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What is a Cryptocurrency?

Before we talk about cryptocurrency, let's backtrack a bit and define what currency is in general. Most people associate a currency with a system of money that is accepted by a particular country (or in the case of the euro, group of countries.) Dollars and euros in the form of paper or coins are prime examples. This is called fiat currency.

In actuality, a currency doesn't require a government to guarantee it. A currency is simply a medium of exchange for goods or services. As long as the buyer and the seller accept a designated form of payment, you have a currency. The extent to which a currency is widely accepted and retains a stable value are two primary characteristics of its success.

Cryptocurrency is a decentralized digital currency. It does not exist in physical form like traditional money so you can't carry it in your pocket or purse. It is made up of blocks of encrypted data and is exchanged through a secure peer-to-peer file transfer system. Its supply and value are depended upon the activities of the users themselves along with complex protocols built into the coding system that provides the governing structure that cannot be easily modified.

It is decentralized in that it operates without any government oversight or intervention. Because of this, cryptocurrencies don't have banks, nor are they backed by anything like the Federal Deposit Insurance Corporation (FDIC) which backs the U.S. dollar. There isn't a traditional mint creating these currencies either. In fact, cryptocurrencies are created by independent miners who are rewarded for their efforts.

So you can't hold these currencies, you can't physically see them and they aren't affiliated with any governmental body. Yet, it seems that millions of people want access to these modern day currencies and will pay a mint to obtain them. Bitcoin and other cryptocurrencies are a phenomenon that has swept the cyber world.