Lots of people have recently sought to enter the cryptocurrency market, having heard about them from friends, on the internet, or in the news. But – what actually constitutes a cryptocurrency?

Cryptocurrencies are digital currencies that are protected against counterfeiting by blockchain technology.

With fiat currency (‘money’), we rely on banks and governments to ensure the legitimacy of the money we use. In this sense, we can call fiat money centralised, for it is controlled and regulated by known bodies. In this system, we place our trust in individual representatives (such as a bank) to verify our transaction, meaning they can charge us for their services at prices which may not be fair or proportionate to their services.

Cryptocurrencies, however, are generally decentralised. In order to maintain the legitimacy of cryptocurrency transactions in the absence of banks and governments, blockchain technology is utilised. In simple terms, blockchain is a way of reaching agreement about the validity of transactions by sequencing transactions one after the other, into blocks, like a thread. Each block is verified by many computers (nodes) agreeing upon the sequence of the blockchain: this is called consensus. The blockchain is therefore continuously verified by multiple, independent, sources, making counterfeiting a transaction near-impossible.

Blockchain is therefore crucial to the integrity of cryptocurrencies, and allows these digital currencies to be transacted without a reliance on centralised bodies. By bypassing banks, cryptocurrencies are faster and cheaper to exchange, and allow cryptocurrencies to operate outside the boundaries of normal, fiat, currencies.

Too many words?
Here’s the short version…

A cryptocurrency is a digital currency that uses an encryption technique (e.g. blockchain) to generate new units (e.g. coins) and to verify transactions, independently of centralised bodies such as central banks.


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