On the surface, cryptocurrency trading is a lot like any other form of trading. But underneath it’s quite different. The first difference is the speed of execution. Cryptocurrency exchanges are extremely fast. On a typical exchange, you can buy or sell 100,000 Bitcoins in less than an hour. That’s 24 hours compared with several months for a typical stock exchange.
The second difference is that cryptocurrency trades are not anonymous. In fact, most cryptocurrency trades are recorded on public ledgers called block chains, and anyone can see who bought or sold what at what price at any time.
Cryptocurrency is all the rage. Everyone wants to get in on it. But why?
What’s the potential payoff? Well, right now the price of bitcoin is going up and down in ways that look like a bubble. Many people think it will go completely to zero.
But if you ask, “What are cryptocurrencies?” and not just “What should I buy?” then the answer might be: they are currencies whose value is derived from something other than their usefulness as a medium of exchange. They are worth what people think they are worth – which is not at all the same thing as what they have any utility for. That sounds crazy, but it’s true.
There are a few cryptocurrencies that do have utility, such as Bitcoin and Ethereum, whose value comes from being an efficient way to transfer bitcoins from one person to another and from efficiently storing a large amount of data on a highly distributed network of computers; but most cryptocurrencies don’t really have any utility except as investments – and even then only very small investors take them seriously as currencies.
Cryptocurrency is a digital currency that lets you make transactions anonymously. It’s also known as an altcoin or a bitcoin alternative.
The cryptocoin bitcoin is the most popular cryptocurrency, but it’s not the only one. Other cryptocoins are Ripple, Litecoin, Peercoin and Namecoin (also known as BitDNS or Bitzdns), DASH and Primecoin.
All of these currencies have a few things in common: they’re all decentralized networks (they don’t belong to any company); their value is derived from cryptography (they are not backed by anything); and they’re all currently traded on online exchanges.
Bitcoin is typically traded between buyers and sellers using an online exchange called MtGox. The MtGox site shows prices for each cryptocoin against bitcoin. The site is used by thousands of people to buy and sell bitcoins and other cryptocoins 24 hours a day, 7 days a week, at the current exchange rate.
The idea behind cryto-currency is to make it possible for large numbers of people to trade goods and services with each other, online, without paying bank or government middlemen. That way no one has to pay taxes. Or if they do they can just hide the money in a digital wallet instead of paying the tax.
I don’t know if such a thing will work, but I do know that it sounds like a good idea. So I’m going to try to get involved–and maybe even make some money out of it.
Cryptocurrency is a new kind of money. It is not printed by governments; it is traded by computers. It can’t be stolen because it doesn’t exist in physical form. It is anonymous, so you don’t need to show your passport at the ATM. And because it is decentralized and not owned by anybody, it has become something of a political movement as well.
Cryptocurrency has something to do with Bitcoin, which was created in 2008 by a mysterious figure called Satoshi Nakamoto. The name comes from the fact that Bitcoin uses a cryptographic technique called “hash function” to encode data, which means that instead of having one central bank controlling the money supply, there is a whole network of computers all over the world “mining” bitcoins by running calculations on numbers.
Bitcoin isn’t the only cryptocurrency: there are hundreds of them, each with its own special characteristics. But making sure that these currencies work and scale can be hard (they are pretty technical), and getting their value into real goods and services has been much harder still (the US dollar remains king). So at the moment cryptocurrency is more an interesting technical challenge than a financial innovation.
The idea of creating a cryptocurrency is based on the assumption that it will be widely used. Cryptocurrency is not a new idea, of course. There have been several attempts to create digital money, each with its own particular approach (e.g., b-money, bit gold).
The most notable attempt was Bitcoin: an algorithm for generating bitcoins that has existed as an open source software project since 2009. The core idea behind bitcoin is to use peer-to-peer technology to make it difficult to generate coins and thus limit inflation. Since it’s impossible to generate more than 21 million bitcoins, the currency cannot become worthless or dilutive like fiat currencies can.
Cryptocurrency is a new form of money. It has monetary properties but is not issued by a government, so it is not sovereign. Unlike money, it doesn’t have any particular legal tender status, which makes it hard to use in transactions requiring official documentation (such as paying taxes).
As the name suggests, cryptocurrency has similarities with other forms of money. It is easy to create, like gold or banknotes; but unlike gold or banknotes, its supply cannot be controlled. It can be used for anything that requires payment for goods or services. And like other forms of money, it has value only because people believe it will be valuable in the future.