sets. Like forks in the road, these splits are based on the existing Bitcoin platform but branch out in different directions and create new cryptocurrencies.
Ethereum was conceived in 2013 by Vitalik Buterin, who was just 19 at the time. First launched in 2016, Ethereum offers functionality that its bigger competitor does not, such as an open source platform. This means that developers can write applications that directly interact with Ethereum’s code. Today, its native currency Ether is the second most-valuable cryptocurrency based on market cap. It is often invoked for more complex financial transactions than those conducted through Bitcoin.
Ethereum has its own drawbacks—above all are the high transaction fees prompted by the immense computing power it demands. That same immense power can make transfer speeds slow—around a dozen transactions per second, which is significantly slower than many competitors and even legacy payment systems like Visa. Yet, Ethereum plans major improvements to its speed, efficiency and environmental impact. Developers refer to these improvements as “The Merge.” Crypto buyers will watch closely to see how it pans out.
Solana is designed to work similarly to Ethereum with some significant improvements. Named for a small Southern California city, it was first proposed in 2017, launched in 2020 and is currently among the top-ten cryptocurrencies in market cap. Known as an “Ethereum killer,” its blockchain uses a proof-of-history mechanism rather than Bitcoin and Ethereum’s slower, heavier proof-of-work algorithms. This timestamp-based system should add a layer of security to Ethereum’s offerings, while its exponentially higher speed also offers greater scalability.
Solana tries to have the best of both worlds: Bitcoin’s decentralization alongside the super-fast transaction speeds of a huge centralized company like Visa. But a hack of Solana this summer hit more than 9,000 wallets, affecting some $4 million in assets and raising questions over whether the enhanced speed was being matched with commitments to security.
Dogecoin started in 2013 as a joke, a dig at the wild speculation in crypto raging at the time (its name and logo stem from the doge meme, a Shiba Inu with a shaky grasp of the English language). Today, its market cap is over $10 billion. Dogecoin is considered an altcoin in that it is not based on Bitcoin or Ethereum but rather on Litecoin (which is itself a Bitcoin fork). Dogecoin’s chief merits are its low price and unlimited supply. And some users just like Dogecoin’s snarky and sarcastic image—its loyal fan base uses it for tipping on social media content. Elon Musk calls it his favorite, and a prominent British soccer team even sponsors it.
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Cryptocurrency: Pros and cons
Decentralization: Cryptocurrency requires no central bank to regulate money supply, thereby offering protection against inflation or a single bank failure.
Speed: Because they do not use third-party intermediaries, crypto transactions can be far faster than traditional online money transfers.
Security: With blockchain tech, each new block connects to those before it in a chain that is nearly impossible to breach. Crypto transactions (and minting new crypto) involve powerful computers racing each other to solve complex math problems.
Serving the underserved: Cryptocurrency has brought thousands of unbanked people worldwide into the financial system and offers promising benefits for the remittance economy.
Instability: Cryptocurrency prices tend to change quickly—the sharp drop in Crypto’s value since last year has been a stark reminder. And like any infant technology, it has had its growing pains. Many crypto buyers bank on predictions for its future growth, not necessarily on current realities.
Environmental impact: Studies have shown that worldwide crypto mining requires twice as much energy as is needed to power homes across the entire U.S. A public backlash has prompted major crypto-mining companies to insist they are working to reduce their environmental footprint significantly.
Potential for abuse: Privacy can have a dark side. Crypto’s anonymous nature means illicit transactions are impossible to trace.
Tax and legal issues: El Salvador is currently the only government that considers cryptocurrency to be legal tender. So sellers must decide which cryptocurrencies, if any, they accept. And the U.S. taxes cryptocurrency as property rather than currency, meaning it’s subject to capital gains taxes—the difference between value at the time of purchase and of sale.
You can learn more about Web2 vs Web 3 in our guide.