“What is cryptocurrency?” seems like a simple question, but it is impossible to give a simple answer.The concept of crypto is relatively new, having only existed since 2008, when Satoshi Nakamoto’s now famous white paper that launched Bitcoin ( BTC ) onto an unsuspecting world was published.However, over the subsequent few years, it has grown and changed rapidly, and now, crypto is the basis for an industry that employs thousands of people and generates enormous wealth for many.
The Roots of the Word At its roots, the term “crypto” is an abbreviation of “cryptocurrency,” a word used to describe Bitcoin initially due to its use of cryptography in mining.Cryptography involves the solving of puzzles and breaking of codes.That is something that computers are very good at, and bitcoin is mined by having those computers solve complex and increasingly difficult problems.
Thus, bitcoin was a currency with its origins in cryptography — a crypto currency.
There are two elements there though, “crypto” and currency,” and the second part is also important.Bitcoin was designed as a currency, a medium of exchange, something that could be used to purchase goods and services.
Decentralization and Disinflation To Bitcoin purists, part of the appeal of Bitcoin was that it was a decentralized, digital currency that offered up the possibility of replacing so called fiat currencies, those controlled by governments and central banks, with a currency created and controlled by its users.To them, it also had the advantage of being disinflationary.There was a preset limit to the number of bitcoins that could ever exist and mining them became increasingly difficult over time.
That meant that one bitcoin would, assuming some degree of adoption, inevitably become more valuable as the years passed.
As an economy grows, there are more goods and services available.In a traditional economy, that is outstripped by governments and central banks increasing the money supply, basically printing more money.
As that happens, the real value of each unit of currency, say each U.S.dollar, decreases.That is why the same house that might have cost your parents around $50,000 dollars when they bought it may now cost $500,000 or more, and a loaf of bread, that cost 25 cents in the 1970s is now $3 to $5.
Bitcoin is in some ways the opposite of traditional currencies like the U.S.dollar.
They lose value as more are printed, pushing the price of goods and services up in dollar terms, while Bitcoin gains in value.If you hold onto one dollar, it will buy significantly less after, say, fifty years.If you hold onto one bitcoin, however, volatility notwithstanding, it will buy more.
Crypto Now Over time, though, the term “crypto” has come to refer to just about any digital token, some of which are not intended as currencies.Many of the tokens issued now are not cryptographically mined.
Their supply and value are instead tied to some real function, and cryptography is used only to protect the blockchain that records transactions.These are known as utility tokens, and their value and issuance can be based on things like loan volume or practical applications.
Clearly, common usage of the word has now deviated from its roots.It has come to describe any currency or token issued outside the confines of the world’s governments or central banks.Any financial business that exists outside those same confines are referred to as decentralized finance, or defi, companies, and are seen as part of the crypto industry.
In this case too, though, their relationship with cryptocurrencies in the literal sense of the word is sometimes tangential at best.
So, What Is Crypto? As you can see, “What is crypto?” is nowhere near as straightforward a question as it may seem.To the purists and the pedantic, it refers to currencies whose discovery is dependent on cryptography.But language is not a constant, and it evolves at any time and does so especially rapidly when describing a new concept.The usage of the term “crypto” is still evolving and will probably continue to do so for some time.
Still, for now, at least, it is best defined as a currency that exists outside traditional monetary systems and that utilizes a blockchain for record-keeping, and an industry based on those products.
*Want more of this kind of stuff? In addition to writing for Nasdaq, Martin Tillier is Head of Research for SmartFi , a crypto company that funds small business loans, and his work for them can be found by clicking here .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc..
