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A cryptocurrency is essentially a virtual currency designed to function as a medium of exchange. Cryptocurrencies are developed using cryptography technology.
The concept of creating cryptocurrency dates back to the 90s when technology was advancing rapidly. In fact, the first versions of cryptocurrency were developed in the 90s – the most famous ones include DigiCash and Beenz. However, these cryptocurrencies were regulated by independent companies that acted as trusted third-parties. Unfortunately, they all failed due to difficulties with regulation and administration.
The first successful development of cryptocurrency came in 2009 when Bitcoin was launched. Thousands of cryptocurrencies have been launched so far, and Ethereum is expediting the development of more cryptocurrencies.
Types of Cryptocurrencies
Each cryptocurrency purports to offer something unique or improve on existing systems. Overall, however, all cryptocurrencies are classified into three categories:
- Currency Tokens: The original cryptocurrency tokens were designed to function as alternatives to fiat currencies. Currency tokens function as mediums of exchange in the real world. To this end, they can be used to purchase goods and services just like the dollar. Bitcoin is the best example of a currency token as it is widely accepted as a means of payment.
- Utility Tokens: Utility tokens are also designed to function as mediums of exchange but on a limited scale. They are mostly issued by companies to their clients. The clients then use them to access certain features on the companies’ platforms. They can also be used to unlock bonuses and promotions.
- Investment Tokens: Investment tokens are essentially securities. There are few tokens that are designed to function solely as investment securities. However, many cryptocurrency tokens qualify as investment tokens as long as they can be traded publicly and appreciate in value.
Legality and Regulation of Tokens
Cryptocurrencies have not gone unnoticed by authorities in governments across the world. Global monetary institutions such as the World Bank are also voicing their concerns and opinions regarding cryptocurrencies. The truth is that the existing financial systems were always against cryptocurrencies from the very start.
Most countries are neutral to the use of cryptocurrencies within their borders. In fact, some such as Switzerland and Singapore have friendly policies towards cryptocurrencies and Venezuela recently launched its very own national cryptocurrency, albeit for controversial reasons. Some countries, however, are outright-hostile towards cryptocurrencies. For instance, the use of cryptocurrencies is banned in Ecuador, Vietnam, Bangladesh, Bolivia, and Nepal, among other countries – consequences of using cryptocurrencies include fines and even jail terms. China and Russia are also formulating more stringent plans designed to outlaw cryptocurrencies altogether.
Interestingly, the United States has been fairly neutral towards cryptocurrencies so far. Now the U.S. Securities and Exchange Commission is stepping in to regulate cryptocurrencies that it deems as securities – the regulator announced in 2017 that it would hold security tokens under the same standards as ordinary securities. There are also plans to regulate other types of cryptocurrencies.
Adoption and Usage of Cryptocurrencies
The first cryptocurrency, Bitcoin, sold for pennies when it launched in 2009. Its price remained relatively low for several years until things started looking up. Today Bitcoin sells for over $4,000 and has inspired the creation of thousands of other cryptocurrencies. Overall, the entire cryptocurrency industry has a market capitalization of hundreds of billions of dollars.
Uses of cryptocurrencies are almost unlimited. The most common ones, however, are:
- Investment: As mentioned earlier, Bitcoin’s price has risen from pennies to an all-time high of over $19,000. Many people regret not having invested in the cryptocurrency when it was still new. To this end, there are more people investing in cryptocurrencies nowadays in hope that their prices, like Bitcoin’s, will appreciate over time. In fact, a majority of cryptocurrencies in circulation today were bought or mined as investment securities.
- Buying Goods and Services: The original idea for cryptocurrencies was inspired by the need for an alternative to fiat currencies. For instance, Bitcoin has already established itself as a preferred means of payment across numerous businesses both online and physically – some major cities even have Bitcoin ATMs. Other cryptocurrencies are yet to gain this acceptance but this is expected to change soon considering the pace at which the cryptocurrency industry is growing.
- Accessing Restricted Services: As mentioned earlier, some cryptocurrency tokens are designed for limited uses. This is mostly associated with utility tokens.
Decentralization – The Core Convenience of Cryptocurrencies
Decentralization is at the core of cryptocurrencies and Blockchain technology in general. Decentralization means that the control of a certain cryptocurrency is not in the hands of any single authority – instead, authority is distributed across multiple ordinary users. This comes with a wide range of benefits that include:
- Unrestricted Custodianship: Money and any other financial assets stored with traditional systems such as banks fall under the control and custody of a third party. This means that the money is not yours for the period that it is in the bank. As such, it can be frozen without notice or consent from you. This is not the case with cryptocurrencies as there is no third party – instead, individuals get full custody over all their money and assets.
- Fast and Cheap Transactions: Banks and other payment systems take several business days to finalize transactions. What’s more, each transaction is billed to pay for the processing fee. This is not the case with cryptocurrencies for two reasons. First, all transactions are handled by a network of computers that is always operational and capable of clearing transactions in seconds or minutes. Second, the fact that transactions are processed by computers means that one does not have to pay for transaction fees, hence guaranteeing fast and cheap transactions.
- Global Reach: Anyone from anywhere in the world can use cryptocurrencies as long as they have the necessary infrastructure – usually a smart device and access to the internet. To this end, cryptocurrencies are expected to revitalize the economies of underdeveloped countries and remote regions of the world.