Introduction to cryptocurrency. What are Bitcoin and Ethereum?

Published 1 year ago

Nine years ago a mysterious person Satoshi Nakamoto introduced to the world an alternative currency in the form cryptocurrency. This person is unknown till current days but his idea is alive and well. So before we dive into cryptocurrencies we need to understand that this digital currency is an alternative to existent fiat currencies. Fiat currency is legal tender whose value is backed by the government that issued it. US Dollar, Euro, GB Pound are currencies centralized around the governments that issued them and if one government defaults the value of its currency will disappear. This situation is called a single point of failure because all people who invested in this currency depend on the government. On the other hand, cryptocurrency is a decentralized currency based on blockchain technology, you can read more on Introduction to Blockchain - the technology behind Bitcoin, which is a public distributed ledger where all the transactions are public and immutable, meaning that there is no central authority who can take decisions for its participants. And once the transaction is made it's not possible to edit it or rollback it back.

Crypto in cryptocurrency means that this technology employs cryptography in order to secure the network. Read more on cryptography in blockchain in my previous article on Blockchain from a technical perspective. And this fact made possible the rising popularity of this technology and the value of cryptocurrencies is always rising.

Cryptocurrencies make possible transactions peer to peer without engaging a central authority, a bank for example. All the transactions are registered on a public ledger backed by blockchain technology. And all the participants keep a copy of this distributed ledger. Read more about it in my article on Blockchain and the distributed ledger. This system is impossible to break because imagine if somebody would try to hack into the system and input some fake transactions - everybody should agree on this fact, but since this transaction have never happened - nobody will agree on this and it will be a simple waste of energy to try to hack it.

The first cryptocurrency created was Bitcoin(BTC). It was proposed nine years ago right after the financial crisis in 2008 by Satoshi Nakamoto. In the beginning, it was very cheap. If you would invest $10 in bitcoin at the beginning you would be a multimillionaire today. At the moment of this writing, the price of a bitcoin is $7500 and its value is going up. More and more people are buying and using bitcoin and thus its value is going up because the amount is limited to 21 million coins. People are using bitcoin for storing value and investing as well as a payment method. The transaction happens very fast and the fee is so low - we can ignore it. The value of a bitcoin is decided by the market capitalization. At the moment of this writing, the market capitalization of bitcoin is approximately $125 billion. The circulating supply at the moment is 16 million coins. Read about mining in our previous post What is Bitcoin Mining and why we need it in order to understand how the rest of the coins will be generated. Now the value of bitcoin is calculated by formula Market Capitalization / Circulating Supply and we get $125 billion / 16 million coins = $7500 for a bitcoin. Bitcoin is the first and most popular cryptocurrency. But there are others currencies based on the blockchain called alternative coins or altcoins.

The second most popular cryptocurrency at the moment is Ethereum(ETH). This year this currency grew from $8 for a coin to $400. At the moment a correction happened and the coin dropped to $300 for an ETH. The market capitalization of Ethereum at the moment of this writing is $28 billion which is a very good achievement. The popularity of this currency is related to the fact that Ethereum is a platform for creating decentralized applications and services which strives to help its participants implement smart contracts and other services on top of the blockchain. In next articles, we are going to discuss more in-depth about this cryptocurrency and its platform. For now its enough to know that this is an alternative to bitcoin which also provides additional possibilities on top of blockchain technology. And this fact is also very important for the general development of the industry because it allows competition between cryptocurrencies.

This is only the beginning of the digital transformation of the current financial system. From my point of view, this is a good alternative and in future blockchain technologies will be applied in all aspects of our lives.