In late November 2017, economists were paying close attention to Bitcoin, the world's leading cryptocurrency, as it approached the widely anticipated benchmark value of $10,000 per token, which means 1 BTC = $10,000. Meanwhile, the market capitalization of the overall cryptocurrency market, which combines major digital currencies such as Bitcoin, Ethereum, Litecoin, and others, was expected to surpass $300 billion.
Even as Bitcoin and the aforementioned digital currencies made global news headlines, many people around the world were not entirely sure as to how cryptocurrencies work and how they may fit into their lives. A cryptocurrency is a digital asset supported by encryption systems and networks; the value of cryptocurrencies is determined by exchange rates and market conditions.
What are digital currencies and how can you use them?
In essence, cryptocurrencies are digital currencies that can be used to store value or conduct monetary transactions. Digital currencies have been around for decades, but the concept of applying cryptographic standards started with Bitcoin in 2009.
When trying to understand Bitcoin, it helps to think about gold and the United States dollar. Gold is a precious metal that used to serve as currency; these days, gold is mostly traded as a financial asset with a tangible value determined by traders and investors. A coin made of 24-karat gold cannot normally be used to pay for a sandwich and a cup of coffee; the coin holder would have to trade it in the commodities market or sell it to a jeweler for the purpose of converting to a fiat currency such as the U.S. dollar.
Cryptocurrency, such as Bitcoin, is similar to gold insofar as being a financial asset that stores value; however, unlike gold, it can be used to pay for that sandwich and coffee at a deli or café that is set up to accept Bitcoin. Cryptocurrencies can be used for payments, remittances and money transfers by means of electronic wallets that connect to the blockchain, which is the cryptographic peer-to-peer (p2p) network that supports them. For the most part, cryptocurrencies are decentralized, which means that they are not subject to monetary intervention by central banks.
Digital Currency Wallets
As long as two parties have the digital addresses of their respective digital wallets, cryptocurrency transactions can take place. In the case of Bitcoin and other major cryptocurrencies, individuals can choose between hardware, software and online wallets to hold their digital tokens or coins. The most popular wallets are offered by reputable exchanges such as Bittrex, Coinbase, GDAX, and Poloniex; the advantage of opening accounts at exchanges is that they offer more than just cryptocurrency wallets; they also open the door to prospective traders and investors through marketplaces.