What Are Cryptocurrencies and Why Were They Created?

Until 10 years ago, probably only a few people knew the term ‘cryptocurrency’. Today, more than 15 years after the creation of the most famous of them – Bitcoin – almost every person with free access to the Internet has heard of them.

However, still, only a small percentage of the population really understands the essence and the reasons why cryptocurrencies are not just a speculative asset, but an asset that can revolutionise the financial sector over time.

What Comes to Mind When the Average Person First Hears the Term Cryptocurrency?

Probably, that it is some kind of currency. Unfortunately, most people start and end their exploration of this subject by imagining cryptocurrency as an alternative internet payment medium similar to the euro, crown or dollar. Combined with the superficial way in which the mainstream media report on cryptocurrencies, it is hardly surprising that even the technologically savvy take some time to understand that cryptocurrencies are more than just a digital copy of regular money.

The easiest way to introduce a newcomer to the subject is to try to illustrate how the king of cryptocurrencies, Bitcoin, differs from the usual state currencies (dollar, euro, etc.). It is its decentralised nature.

Decentralisation means that there is no central entity or authority that can control and influence it. The power over Bitcoin is, in very simplistic terms, held by “everybody” and this is done with the help of mathematics and cryptography. This makes it a perfect alternative to the conventional banking system.

When you walk into a bank and decide to transfer money from your account to your friend’s account, you are not actually transferring the money directly, but your bank, or a third party, is. Should that bank go bankrupt or decide to simply reject your transaction for some reason, you have a serious problem.

This cannot happen in the case of Bitcoin, because the control of your bitcoins is solely with you, or whoever knows the private key to your Bitcoin wallet. There is no entity that can shut Bitcoin down. Neither the courts, the police, the military, hackers, nor the presidents of the U.S. or Russia can do it. In fact, unlike conventional fiat currencies, central banks and national governments have no power over cryptocurrencies in terms of their very existence.

To get Bitcoin to be shut down or banned across the board, you would have to shut down the internet worldwide. But even then, thanks to Blockstream, which already covers almost all areas of the earth with its satellites, its blockchain would live on.

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Bitcoin’s Decentralised Nature Is Ensured by Its Mining.

This is a process whereby so-called miners verify all transactions on the Bitcoin network, for which they are rewarded with newly mined bitcoins. We will go into this in more detail later, but it is important to know that mining plays a similar role for Bitcoin cryptocurrencies as central banks do for fiat money. The difference, however, is that mining remains decentralised due to the fact that anyone can get involved.

As part of the mining process, Bitcoin grows its ledger, which we call the blockchain, an unmistakable transparent history of all Bitcoin transactions. In the case of the blockchain, you can be sure that no transaction will ever be lost and also that no bitcoins will ever disappear from the Bitcoin wallet without the private key being used.

This private key cannot be decrypted. So if you heard that Bitcoin was hacked, this was a misinterpretation by the media. Theft of cryptocurrencies only occurs when owners entrust them to third parties for safekeeping – for example, holding them on a centralised exchange that gets hacked, or a hacker accessing their private key, which is stored online somewhere. In other words, the theft of cryptocurrencies can only occur by neglecting the security rules of the private key holder, but not by hacking the system on which Bitcoin operates. We will cover the topic of security risks and ways to protect your cryptocurrencies later in this blog.

Why Were Cryptocurrencies Created?

Cryptocurrencies are created for a variety of reasons. Some want to replace current money, others aim to provide a space on their blockchain to create decentralised applications. Still, others focus on the possibilities of sending completely anonymous untraceable transactions. The “father of cryptocurrencies,” Bitcoin, however, seems to have originated as a currency that was meant to be a reaction to the abolition of the gold standard and the way the current financial world works.

Its founder, known only by the pseudonym Satoshi Nakamoto, brought it into the world symbolically on January 3, 2009, by mining the first Genesis block at the time of the raging mortgage crisis in the United States, which shook the entire financial world. Since every transaction on the blockchain can contain information in addition to the data needed to execute the transaction, Satoshi incorporated the text “Chancellor on brink of second bailout for banks” into this Genesis block.

Bitcoin, by its nature and the fact that it is a deflationary currency, has offered people a new alternative to money. Despite the experience of the last crisis, the central banks continue to print more and more money, devaluing the existing money. Bitcoin, on the other hand, is programmed so that there will never be more than 21 million of it. It has thus become the perfect alternative to conventional currencies – for it is a combination of decentralisation and deflationary policies. It has a history of over 15 years and is here to stay.

But Bitcoin is far from the only cryptocurrency looking for a place under the sun. Many other cryptocurrencies have been created with different motives.

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In the case of decentralised applications, the Ethereum cryptocurrency and its blockchain are currently leading the way, and other projects and decentralised applications of the future may be built on top of them. The XRP cryptocurrency is a great example of how the blockchain can help traditional banks to make fast and cheap transactions. Its creator, Ripple, is not at all reluctant to admit that, unlike Bitcoin, it wants to work with banks.

There are already thousands of cryptocurrencies and, unfortunately, many fraudulent ones alongside them. Most of them will never find a use and will remain a speculative asset. Therefore, the next few years will mainly be a battle between a few dozen really promising projects, which will fight a tough battle among themselves to see who will create the new standards of the digital economy.

While Bitcoin is currently lauded for its size, robustness, impenetrability, and guarantees of decentralisation, some cryptocurrencies have ambitions to overtake Bitcoin in the nature of decentralisation and, alongside that, solve its main weakness, which also offers its biggest advantage so far. This is mining, which is associated with high electricity costs and, according to some studies, a negative impact on the environment.

Therefore, cryptocurrencies that seek to best Bitcoin and achieve decentralisation in a greener and cheaper way have emerged.

These are projects that want to use the Proof of Stake algorithm. The aforementioned Ethereum is planning to switch to it, as well as, for example, a cryptocurrency that is being developed by a wide academic community. Its name is Cardano.

There are also digital currencies emerging that place an emphasis on making their transactions as cheap as possible and extremely fast at the same time, while their decentralisation is not as high as Bitcoin’s. Here we can include, for example, the smart-contract platforms Solana or Avalanche, which are cheap and fast, but somewhat less decentralised. One can also include EOS or Tron.

Bitcoin is also currently suffering from problems related to the scalability of its network. A consequence of its robustness is that transactions take longer and are more costly. Therefore, cryptocurrencies based on the same technology, but with slight modifications that partly address this problem have emerged.

Litecoin, which is referred to as “digital silver” because it was created as a copy of Bitcoin with some modified features that ensure faster transactions and four times the number of coins, can be included in this category. Or there’s Bitcoin Cash, which was created by splitting off from Bitcoin (the so-called hard-fork) in 2017, with the caveat that, unlike Bitcoin, Bitcoin Cash can fit more data into a single mined block and thus can perform more transactions in the same amount of time.

Different projects have different ambitions. However, whether it is the decentralized deflationary Bitcoin or the bank-centric XRP, cryptocurrencies offer an alternative and technological innovation that cannot be ignored. However, even the oldest ones have still only been around for a few years and it is therefore logical that their price suffers from high volatility.

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