Cryptocurrency — Its History and Working

Published in

SN Mentoring

7 min readOct 21, 2022

Cryptocurrency is a hot topic that has seized everyone’s minds. However, most people still don’t grasp its concept. More than just a form of digital cash, cryptocurrency and the technology underlying it have the potential to transform the financial sector and many other industries as well. It is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don’t have a central issuing or regulating authority, instead use a decentralized system to record transactions and issue new units. In the crypto system, there is zero dependence on banks to verify transactions.

Modeled on a peer-to-peer system, crypto can enable anyone anywhere to send and receive payments. No exchange of physical money in the real world is involved. Such payments exist only and only as digital entries in an online database enlisting specific transactions. The transactions of cryptocurrency funds are recorded in a public ledger. Cryptocurrency is stored in digital wallets. One of its most striking characteristics is that it is not usually issued by any central authority and is hence, theoretically immune to government interference or manipulation.

Cryptocurrency has received its name from the fact that encryption is used to verify transactions, so as to provide safety and security. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with investors either making instant millions or having to beg for work.

History of Cryptocurrency -

The idea of cryptocurrency originated in the 1980s with the idea of sending untraceable currency that didn’t require centralization. David Chaum — an American cryptographer — created anonymous money called DigiCash — the first form of electronic payment requiring software and encrypted keys to send and withdraw money. Next, came Bit Gold, often considered to be the precursor to Bitcoin. Designed by Nick Szabo in 1998, it required solving a puzzle to get the reward. Bitcoin is essentially these two concepts put together.

In 2008, Satoshi Nakamoto published Bitcoin — A Peer-to-Peer Electronic Cash System, a white paper that described the blockchain network and its technology. According to him, Bitcoin was “an electronic payment system based on cryptographic proof instead of trust.” He also stated that cryptocurrency would not be possible without blockchain technology. Finally, Satoshi Nakamoto mined the first bitcoin in 2009. The first block of 50 bitcoin — known as the Genesis Block — had no real value for the first few months. In the first seven months following Bitcoin’s launch, Satoshi reportedly mined up to 1.1 million Bitcoins (worth about $22 billion now).

With publicity in publications such as Forbes, prices started to increase. It first became available to buy, sell and trade on online exchanges in 2010. In April 2011, the price of Bitcoin crossed the $1 threshold for the first time. Other forms of cryptocurrency then started to be created, using blockchain technology. Now there are several different types of cryptocurrency with new ones emerging regularly:

Ethereum
Dogecoin
Tether
Cardano
Binance Coin, etc.

Blockchain:

Central to the appeal and functionality of all cryptocurrencies is blockchain technology. As indicated by its name, blockchain is a set of connected blocks or an online ledger. Each block contains a set of transactions that have been independently verified by each member of the network.

Transaction histories are nigh impossible to forge since every new block generated must be verified by each node before being confirmed. The contents of the online ledger must be agreed upon by the entire network of an individual node, or computer maintaining a copy of the ledger.

However, experts say that blockchain technology can serve multiple industries, such as supply chains, and processes like online voting and crowdfunding. Crypto can be compared to a car, with blockchain being its motor. A car is useless without the motor but a motor has multiple uses elsewhere. Blockchain is the underlying technology powering cryptocurrencies, but it has many other potential applications that have nothing to do with digital currencies. For egs: financial institutions such as JPMorgan Chase & Co. (JPM) are testing the use of blockchain technology to lower transaction costs by streamlining payment processing.

How Cryptocurrency Works -

A wallet for a digital currency is required to make a cryptocurrency transaction. This wallet only specifies an address for your funds on the blockchain and does not actually hold any real currency. It also includes private and public keys that enable you to complete secure transactions.

A cryptocurrency exchange facilitates trade of cryptocurrency. It can hold deposits in both fiat and cryptocurrencies, credit and debit the appropriate balances of buyers and sellers in order to complete cryptocurrency transactions. Another use of cryptocurrency is to buy something such as a product or service.

Every instance of buying cryptocurrency or using it to purchase a good, automatically authorizes the movement of a specified amount of the cryptocurrency from your wallet address to that of the seller. Each transaction is encrypted with your private key and pushed to the blockchain. The cryptocurrency network’s miners access your public key to confirm that your private key was used to encrypt the transaction. Once the block that includes your transaction is confirmed, the ledger is updated to show the new cryptocurrency balances for both your address and the seller’s address. This entire process is conducted by software.

Cryptocurrency exchanges:

The popular cryptocurrencies, like Bitcoin or Ether, are available to trade on multiple exchanges. The smaller currencies may only be available on certain exchanges, which limits access. Being listed on more exchanges, will increase their availability to investors, hence, increasing the demand. An account on a cryptocurrency broker, such as Coinbase, eToro or Gemini, can be used to purchase cryptocurrency. These accounts are similar to opening any other investment account.

If a user wants to exchange one cryptocurrency for another, this is possible using cross-chain bridges. It’s similar to the exchange between different countries’ currencies. There are several cross-chain bridges to help explore various blockchain ecosystems.

How do Cryptocurrencies Gain Value?

Cryptocurrency can gain value on exchange platforms, based on supply and demand. A cryptocurrency’s supply depends on the number of new coins being mined and the number of current owners who wish to sell off their coins.

The demand for a cryptocurrency depends on many factors, the most prominent being how useful it is to own the coins. This implies that if the crypto monetary system works well (i.e. fast transactions and low fees), smart contracts become more commonplace, and more businesses start to accept crypto, the demand for crypto will increase. There is also an increased demand for cryptocurrencies due to them being a store of value investment.

Like any market, the value of cryptocurrencies fluctuates based on the market’s perception of its value at any given time. These fluctuations may stem from the above mentioned demand and supply factors or as a result of hidden market factors.

Value of Bitcoin over the past 10 years -

Why is crypto so popular?

Increasing utility: Cryptocurrency is being used for more and more new things. Even uses for blockchain technology are being developed day by day. Such applications range from new blockchain games to non-fungible tokens (NFTs). Additionally, more retailers and service providers are accepting cryptocurrency as payment.
Attractive investment: The skyrocketing value of cryptocurrency as an asset over the past five years has created millionaires out of the blue. In such a short time, crypto has evolved from a meritless topic to a subject in everyday discussions. It is viewed as an exciting opportunity to produce ‘oversized returns’ through both small and large investments.
Futurism: It is believed that cryptocurrency is the next step after money. Various businesses across innumerable industries are searching for ways to use blockchain technology so as to improve their services. Although these are the early days of cryptocurrency, it may be seen as the way to go forward.

References:

Cryptocurrency — Its History and Working

Written by Vihaan Bakshi