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Breaking Down Cryptocurrency: What Is It, How Did It Come to Be

Story Highlights

  • What is cryptocurrency?
  • How it all began?
  • Birth of Bitcoin
  • Bitcoin development and effects
  • Bitcoin alternatives
  • Corporations, countries launch cryptos
  • Using cryptocurrency
  • Final words

The cryptocurrency craze took the world by storm a few years ago, with a lot of people investing in the likes of Bitcoin, Ethereum, and Ripple. Cryptos were the talk of the town. You couldn’t browse the web without stumbling on something related to them. Whether you were scrolling through Facebook and Twitter, or simply reading the news, cryptocurrencies were everywhere.

There’s so much hype about cryptos on the internet these days. But what do you know about them?

In this walkthrough, I will talk about the history of these digital currencies, their different types, and how they work. So if you’d like to learn more about cryptocurrency, strap yourself in for a quick read.


Content Overview


What Is a Cryptocurrency?

The simplest way to explain what cryptos are is to describe them as digital cash. It’s an online form of money that has no physical form, and no central authority to manage or control them in any way. Teams of developers created cryptocurrencies, and the community maintained them through the use of blockchain technology.

If you don’t know what blockchain technology is — don’t worry, I will cover that as well, in due time. As for the cryptocurrency explanation, you won’t find a more straightforward answer than the above. However, the description that I gave doesn’t tell you how cryptos work and how they became so popular.

To learn what cryptocurrencies are, the best place to start is by covering their history and origin.


History and Origin of Cryptocurrencies

Cryptocurrencies, a.k.a. ‘digital currencies’ or ‘cryptos,’ are not particularly old. They came to life a little more than ten years ago in 2008/2009.

Back then, the world was dealing with a financial crisis caused by the banks. Some say that it was the worst one that the world had experienced since the Great Depression.

To put it simply, banks in the United States started giving out risky loans to people to attract new customers. As a consequence, they had to face significant defaults on these loans, and people were not able to pay back the money in time. As a result, the banks started collapsing and filing for bankruptcy.

In the end, a lot of people lost their money, and several banks closed up shop. Many started thinking that banks have too much power and influence and that they are not handling it properly. This inspired one individual (or a team) known as Satoshi Nakamoto to come up with a new concept for a new financial asset.

Nakamoto named it Bitcoin, and it was the first successful cryptocurrency ever to be created. I say the first ‘successful‘ cryptocurrency because the concept of digital cash was not new at the time. However, no one else managed to create a working model that would not suffer from a lot of significant issues.

So, on Halloween’s October 31st of 2008, Nakamoto published Bitcoin’s white paper.


The Birth of Bitcoin

In case you’re wondering, a white paper is a document that presents the concept of a project. In this case, the project was a cryptocurrency, which was the first of its kind. Named Bitcoin, it would have several features that would separate it from other types of currencies and prevent problems caused by the USD mismanagement.

Some of those features include:

  • Decentralization: No single entity such as banks, governments, or agencies is in charge of managing it. This also makes it safer because hackers will have a hard time trying to attack thousands of servers.
  • Limited supply: The maximum Bitcoin cap is 21 million coins, with no plans to add more. That way, it would be impossible to suffer from financial problems, such as inflation. However, that number hasn’t been reached yet (currently 17.7 million coins).
  • Anonymity: When using Bitcoin, people could make online payments without revealing their identity. This feature faded away somewhat over time, but I will talk more on that later.
  • Fast, international transactions: Bitcoin, as an online currency, is borderless. In other words, you can send it to anyone at any time, whether they are sitting right next to you, or on the other side of the world.
  • Cheaper transaction fees: To have your payment processed, you must still pay a transaction fee. However, they are significantly less expensive than the fees that banks demand, which is especially important when making international payments.

There are additional benefits and advantages of Bitcoin and other cryptocurrencies, but these are the main ones.

The important part is that the idea was genuine, and the mysterious Satoshi Nakamoto, an individual or group whose real identity remains unknown to this very day, proceeded to launch Bitcoin on January 3rd, 2009.


Blockchain Technology

Now, one important thing to note here is that Bitcoin, as well as other cryptocurrencies, use blockchain technology. Blockchain, as the name suggests, is a chain made up of blocks. These blocks are lists of records that are grouped until they fill up the memory available per each block.

Think of them as well-arranged boxes full of data. They are not very big (at least in Bitcoin’s case), and the data includes details of completed crypto transactions. Each block also contains a timestamp that shows when it was created, processed, and added to the chain.

Now, you might be wondering: who processes transactions? In traditional finances, this is the job of the bank. Banks confirm that your payment is legitimate. When it comes to cryptocurrencies, however, there are no banks. That’s the whole point of inventing them.

Instead, blockchain network participants, i.e., the community, process transactions.

You see, blockchain is a decentralized ledger spread across multiple servers. Each member of the network has the complete copy of the blockchain stored on that computer, and any new legitimate blocks get added to it. Each block must undergo processing to become part of the blockchain, with the latter serving as a timeline of all past transactions.

This is why it is impossible to hack the blockchain since you would have to hack thousands of computers and change the records on each one.


Mining

Blockchain members connect their computers to the network and use their computing powers and resources to solve different mathematical problems. The computer does this automatically, and once the math issue is resolved, so is the block. All transactions that were a part of that block are then considered processed and legit. 

Meanwhile, the participant members who helped solve the mathematical problem receive some amount of cryptocurrency coins as a reward. These coins come from transactions fee that you, as a payment sender, have paid.

This is also how new coins are created, and the person who is solving the transactions is called a cryptocurrency miner. Also, the process of solving operations and releasing new coins in circulation is called mining.

Bitcoin has a maximum coin cap of 21 million BTC. But not all coins are mined and released in circulation as of yet. The current supply is 17,866,050 BTC, at the time of writing.

This is why the date of January 3rd, 2009, is so important. It was when Satoshi Nakamoto mined the first Bitcoin block, known as the Genesis Block. He received a reward of 50 Bitcoin (BTC) for his trouble, and the first 50 BTC in history went into circulation.

As block mining continued in years to come, the rewards went through a process called ‘halving‘ every time miners reached a certain block number. In other words, when people make transactions, they get grouped into blocks. Each time miners solve a specific amount of blocks (210,000), the reward for answering them gets cut in half.

That means that the rewards for mining are only going to get smaller and smaller as time progresses.

crypto mining

Bitcoin: The Early Years

Back when Bitcoin first launched, it had no value at all and a price tag of $0. It was completely worthless. However, that soon started to change, simply because it offered an alternative. It allowed people to make payments without relying on banks that had already misused their authority, trust, and funds that people gave them for safekeeping.

As the years went by, Bitcoin’s price started to grow, slowly at first, but then at a faster rate. In its beginnings, it was only attractive to tech geeks and online criminals. Criminals were interested in it because they could use it to pay for illegal goods and services without revealing their identity.

In fact, it was estimated that the daily sales volume reached by six dark web markets in 2014 exceeded $650,000. But, as more people learned about the coin, it slowly but surely started coming to light. 

It was not long before the first cryptocurrency exchanges launched. These are online exchanges where you can go and buy or sell Bitcoins, and get other coins, or traditional (fiat) currencies, such as dollars, euros, and alike.

Soon after that, developers started thinking about Bitcoin’s code, inspecting it, and detecting problems. For example, Bitcoin’s blockchain can only process one block per 10 minutes. That would not be a problem, if not for the fact that it can only handle a handful of transactions per block.

People quickly realized that this would be an issue when the number of those making crypto payments increases, and they were right.


Bitcoin Alternatives

These challenges inspired developers to start making other coins called ‘Altcoins,‘ which is short for Alternative Coins. Namecoin was the first-ever altcoin, although it did not last for very long. But, the idea of having alternatives to Bitcoin stuck around, and soon enough, others started emerging as well.

One of the oldest altcoins that are still popular today is called Litecoin (LTC). It was born when Bitcoin’s blockchain forked, meaning that it got split in two. One part of it remained traditional Bitcoin, the one we know today. The other received an update that changed some of its parameters.

This was not Bitcoin anymore, but Litecoin, an altcoin that uses the same technology, but comes with changes. That includes larger block size and faster block processing time (2.5 minutes), Which means swifter transactions and such.

Other developers created new coins and blockchains from scratch, which was a common practice until Ethereum was born.


Ethereum: The Game-Changer

Many believe that Ethereum is the second most important coin ever created, with Bitcoin being the first one, of course.

That’s because Ethereum isn’t just a cryptocurrency that you can use for payments. It does have that function, of course, but its primary purpose was not for payments.

Instead, Ethereum was created back on July 30th, 2015, as a development platform. That single difference shifted the attention of developers from cryptocurrencies towards blockchain technology.

They figured: if we can make decentralized money, why not make decentralized everything? This train of thought led them to the creation of decentralized applications (dApps), smart contracts, decentralized exchanges, and even the production of new coins, based on Ethereum’s platform and technology. 


The Rise and Fall

This invention significantly sped up the creation of new altcoins, and just in time, too. Once things started speeding up a bit, cryptocurrencies finally came out of the shadows and into the light. This was in 2016 and 2017 when the entire world finally heard of cryptocurrencies, and they became a hit.

In early 2017, Bitcoin’s price already reached the height of over $1,000 per coin. By the end of the year, the price was 20 times larger, sitting comfortably at $20,000 a coin.

Altcoins got their fair share of popularity as well. And while not a single one was even close to Bitcoin’s value, they were also far more valuable than ever before.

As a result, new coins were born almost daily, sometimes several of them per day. And once they were available for trade, investors quickly sought to buy them at a low price and then sell them once their value grew to make a profit.

These token sales were named ICOs, or Initial Coin Offerings. It’s the crypto version of Initial Public Offerings (IPOs), which are a part of the traditional finance industry.


What Goes Up Must Come Down

However, then came 2018, and with it, the most significant price drop in crypto history. Once Bitcoin hit $20,000, people started selling their coins for USD.

Cryptocurrencies are well known and popular, but there was not much you could do with them, apart from trading, waiting for prices to grow, and then cashing out to get fiat currencies.

A lot of people started doing this when BTC hit $20,000, and the overselling resulted in a price crash. After all, Bitcoin is not backed by anything. There is no real-world asset that would maintain its price at a certain height.

Its only worth lies with its trading volume. In other words, if a lot of people want it, its price goes up. If people start selling it, its price is bound to come crashing down, which is precisely what happened.


Follow the Leader

Now, as the market leader, and the most influential coin in the cryptocurrency sector, Bitcoin pretty much dictates the behavior of other currencies. When people want Bitcoin, it is a sign of cryptos having value. And those who cannot afford BTC tend to go for altcoins.

But if Bitcoin sees massive sales, the altcoins will suffer the same fate, and their prices will drop accordingly. Basically, it is all about market sentiment and the investors’ thoughts.

With Bitcoin crashing down, all other cryptocurrencies followed, and they lost investors’ trust. The prices kept dropping for the entire year of 2018, and this period came to be known as ‘the crypto winter.’


Corporate Interest in Cryptocurrency

Then, 2019 came, and institutions started getting interested in the coins. Major players, like Facebook, Telegram, Apple, and Amazon. Even some banks such as JP Morgan hopped aboard the crypto express and announced their own coins.

Facebook also announced its Libra coin recently, after months of the community speculations about the company’s future plans.

As for JP Morgan, it revealed its JPM Coin, which, according to many, would not be an actual cryptocurrency. It won’t be a decentralized coin, but rather a digital version of the money that the bank’s clients can deposit into the bank.

“The applications are frankly quite endless; anything where you have a distributed ledger which involves corporations or institutions can use this.”

Umar Farooq, Head of J.P. Morgan’s Blockchain Projects

But even so, experts believe that the bank’s involvement might bring new users to the crypto world. Once they learn about cryptocurrencies, they will know that JPM Coin doesn’t qualify as one and they’ll likely ditch it for Bitcoin.


Venezuela Gets in on the Act

Besides, companies and banks are not the only ones interested in these currencies. Some countries like Venezuela developed their own cryptos. The South American nation, which suffers from massive inflation, released Petro. This coin is backed by the Venezuelan oil reserves, which should secure its price and prevent volatility.

Unfortunately, Venezuelans were not too fond of Petro, nor was the US government, which imposed sanctions on the country. And while many of them still choose to use cryptocurrencies, they often go for some other altcoin, or BTC itself.

Nonetheless, the interest in cryptos by major corporations in 2019 refreshed the investors’ trust in cryptocurrencies. As a result, the prices started rising earlier this year again.

Today, Bitcoin’s price climbed back up to $11,800, after dropping to $3,200 during the crypto winter. BTC is halfway towards its highest rate ever, the all-time high (ATH) of $20,000, and many predict that it will go much higher this time.


The Uses of Cryptocurrencies

Cryptocurrencies are crucial because they represent the biggest change in financial history since the invention of money. Even the shift from gold coins or similar assets to paper money was not that big of a deal, because the money was still tangible.

But with Bitcoin and altcoins, however, the situation is different.

Coins are now just a piece of code that exists as information on the internet. Naturally, it is quite a significant change, and a lot of people are hesitant to go along with it. Others who are more open to the idea gladly accepted it and became traders, investors, and alike.

“The main advantage of blockchain technology is supposed to be that it’s more secure, but new technologies are generally hard for people to trust, and this paradox can’t really be avoided.”

Vitalik Buterin, co-founder of Ethereum

One amusing report from years back tells the story of a Bitcoin holder who offered 10,000 BTC to anyone who brings him two pizzas, and he actually paid them. Of course, that was back in 2010, when 10,000 BTC was worth around $40. But in today’s market, these two pizzas are known as the most expensive dishes in history (10,000 BTC = $100+ million).

If you were wondering what can you do with cryptocurrencies, the answer is: More than before, but still not enough.


Online Payments

crypto online payment

At first, you could only use cryptos for trading. But with time, some of the braver online merchants started accepting cryptocurrencies as a form of payment for goods and services. And their numbers began to grow.

Now, you can even order a crypto debit card from one of the crypto card makers, which are mostly new companies. The fees are quite high, and many believe that they are not worth using, but the option is there for those who can afford it.

You can still use cryptocurrency for trading, of course, but they are also a great way to make online payments and keep your anonymity, or at least pseudonymity. Most cryptos offered user anonymity in the early days. You would create a wallet, fill it with coins, and pay for things.

However, the governments did not like the idea of people being fully anonymous, so they forced a lot of exchanges to start verifying their users

Therefore, you have to submit a photo of your ID card when making an account on an exchange nowadays. Then, as you buy crypto and send it to your wallet, your identity becomes visible. As a result, people can trace it and discover that you are the owner of the wallet. This is why true anonymity is very hard to achieve, even with cryptocurrencies.


Online Gaming Rewards

Cryptos are also popular in online gaming, where you can earn them as rewards for playing a game. You can then purchase in-game items, transfer the coins to your wallet, trade it for another coin, or cash out and withdraw USD or some other fiat currency.

You can even use it to invest in other coins through ICOs and other token sale models.


Illegal Usage

Bitcoin has a few shady uses, as well. It was particularly popular among hackers and cybercriminals, as they believed that Bitcoin transactions were untraceable.

Hackers often used it during ransomware attacks, where they would infect your computer with malware and lock away your files and encrypt them. Then, they would demand payment in Bitcoin in exchange for the decryption key.

The WannaCry ransomware attack, which infected computers around the world, is the perfect example.

Criminals who visited the dark web black market (a.k.a. The Silk Road) also favored cryptocurrency. When the government shut it down, the Feds reportedly seized up to $48 million in Bitcoin.


Conclusion

There is still a lot more to learn about cryptocurrencies, such as their risks, different coin types, how to obtain them. However, after reading this guide, you’ll at least have a full understanding of what cryptos are, how they became so popular, and what you can do with them.

They are a new form of money and form a major shift in the way we understand finances. As a result, they are having trouble with going mainstream, but each day is another step on that road.

Therefore, it is critical that you learn as much about cryptos as possible, because many believe that they are the way of the future. Not only that but getting involved now will let you watch history unfold.

Have you ever traded or used cryptocurrency before? Share your experience with us in the comment section below.

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Ralph Peterson

Ralph was bitten by the tech bug from an early age. Today, he is a cybersecurity geek who is obsessed with online privacy. Peterson is also a hardcore streamer of the latest TV shows and sports tournaments. We constantly hear him shouting at his screen whenever there's a live Premier League match (or a bad ending to a TV series like GoT).

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