Cryptocurrency
Cryptocurrency, often referred to as crypto, is a form of digital currency designed to facilitate transactions without the need for traditional financial institutions like banks. These currencies operate on a decentralized network, meaning they are not controlled by any single government or regulatory body. Instead, transactions occur directly between users through a peer-to-peer system, which eliminates intermediaries and associated fees. The most well-known cryptocurrency, Bitcoin, was created in 2009 by an individual or group using the pseudonym Satoshi Nakamoto and introduced the concept of blockchain technology for secure and anonymous transactions.
Cryptocurrencies are characterized by their inherent volatility, which can lead to significant fluctuations in value, making them a risky investment. While they offer advantages such as transaction anonymity and global accessibility, they also attract criminal activity due to their untraceable nature. Over the years, various cryptocurrencies have emerged, with Bitcoin leading the way followed by others like Ethereum and Litecoin. Some nations, like El Salvador and Cuba, have begun to recognize cryptocurrencies as legal tender, indicating a growing acceptance in the mainstream financial world. However, regulatory scrutiny has increased alongside the popularity of cryptocurrencies, leading to discussions about potential regulations to address risks and protect investors. Overall, cryptocurrencies present a complex interplay of innovation, opportunity, and risk, particularly for historically marginalized communities who may find traditional finance inaccessible.
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Cryptocurrency
Cryptocurrency, also known as crypto, is digital currency designed to replace cash. Cryptocurrencies are decentralized, meaning they are not controlled by a single nation, government, or regulatory agency. Instead, they are created through a complex peer-to-peer (P2P) network, where individual users act as nodes in a much larger network. Within this network, individuals send the currency directly to one another. No bank or agency is involved in this transaction, which cuts out the middleman and eliminates fees.
Many cryptocurrencies, like Bitcoin, are prized for their anonymity. Because of the strong cryptography used to make the systems secure, it can be extremely difficult to trace a cryptocurrency transaction back to an individual. While this makes the currency popular, it also attracts people looking to make illicit purchases.
Another problem associated with cryptocurrencies is their lack of stability. The value of cryptocurrencies, as compared to more traditional currencies, fluctuates wildly over time. This makes investing in cryptocurrencies a gamble. If the value rises, the investor will make money. However, if the value falls, the investor may lose significant amounts of purchasing power.
Background
The first attempt to create a cryptocurrency occurred in the late 1980s. Researchers wanted to develop a digital form of money that would allow truckers in the Netherlands to refuel late at night without exposing gas-station employees to the dangers of late-night robberies. This led to the invention of DigiCash, a digital currency that utilized a new type of encryption called a blinding formula, which allowed money to be transferred to or from an account without revealing the nature of the transaction to the bank, the mint, or other money-storage location. This allowed for more privacy than ever before. However, despite Microsoft's offer to purchase the company, DigiCash soon failed.
PayPal, created in the 1990s, provided a secure, encrypted means to transfer money digitally. Unlike other similar companies, PayPal did not require a user to be a merchant to receive money. It allowed direct monetary transfers between any users. This set the tone for future forms of digital currency.
In late 2008, Satoshi Nakamoto (a name used for an unknown individual or individuals) announced that he had developed peer-to-peer electronic currency transfer software that allowed individuals to transfer currency to one another without the need for a central corporation like PayPal. Nakamoto soon took this a step farther and created a digital form of cash. His inspiration for the idea came from the peer-to-peer file-sharing networks that had begun in the early 2000s. Nakamoto's digital form of cash, Bitcoin, developed into the first successful form of cryptocurrency.
Overview
Cryptocurrencies are decentralized currencies that exist entirely in digital form. They are not digital representations of cash, gold, silver, or any other physical material. Most cryptocurrencies are exchanged on an individual-to-individual basis and not stored in central locations such as banks. This makes the currencies volatile but useful for those who dislike governmental supervision or intervention.
All digital currencies, including digital representations of physical money, can be summarized as entries in a database that can only be changed under strict, specific conditions. In most online banking systems, a central organization like PayPal or a banking server has the final say as to the exact entries in the database. With cryptocurrencies, there is no central server. Instead, transactions are distributed from user to user through the peer-to-peer network, leaving a permanent record of each transaction. This technology is known as blockchain.
Bitcoin, the first successful cryptocurrency, became the model for all subsequent cryptocurrencies. Developed by Nakamoto, it boasted an anonymous, untraceable currency that was free from control by any national government or regulatory agency.
Bitcoin transactions are confirmed by individuals called miners. No money is exchanged until a transaction is confirmed. This is one of the most important parts of the cryptocurrency network. Individuals using the network must volunteer their computer or phone for mining, which uses their device's computing power. Users are compensated for this with some of the currency. However, many cryptocurrencies place an ultimate limit on the number of "coins" or units that can be mined. (As networks have grown, it takes larger and larger amounts of energy to mine new coins.)
Each user holds the information to access a wallet. No identifying characteristics are tied to each wallet, and transactions are sent directly from one wallet to another. While a record that a transaction occurred from one wallet to another is stored in the network, it can be incredibly difficult to prove that a wallet belongs to a particular individual.
Cryptocurrencies like Bitcoin are used for a number of reasons. Users of cryptocurrencies can instantly send money to anyone in the world, with no fees or interference from outside powers. Relatively few people use cryptocurrencies for day-to-day purchases, however. Instead, cryptocurrencies are often preferred whenever anonymity is valued by the individuals engaging in transactions. Unfortunately, that same anonymity makes cryptocurrencies attractive to criminals, who use them to conduct deals on the black market, launder money, and commit other crimes.
Another major problem associated with cryptocurrencies is their inherent volatility. In this context, volatility refers to a lack of stable value when compared to other forms of currency. When measured against the currencies used by most of the population, the value of cryptocurrencies routinely spikes and plummets. This makes investing in Bitcoin and other cryptocurrencies a risky endeavor. Investing at a high point could result in losing most of an investment when the cryptocurrency's value drops. Additionally, it can sometimes be difficult to convert a cryptocurrency to a traditional currency. Nevertheless, the potential to benefit from rapid price increases made cryptocurrency a popular subject among investors in the late 2010s and early 2020s. Many different cryptocurrencies were created; popular competitors to Bitcoin included Ethereum and Litecoin, while even examples created as jokes, like Dogecoin, became highly valuable. Other, lesser-known cryptocurrencies were often subject to "pump and dump" schemes, in which the creator or early investors drive up the price and then sell, causing a crash. Various cryptocurrency exchanges were also created to promote trading of cryptocurrencies, usually as separate entities from the currencies themselves, and some saw rapid growth.
Though cryptocurrency continued to be criticized by many financial experts, others hailed it as revolutionary, and it began to win more mainstream acceptance in the 2020s. In 2021 El Salvador recognized Bitcoin as legal tender and Cuba followed shortly after, making them the first nations to do so. The United States also began to consider ways to tax proceeds from cryptocurrency trading, viewing cryptocurrency as a form of property or financial asset rather than a type of money, and major financial institutions began to involve themselves in the cryptocurrency market. In 2022 the US Federal Reserve Board released guidelines for banks on cryptocurrency activity, and members of the board called for stricter regulation of the cryptocurrency market, especially amid another major market-wide crash. Other nations cracked down on the use of such technologies, most notably when China outlawed all transactions using cryptocurrency in September 2021. Several high-profile hacks of cryptocurrency exchanges and wallets also demonstrated that while blockchain technology itself is extremely secure, other elements of cryptocurrency may not be. Without the backing of a bank or other authority, in many cases there may be little that can be done about stolen cryptocurrency.
As cryptocurrency gained popularity there was also growing interest in the social impact of the technology. Notably, several studies in the early 2020s showed that cryptocurrency was especially popular among many groups who had historically been marginalized by the financial industry, such as people of color. Polls suggested that Black Americans and Latino Americans owned cryptocurrency at slightly higher than average rates, for example. While some activists suggested the technology presented an appealing way to build wealth outside of the long-discriminatory world of mainstream finance, others cautioned that the high-risk nature of cryptocurrency could provide a further threat to those with already insecure finances. The volatility of cryptocurrency was again demonstrated in 2022 with a drastic and sustained price crash for most examples, as well as the high-profile collapse of the major cryptocurrency exchange FTX, which was subsequently investigated for fraud. The cryptocurrency market continued to see wide price fluctuations throughout 2023 and 2024, with major cryptocurrencies such as Bitcoin undergoing sharp rises and falls in value during this period.
In January 2024 the US Securities and Exchange Commission (SEC) approved an exchange-traded fund (ETF) linked to the price of Bitcoin, which soon reached a record high. To some observers, this indicated the increasing acceptance of cryptocurrency in mainstream financial markets. Another crypto-linked ETF, tied to the cryptocurrency Ether, was approved by the SEC in May 2024.
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