Cryptocurrency is defined as any type of digital unit, created or obtained by mathematical calculation, whose system is based on the Internet and which is used as a medium of exchange. They exist only on the web, and their generation and storage is purely digital.
Perhaps it is easier to answer what cryptocurrencies are by saying that they are virtual currencies that use a digital encryption in their operations, such as money transfers or payment of a certain product or service, with which you can operate as with any traditional currency and that have no physical representation.
Cryptocurrencies were conceived as a conventional means of payment, but it is a much discussed product and only in some occasions they are accepted as such. However, cryptocurrencies have a behavior similar to that of commodities, since their value is not linked to the behavior of any specific economy and the effect of changes in interest rates and money market reserves is indirect at best.
Cryptocurrencies, unlike other currencies, are not created by any bank but are created by "mining". Mining is a process through which cryptocurrency transactions are verified and new units are offered.
Cryptocurrencies are an investment instrument that has become widespread. There is a lot of controversy about their use, due to their high volatility and lack of control by governments and central banks.
Miners collect the latest transactions in blocks and solve an algorithm, in return for which they receive cryptocurrency.
Therefore, one of the main differences between a traditional currency and a cryptocurrency is that the former are controlled by governments and cryptocurrencies escape their control.
The first cryptocurrency was Bitcoin in 2009, it was created by one or more people using the pseudonym Satshi Nakamoto and is the most widely used cryptocurrency. It uses the SHA-256 cryptographic function set and its POW (proof-of-work) scheme. Other major cryptocurrencies include Ethereum, Namecoin, Litecoin, Peercoin, Freicoin and Ripple.
Some characteristics of cryptocurrencies are:
- They are digital currencies without physical representation, which can be transferred instantly to any location.
- They are outside any state regulation, so their issuance, and therefore their supply, is outside the control of the central banks of the countries where they are used. They are produced through mining.
- Since this is a very rigid market as far as the creation of currency is concerned, since a specific amount is generated with a known value defined in advance, there can be periods of price instability, with highly inflationary or deflationary phases.
- They are not tied to any country; they are global currencies.
- They are traded in highly volatile markets.
- Both the security and the integrity and balance of the cryptocurrency market is carried out by a network of agents, who are called miners.
- Transactions can be carried out between anonymous persons in such a way that tracking them is almost impossible.
- They are currencies that in principle cannot be counterfeited, as they are electronic currencies in which the number of coins is defined