What is a Cryptocurrency and How It Differs from the Conventional Concept of ‘Money’

Virtual currencies are widely defined as a medium of exchange operating similarly to regular currency without having legal tender status. Where a virtual currency can be purchased and sold for legal tender, which would be called a convertible currency, it can be called a cryptocurrency. Cryptocurrency is a form of virtual currency that is decentralized i.e neither backed by central bank nor funded by any government.

So how does a cryptocurrency differ from the conventional form of money? There are certain distinct differences between the money we know i.e ‘fiat money’ and cryptocurrencies. As mentioned, cryptocurrency networks are completely decentralized. Cryptocurrencies operate through peer-to-peer exchanges, depending on no financial institution for the transactions. They rely on what is called a blockchain technology, a system recording transactions. Therefore, everyone in the network can see every account’s balance. This technology is completely anonymous and the transactions are undertaken by users. Users can trade through crypto-ID’s, without providing any names, addresses or any kind of personal information.

The most widely known crypto currency is Bitcoin. There exist cryptocurrencies of similar principles such as Litecoin and other types of cryptocurrencies such as Ethereum and Ripple. Based on popularity it is best to examine Bitcoin further along.

Bitcoins show a certain resistance to inflation. Fiat money occasionally need to be emitted in order to expand the money supply. However, Bitcoin is designed to have a maximum emission limit. By this, it is meant that there is a maximum number of Bitcoins that can be released for trading. As known, such upper limit is not set for fiat money. The algorithm provides this maximum and research shows that by now about 75% of coins have been emitted. However this does not mean that they are the safest form of investment. Value of Bitcoin, as well as other cryptocurrencies fluctuate like no other asset. Furthermore, the widely unregulated nature of cryptocurrencies also poses a risk, especially in certain jurisdictions. You can find details as to the legal status of cryptocurrencies in our ‘The Legal Status of the Cryptocurrencies and the Regulatory Framework in the EU and Cyprus’ article and the investment advice in our ‘Can Your Business Benefit from the Cryptocurrency Trend’ article also available on our website.

Although anonymous, Bitcoin transactions provide a good degree of transparency. Every user of the system is able to see how many Bitcoins a user from a certain Bitcoin-address has. This means that one user is able to see the prospects of the other user while engaging in trade. This can be regarded as a relative safety net Bitcoin provides. Each Bitcoin wallet records a data base containing all transaction ever performed in the system. This recording system provides verification of origin of each transaction, providing transparency on the nature of these transactions if need be.

One other difference is the impossibility of the transaction cancellation. Since there is no intermediary, there is no entity to cancel a transaction; once the Bitcoins are transferred, the deed is done. The only way to ‘undo’ a transaction is if the recipient sends the coins back to the sender. Due to the set-up of the system, the transfers are unforgeable.

An individual or a corporation can purchase cryptocurrency, although via different means. The most straightforward way to purchase is via special ATM’s available in countries promoting cryptocurrencies. They can also be purchased via gift cards. If one intends to purchase large numbers, a still popular method is to do it in person, in gatherings or meetings undertaken by traders. Once you purchase your cryptocurrency, you need a location for storage. Wallet services provide this for you. The wallet will provide you with a PIN for secure maintenance. While an online wallet is convenient, it might be safer and more controlled to store your assets offline, in hard drive or a hardware wallet. You can find details to this in our ‘Should Your Business Invest in Cryptocurrency’ article.