What is a cryptocurrency?

Diving deep in the Wild West of crypto? In this explainer, we look at what cryptocurrencies are.

A cryptocurrency, or crypto, is a digital asset secured by cryptography issued and stored on blockchain network.

It can be traded, utilized as a medium of exchange, or used as a store of value, without the need for a central authority.

How are cryptocurrencies produced?

Cryptocurrencies are software, and they can be mined or issued by code. In many cases, new cryptocurrencies are produced by mining them using specialized hardware.

They can then be transferred from one party to another and traded with other cryptocurrencies on exchanges.

They exist in digital form only, and each cryptocurrency has their own unique properties and code that controls properties like its supply and inflation schedule that determines how fast new supply gets produced.

The code can be changed just like changing software, but unlike traditional software, changing cryptocurrency code requires the agreement of the majority of computers (called nodes) running the software to agree on the upgrade.

Bitcoin

Bitcoin (BTC) is the most popular and valuable cryptocurrency first introduced in 2009. It is produced through the process of mining, where miners receive new Bitcoin as a reward for completing blocks of verified transactions, which are added to the blockchain.

The supply of Bitcoin is fixed such that only 21 million bitcoins will ever exist and the rate of new Bitcoin issuance halves every 4 years.

Bitcoin was branded as digital gold, with its main use case as a transfer and store of value.

Ethereum

Similar to Bitcoin, Ethereum is produced through the process of mining, when miners successfully verify a group of transactions, they are awarded Ether (ETH). Unlike Bitcoin, Ether has no fixed and maximum supply.

The production of new Ether will change following Ethereum's move towards a Proof-of-Stake model. In the future, new units of Ether can only be produced by staking (locking) Ether into a smart contract.

Ether has inherent utility as it powers the Ethereum blockchain as its native currency, which is used to pay for transaction fees on the blockchain.

Other cryptocurrencies

There are literally thousands of other cryptocurrencies - tracking site Coinmarketcap tracks the universe of cryptocurrencies and puts the current total at 10,026 different cryptocurrencies.

Top 8 cryptocurrencies by market cap. Source: Coinmarketcap

Not all cryptocurrencies have the same utility as Bitcoin and Ether. Some cryptocurrencies like USDC are simply pegged assets, while others like Terra (LUNA) offer additional utility such as being collateral for the blockchain's native stablecoin.