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A logo for Bitcoin. Bitcoin was the first decentralized cryptocurrency.

Cryptocurrency is a type of currency which uses digital files as money. Usually, the files are created using the same ways as cryptography (the science of hiding information). Digital signatures can be used to keep the transactions safe, and to let other people check that the transactions are real.[1][2][3] The first cryptocurrencies were made to be free of government-given currencies.

Cryptocurrencies are usually not controlled by any one person, but instead they are decentralized and controlled by many people.[4] This is different to 'centralized' electronic money and central banks which are controlled by a small amount of people.[5] The control of each cryptocurrency works through a distributed ledger (a list of transactions shared by everyone), usually a blockchain.[6] This lets everyone know all of the financial transactions that have taken place.[7]

Bitcoin, first released as open-source software in 2009, is often called the first decentralized cryptocurrency.[8] Since then, over 4,000 cryptocurrencies (sometimes called altcoins, which is short for alternative coins) have been created. [9]

The value problem[change | change source]

In many cases, cryptocurrencies cannot be converted to real currencies; it is only possible to convert them to other cryptocurrencies, or to use them to buy things. Some cryptocurrencies can be converted to real currencies: They usually have a high volatility, and using them carries a high risk.[10] They are also a target for so-called Pump-and-Dump-Attacks.[11] They act like a big distributed economic system: as they are not issued or controlled by central banks, their value is difficult to influence: For this reason, they cannot really take the place of a stable currency.[12]

Cryptocurrencies are prone to speculation, which makes building a system of more or less stable exchange rates very difficult.[13] Another problem is the inequality of distribution: Many cryptocurrencies are held by only few people. As an example: about 1.000 people hold half of the total amount of bitcoins in the world. This means that if any of these people start using the Bitcoin that they own, this will have an effect on the exchange rate. It also means that these people have a great influence on the value of the currency and are able to change its value easily.[14] The currency itself only tells you who owns it. Exchange rates of cryptocurrencies are established outside the system. Exchange rates are given by brokers and traders. What they say is no guarantee that the currency is traded at the value proposed. In itself, the unit of cryptocurrency has no value.[source?]

In contrast to cryptocurrencies, real currencies are controlled by central banks. Certain economic phenomena such as inflation or deflation may change the value (and exchange rate) of a currency. The people who own units of the currency have no direct influence on its value.[source?]

Formal definition[change | change source]

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:[15]

  1. The system does not require a central authority, distributed achieve consensus on its state [sic].
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines if new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the how to create new units, and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The owner of a unit of cryptocurrency can transfer this unit. For this transfer to be successful, the current owner must prove the ownership.
  6. If two different instructions for changing the ownership of the same cryptographic units are entered at the same time, the system performs at most one of them.

In March 2018, the word "cryptocurrency" was added to the Merriam-Webster Dictionary.[16]

Crypto mixing[change | change source]

Basically, crypto mixing is a service where tainted bitcoins can become anonymized bitcoins. Bitcoin mixing, also referred to as Bitcoin tumbling or Bitcoin blending, is the process of using a service to make your Bitcoin purchases and transactions untraceable. Instantly mixing Bitcoin is the only way to cover tracks and make your Bitcoin transactions impossible to track. This protects against criminals, hackers, and activities prohibited by the law where Bitcoin is involved, it also protects you against law enforcement. The huge amount of bitcoins on mixing services come from mining pools around the world.[17]

Crypto mining[change | change source]

The term crypto mining means gaining cryptocurrencies by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to a public record (ledger) known as a blockchain.[18] This verifies transactions that were recently added. On top of maintaining the blockchain’s integrity, verification also prevents double-spending.

References[change | change source]

  1. Andy Greenberg (20 April 2011). "Crypto Currency". Archived from the original on 31 August 2014. Retrieved 8 August 2014.
  2. Cryptocurrencies: A Brief Thematic Review Archived 2017-12-25 at the Wayback Machine. Economics of Networks Journal. Social Science Research Network (SSRN). Date accessed 28 august 2017.
  3. Schueffel, Patrick (2017). The Concise Fintech Compendium. Fribourg: School of Management Fribourg/Switzerland. Archived from the original on 2017-10-24. Retrieved 2018-06-24.
  4. McDonnell, Patrick "PK" (9 September 2015). "What Is The Difference Between Bitcoin, Forex, and Gold". NewsBTC. Archived from the original on 16 September 2015. Retrieved 15 September 2015.
  5. Allison, Ian (8 September 2015). "If Banks Want Benefits of Blockchains, They Must Go Permissionless". NewsBTC. Archived from the original on 12 September 2015. Retrieved 15 September 2015.
  6. Walters, Steve (27 Sep 2017). "Beginners Guide to Blockchains". Coin Bureau. Retrieved 25 Jun 2018.
  7. Matteo D’Agnolo. "All you need to know about Bitcoin". timesofindia-economictimes. Archived from the original on 2015-10-26.
  8. Sagona-Stophel, Katherine. "Bitcoin 101 white paper" (PDF). Thomson Reuters. Archived from the original (PDF) on 13 Aug 2016. Retrieved 11 July 2016.
  9. "Number of cryptocurrencies worldwide from 2013 to November 2021". Statista.
  10. "Bitcoin's Volatility Problem: Why Today's Selloff Won't Be the Last". Businessweek. 2013-12-05. Retrieved 2013-12-29.
  11. "A crypto-currency primer: Bitcoin vs. Litecoin". ZDNet. 2013-12-14. Retrieved 2013-12-29.
  12. Chicago Fed Letter: Bitcoin: A primer (englisch; PDF; 180 kB)
  13. Philip Banse: Digitale Währung mit starken Schwankungen. In: Deutschlandfunk. 30. Dezember 2013.
  14. "Cyber experts unearth massive bitcoin scam". 2013-12-10.
  15. Lansky, Jan (January 2018). "Possible State Approaches to Cryptocurrencies". Journal of Systems Integration. 9/1: 19–31. doi:10.20470/jsi.v9i1.335. S2CID 3699248. Archived from the original on 2018-02-12. Retrieved 2018-06-24.
  16. "The Dictionary Just Got a Whole Lot Bigger". Merriam-Webster. March 2018. Retrieved March 5, 2018.
  17. " Launching the Solution for Users' Privacy". 2021-11-26. Retrieved 2022-11-13.
  18. "How Crypto Mining works". 2022-06-15. Retrieved 2022-06-19.