Since the creation of Bitcoin in 2009, the cryptocurrency market has been growing steadily, with cryptos becoming increasingly popular among users each year.
According to data from Statista, as of 2023, there are over 673 million cryptocurrency users worldwide.
Because the significance of and interest in cryptos will continue to grow, in this article, we will shed more light on what cryptocurrencies are and what they aren’t, how they work, and what the difference between cryptocurrencies, traditional money, and other forms of digital currencies is.
Cryptocurrencies are a digital or virtual currency that uses cryptography for security (hence the name). As such, cryptocurrencies are not to be mistaken with Central Bank Digital Currencies (CBDCs). CBDCs are controlled and issued by a government authority, usually a central bank, as the name suggests. Cryptocurrencies, on the other hand, are decentralized and are not controlled by any government or central bank. And while Central Bank Digital Currencies are an alternative to traditional cash, cryptocurrencies aren’t.
Did you know?
As of October 2023, there are several functioning retail Central Bank Digital Currencies (CBDCs) in the world, including but not limited to the Sand Dollar (Bahamas), Bakong (Cambodia), e-Naira (Nigeria), and the Digital yan or e-Yan (China.)
Some countries are in the pilot or development stages of CBDCs, including the United States, the United Kingdom, and Japan. Closer to home, the European Central Bank recently announced that it’s moving on to the next phase of the Digital Euro Project.
Cryptocurrencies came into existence with the invention of Bitcoin back in 2009. A person or a group of people under the pseudonym of Satoshi Nakamoto introduced Bitcoin as a peer-to-peer electronic cash system that would enable transactions without the need for banks or similar central bodies. The key innovation of Bitcoin was the underlying technology — blockchain — a system that provides a secure and transparent way to record and verify transactions.
Since the creation of Bitcoin, thousands of other cryptocurrencies, often called “altcoins,” (alternative coins) have been developed. They vary in terms of technology, purpose, and features. Here are a few examples:
After Bitcoin, Litecoin (LTC) and Namecoin (NMC) were the first cryptocurrencies to appear in 2011. Litecoin has faster block generation times and uses a different hashing algorithm than Bitcoin. Namecoin, on the other hand, was the first cryptocurrency to merge mining with Bitcoin and “still is one of the most innovative altcoins.”
Ripple (XRP) was released in 2012 as a “cryptocurrency for the financial services space.” It enables financial institutions to execute fast and low-cost cross-border payments and works as a cryptocurrency and a payment protocol. It prides itself on being a carbon-neutral technology that can handle 3,400 transactions per second and settle each in 3–5 seconds.
Ethereum (ETH) was launched in 2015. As of today, it is the second best-known cryptocurrency after Bitcoin. As a technology, the Ethereum blockchain is known for creating smart contracts — self-executing contracts with the terms directly written into code.
Polkadot (DOT) was created in 2020 by one of the co-founders of Ethereum. The Polkadot blockchain connects multiple blockchains and facilitates data exchange between different networks.
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Cryptocurrencies operate on blockchain technology — a network of computers called nodes acting as a distributed public ledger that records and verifies all transactions across the network. There is no need for a middleman for the transactions to be executed or for the data to be confirmed. Everything is visible to all network participants, and it is almost impossible for one person to change existing data as it has to be confirmed across the entire network. That is the main difference between how cryptocurrencies and traditional currencies work. Let’s have a look at what else is different.
Cryptocurrencies are entirely digital, while traditional money has a physical aspect. And while fiat money (banknotes) is issued and regulated by governments and national banks, cryptocurrencies are neither issued nor regulated by a central authority.
Because cryptocurrencies are not regulated by banks or governments, they are highly volatile, meaning their value can change suddenly or unexpectedly. In comparison, traditional currencies are relatively stable, mainly because central banks have the authority to control the money supply and interest rates.
Cryptocurrencies have a predetermined limited supply. For example, Bitcoin has a total cap of 21 million, of which over 19 million have been mined and are currently in circulation. It is expected that the remaining amount will be mined by 2140, after which no Bitcoins will be issued.
In contrast, traditional money, governed by central banks, can be printed indefinitely, and as more money becomes available, the less its value and purchasing power. By design, the limited supply of cryptocurrencies helps maintain their value steady over time.
Cryptocurrencies are global and can be transferred across borders easily. There is no need for currency conversion or dealing with exchange rates. Traditional money is specific to a country (or a group of countries, as is the case with the Euro) and requires conversion when used internationally.
The same differences exist between cryptocurrencies and other digital currencies, such as the ones mentioned at the beginning of the article. As the digital representations of traditional fiat currencies, Central Bank Digital Currencies are issued and regulated by governments or central banks and, therefore, are centralized, as opposed to cryptocurrencies. Transactions happen on traditional banking systems or centralized databases instead of blockchains, and transparency levels can vary.
Stablecoins are a type of cryptocurrency, and as the name suggests, they are designed to address the issue of volatility that traditional cryptocurrencies like Bitcoin (BTC) or Ether (ETH) are notorious for. To achieve that, their value is pegged to some external commodity or money, like the US Dollar. Some examples of stablecoins include Tether (USDT), USD Coin (USDC), and TrueUSD (TUSD).
Because stablecoins have reduced volatility and more stable prices, they are good for everyday transactions without the concern of significant value fluctuations.
The main difference between cryptocurrencies and other tokens is that cryptocurrencies have their dedicated blockchains. For example, if we take the cryptos mentioned in this article, Bitcoin (BTC) has the Bitcoin blockchain, Ether (ETH) has the Ethereum blockchain, XRP has Ripple, and DOT has the Polkadot blockchain.
Tokens, on the other hand, are digital assets built on existing blockchains, as opposed to their native blockchains. Some examples of tokens created on the Ethereum blockchain include:
As mentioned above, because cryptocurrencies operate on blockchain systems that are, in effect, public ledgers, the transactions are transparent, traceable, and visible to everyone on the network. That is not the case with traditional money.
Cryptocurrencies are borderless and accessible — they can be accessed by anyone anywhere with a functioning internet connection. Transactions are peer-to-peer. There is no need for a third party to be involved, and there are no exchange rates.
The time it takes to execute a cryptocurrency transaction on a blockchain system is much less in comparison to traditional systems, especially when talking about cross-border transfers.
According to Statista, Ripple (XRP) and Solana (SOL) have near-instant transaction times, while Avalance (AVA) and Polkadot (DOT) take, respectively, 1 and 2 minutes per transaction. In comparison, cross-border transfers via traditional banks can sometimes take 2–3 days to complete.
On the downside, cryptocurrencies are volatile, and while that may lead to substantial wins, it may also mean big losses for investors. Also, because the crypto space is not well-regulated, there is always a risk of market manipulation, scams, and other illegal activities.
Cryptocurrency adoption has been increasing steadily over the past years, and it is expected that the market will continue to grow as businesses, individuals and institutions continue to embrace them.
In addition, current efforts to regulate the market in the EU, for example, will improve traceability, prevent system abuse, and offer enhanced user protection, which will help regain trust in the industry, and open the doors to further expansion.
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