What are cryptocurrencies?

Cryptocurrency is a digital or virtual currency that is secured by cryptography. In cryptocurrencies, cryptography is utilized e.g. confirming transactions, controlling foreign exchange reserves and encrypting user accounts. Cryptocurrencies are based on blockchain technology, so they are completely digital. Blockchain technology enables a lot of advantages to cryptocurrencies. The biggest advantages of cryptocurrencies are reliability, security, and fast money transfers.

Blockchain technology is a technology that allows different parties in a blockchain to create and maintain distributed and shared databases. The decentralization of blockchain happens by storing data across the blockchain’s peer-to-peer network. Blockchains offer a lot of different benefits like safety and reliability.

Many people heard about cryptocurrencies for the first time in 2017. 2017 was a good year for cryptocurrencies, and cryptocurrencies started to gain more and more column space in the traditional media. Many people noticed that cryptocurrencies and the blockchain technology behind them can provide a solution to many real-world problems. Some of the cryptocurrencies focus on a specific goal or goals like increasing the users’ privacy, creating a platform to create your own application or rewarding creators of content.

Anyone can create their own cryptocurrency. The market determines the prices of cryptocurrencies, and if there is no demand for some cryptocurrency, its price will also remain low. The most popular cryptocurrencies typically seek to provide solutions to some real-world problems. Investors' interest in cryptocurrencies has been growing steadily for several years. The interest in cryptocurrencies among investors is reflected in the fact that Bitcoin was the most profitable investment of the last decade by several measures.

History of cryptocurrencies

The first cryptocurrency, Bitcoin, was created in 2009, and it was a response to the 2008 financial crisis. Bitcoin was released by an unknown person or group using the name Satoshi Nakamoto. For the first time, people had access to a digital currency equipped with a truly fully decentralized administration and much-needed scarcity. In the case of Bitcoin, scarcity means a predetermined maximum amount of bitcoins.

Satoshi Nakamoto created Bitcoin at the best possible moment. Bitcoin is a response to the economic crises that preceded it. Over the years, the popularity of Bitcoin has grown. Bitcoin has also shown that there is a clear order for a new currency system.

Bitcoin belongs to the first generation of cryptocurrencies. Ethereum, the second largest cryptocurrency in the cryptocurrency market, belongs to the second generation of cryptocurrencies. Unlike Bitcoin, Ethereum is a complete ecosystem and almost anything can be programmed on top of Ethereum. Most of the cryptocurrencies that enter the market today belong to the third generation of cryptocurrencies. Third-generation cryptocurrencies are more technically advanced than previous generations.

Cryptocurrencies as an investment

The value of cryptocurrencies is mainly determined by supply and demand. However, the values of cryptocurrencies can also be seen to be driven by a variety of so-called fundamental factors. When discussing the value of cryptocurrencies, it is also important to take into account the relative youth of the cryptocurrency market, which contributes to the fact that cryptocurrency values can fluctuate drastically within a short period of time.

The maximum amount of almost all cryptocurrencies is limited. In traditional currencies (e.g. euro and dollar) the situation is completely different. The value of traditional currencies is strongly based on the central bank’s decisions. For example, the coronavirus pandemic in 2020 led to huge amounts of traditional currencies being printed on the market as a result of decisions taken by central banks. In the long run, this type of monetary policy naturally leads to inflation, i.e. a fall in purchasing power. Cryptocurrencies are completely immune to central bank monetary policy and offer a good alternative to the current monetary system.

Cryptocurrencies can have a lot of different use cases. Since the first cryptocurrency, Bitcoin, thousands of different cryptocurrencies have appeared on the cryptocurrency market. After all, the prices of cryptocurrencies are determined by their demand and supply. Each cryptocurrency has its own strengths and weaknesses. When buying cryptocurrencies, it is always worthwhile to find out the purpose of that currency and other background information to make sure it is reliable and functional.