What is a cryptocurrency?

A cryptocurrency is a digital currency that can be used as a medium of exchange.  There are many cryptocurrencies today but they are all essentially built on the same technology called blockchain.  Bitcoin is the most popular cryptocurrency.  The traditional currencies, like the US Dollar or the Euro, are called Fiat currencies. 

The table below shows some of the differences between Cryptocurrencies and Fiat Currencies.

Fiat Currency

Cryptocurrency

Can be represented by tangible or physical notes

The currency is digital (intangible) and stored online

Fiat currency is legal tender backed by a central government

Cryptocurrency is not a legal tender and it is not backed by a central government or bank

The money supply is controlled by the reserve bank or government

The money supply is controlled by an algorithm built into the block chain technology at inception

The control of fiat is centralised

The control of cryptocurrency is decentralised

A fiat currency is country or region specific

A cryptocurrency is international and "borderless"

 

A cryptocurrency is supported by a network of peer machines.  Every peer has a record of the complete history of all transactions.  Based on this, it will have a view of all the balances.

Transactions are confirmed by miners.  Mining machines stamp the transaction as legitimate and then spread this information across the network.  This transaction has now been confirmed in the blockchain.

The major hurdle with payment networks is preventing "double spending" or to prevent someone from spending the same money twice.  In traditional banking, this is managed by a central system.  What popularised Bitcoin and supported its value was that the inventor of Bitcoin found a way to prevent double spending on a decentralised technology.

Altcoins refer to all the other cryptocurrencies outside of Bitcoin. There are thousands of Altcoins that compete with Bitcoin.  Some of the other notable cryptocurrencies are Ethereum and Ripple.