A cryptocurrency, crypto-currency, or crypto is a
digital currency
Digital currency (digital money, electronic money or electronic currency) is any currency, money, or money-like asset that is primarily managed, stored or exchanged on digital computer systems, especially over the internet. Types of digital cu ...
designed to work as a
medium of exchange
In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency.
The origin of "mediums of exchange" in human societies is as ...
through a
computer network that is not reliant on any central authority, such as a
government or
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
, to uphold or maintain it.
It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.
Individual coin ownership records are stored in a digital
ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
, which is a computerized
database using
strong cryptography to secure
transaction records, control the creation of additional coins, and verify the transfer of coin ownership.
Despite their name, cryptocurrencies are not considered to be
currencies
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
in the traditional sense, and while varying treatments have been applied to them, including classification as
commodities
In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.
The price of a co ...
,
securities, and currencies, cryptocurrencies are generally viewed as a distinct asset class in practice. Some crypto schemes use validators to maintain the cryptocurrency. In a
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens, or other such reward mechanisms.
Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use
decentralized control as opposed to a
central bank digital currency
A central bank digital currency (CBDC) (also called digital fiat currency or digital base money) is a digital currency issued by a central bank, rather than by a commercial bank.
A report by the Bank for International Settlements states that, ...
(CBDC). When a cryptocurrency is minted, or created prior to issuance, or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through
distributed ledger technology, typically a
blockchain
A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, ...
, that serves as a public financial transaction database. Traditional asset classes like currencies, commodities, and stocks, as well as macroeconomic factors, have modest exposures to cryptocurrency returns.
The first decentralized cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of March 2022, there were more than 9,000
other cryptocurrencies in the marketplace, of which more than 70 had a
market capitalization exceeding $1 billion.
History
In 1983, American
cryptographer
Cryptography, or cryptology (from grc, , translit=kryptós "hidden, secret"; and ''graphein'', "to write", or '' -logia'', "study", respectively), is the practice and study of techniques for secure communication in the presence of adve ...
David Chaum conceived of a type of cryptographic
electronic money called
ecash Ecash was conceived by David Chaum as an anonymous cryptographic electronic money or electronic cash system in 1983. It was realized through his corporation Digicash and used as micropayment system at one US bank from 1995 to 1998.
Design
Chaum ...
. Later, in 1995, he implemented it through
Digicash
DigiCash Inc. was an electronic money corporation founded by David Chaum in 1989. DigiCash transactions were unique in that they were anonymous due to a number of cryptographic protocols developed by its founder. DigiCash declared bankruptcy in ...
, an early form of cryptographic electronic payments. Digicash required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by a third party.
In 1996, the
National Security Agency published a paper entitled ''How to Make a Mint: the Cryptography of Anonymous Electronic Cash'', describing a cryptocurrency system. The paper was first published in an
MIT
The Massachusetts Institute of Technology (MIT) is a private land-grant research university in Cambridge, Massachusetts. Established in 1861, MIT has played a key role in the development of modern technology and science, and is one of the m ...
mailing list and later in 1997 in ''The American Law Review''.
In the 1997 book ''
The Sovereign Individual
''The Sovereign Individual: Mastering the Transition to the Information Age'' is a 1997 non-fiction book by William Rees-Mogg and James Dale Davidson. Later republished on 26 August 1999 by Touchstone, it forecasts the development of the twen ...
'', the authors,
William Rees-Mogg and
James Dale Davidson
James Dale Davidson is an American private investor and investment writer, co-writer of the newsletter ''Strategic Investment'', and co-author with William Rees-Mogg of ''Blood in the Streets: Investment Profits in a World Gone Mad'' (1987), ''The ...
, predict that the currency used in the
information age
The Information Age (also known as the Computer Age, Digital Age, Silicon Age, or New Media Age) is a historical period that began in the mid-20th century. It is characterized by a rapid shift from traditional industries, as established during t ...
would be using "mathematical algorithms that have no physical existence", which has led some in the cryptocurrency community to call the book's claim a "prophecy".
In 1998,
Wei Dai described "b-money", an anonymous, distributed electronic cash system. Shortly thereafter,
Nick Szabo described
bit gold. Like
Bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange BitGold) was described as an electronic currency system which required users to complete a
proof of work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expe ...
function with solutions being cryptographically put together and published.
In January 2009, Bitcoin was created by
pseudonymous developer
Satoshi Nakamoto. It used
SHA-256, a cryptographic hash function, in its
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this exp ...
scheme.
In April 2011,
Namecoin
Namecoin (Abbreviation: NMC; sign: \mathbb) is a cryptocurrency originally forked from bitcoin software. It uses proof-of-work algorithm. Like bitcoin, it is limited to \mathbb21 million.
Namecoin can store data within its own blockchain ...
was created as an attempt at forming a decentralized
DNS
The Domain Name System (DNS) is a hierarchical and distributed naming system for computers, services, and other resources in the Internet or other Internet Protocol (IP) networks. It associates various information with domain names assigned to ...
. In October 2011,
Litecoin was released which used
scrypt as its hash function instead of SHA-256.
Peercoin
Peercoin, also known as Peer-to-Peer Coin, PP Coin, or PPC is a cryptocurrency utilizing both proof-of-stake and proof-of-work systems.
History
Peercoin is based on an August 2012 paper which listed the authors as Scott Nadal and Sunny King. K ...
, created in August 2012, used a hybrid of proof-of-work and
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
.
On 6 August 2014, the UK announced its
Treasury
A treasury is either
*A government department related to finance and taxation, a finance ministry.
*A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or ...
had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.
Its final report was published in 2018, and it issued a consultation on cryptoassets and
stablecoins in January 2021.
In June 2021,
El Salvador became the first country to accept Bitcoin as
legal tender, after the
Legislative Assembly had voted 62–22 to pass a bill submitted by President
Nayib Bukele classifying the cryptocurrency as such.
In August 2021,
Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as Bitcoin.
In September 2021, the
government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.
On 15 September 2022, the world second largest cryptocurrency at that time,
Ethereum transitioned its
consensus mechanism from
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this exp ...
(PoW) to
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
(PoS) in an upgrade process known as "the Merge". According to the Ethereum Founder, the upgrade can cut Ethereum's energy use by 99.9% and carbon-dioxide emissions by 99.9%.
Formal definition
According to Jan Lansky, a cryptocurrency is a system that meets six conditions:
# The system does not require a central authority; its state is maintained through distributed consensus.
# The system keeps an overview of cryptocurrency units and their ownership.
# The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
# Ownership of cryptocurrency units can be proved exclusively cryptographically.
# The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
# If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
In March 2018, the word ''cryptocurrency'' was added to the ''
Merriam-Webster Dictionary''.
Altcoins
Tokens, cryptocurrencies, and other digital assets other than Bitcoin are collectively known as alternative cryptocurrencies, typically shortened to "altcoins" or "alt coins", or disparagingly "shitcoins". Paul Vigna of ''The Wall Street Journal'' also described altcoins as "alternative versions of Bitcoin" given its role as the model protocol for altcoin designers.
Altcoins often have underlying differences when compared to Bitcoin. For example,
Litecoin aims to process a block every 2.5 minutes, rather than Bitcoin's 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin. Another example is
Ethereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain. Ethereum was the most used blockchain in 2020, according to Bloomberg News. In 2016, it had the largest "following" of any altcoin, according to the ''New York Times''.
Significant rallies across altcoin markets are often referred to as an "altseason".
Stablecoins
Stablecoins are cryptocurrencies designed to maintain a stable level of
purchasing power. Notably, these designs are not foolproof, as a number of stablecoins have crashed or lost their peg. For example, on 11 May 2022,
Terra
Terra may often refer to:
* Terra (mythology), primeval Roman goddess
* An alternate name for planet Earth, as well as the Latin name for the planet
Terra may also refer to: Geography Astronomy
* Terra (satellite), a multi-national NASA scienti ...
's stablecoin UST fell from $1 to 26 cents. The subsequent failure of
Terraform Labs
Terra is a blockchain protocol and payment platform used for algorithmic stablecoins. The project was created in 2018 by Terraform Labs, a startup co-founded by Do Kwon and Daniel Shin. It is most known for its Terra stablecoin and the associat ...
resulted in the loss of nearly $40B invested in the Terra and Luna bitcoins. In September 2022, South Korean prosecutors requested the issuance of an
Interpol Red Notice
An Interpol notice is an international alert circulated by Interpol to communicate information about crimes, criminals, and threats by police in a member state (or an authorised international entity) to their counterparts around the world. The in ...
against the company's founder,
Do Kwon
Kwon Do-Hyung (), more commonly known as Do Kwon, is the South Korean co-founder and CEO of Singapore-based Terraform Labs, the parent company of crashed stablecoin TerraUSD and cryptocurrency Luna. TerraUSD and Luna collapsed in May 2022, wipi ...
.
Architecture
Cryptocurrency is produced by an entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly stated. In centralized banking and economic systems such as the US
Federal Reserve System
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, corporate boards or governments control the supply of currency. In the case of cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which cryptocurrencies are based was created by
Satoshi Nakamoto.
Within a
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this exp ...
system such as Bitcoin, the safety, integrity and balance of
ledger
A ledger is a book or collection of accounts in which account transactions are recorded. Each account has an opening or carry-forward balance, and would record each transaction as either a debit or credit in separate columns, and the ending or ...
s is maintained by a community of mutually distrustful parties referred to as
miners. Miners use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.
In a
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools.
Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation. Compared with ordinary currencies held by financial institutions or kept as
cash
In economics, cash is money in the physical form of currency, such as banknotes and coins.
In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...
on hand, cryptocurrencies can be more difficult for
seizure
An epileptic seizure, informally known as a seizure, is a period of symptoms due to abnormally excessive or synchronous neuronal activity in the brain. Outward effects vary from uncontrolled shaking movements involving much of the body with los ...
by law enforcement.
Blockchain
The validity of each cryptocurrency's coins is provided by a
blockchain
A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, ...
. A blockchain is a continuously growing list of
records
A record, recording or records may refer to:
An item or collection of data Computing
* Record (computer science), a data structure
** Record, or row (database), a set of fields in a database related to one entity
** Boot sector or boot record, ...
, called ''blocks'', which are linked and secured using cryptography.
Each block typically contains a
hash pointer as a link to a previous block,
a
timestamp and transaction data.
By design, blockchains are inherently resistant to modification of the data. It is "an open,
distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".
For use as a distributed ledger, a blockchain is typically managed by a
peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are
secure by design
Secure by design, in software engineering, means that software products and capabilities have been designed to be foundationally secure.
Alternate security strategies, tactics and patterns are considered at the beginning of a software design, ...
and are an example of a distributed computing system with high
Byzantine fault tolerance
A Byzantine fault (also Byzantine generals problem, interactive consistency, source congruency, error avalanche, Byzantine agreement problem, and Byzantine failure) is a condition of a computer system, particularly distributed computing systems, ...
.
Decentralized consensus has therefore been achieved with a blockchain.
Nodes
A ''node'' is a computer that connects to a cryptocurrency network. The node supports the cryptocurrency's network through either relaying transactions, validation, or hosting a copy of the blockchain. In terms of relaying transactions, each network computer (node) has a copy of the blockchain of the cryptocurrency it supports. When a transaction is made, the node creating the transaction broadcasts details of the transaction using encryption to other nodes throughout the node network so that the transaction (and every other transaction) is known.
Node owners are either volunteers, those hosted by the organization or body responsible for developing the cryptocurrency blockchain network technology, or those who are enticed to host a node to receive rewards from hosting the node network.
Timestamping
Cryptocurrencies use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party.
The first timestamping scheme invented was the
proof-of-work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this exp ...
scheme. The most widely used proof-of-work schemes are based on SHA-256 and
scrypt.
Some other hashing algorithms that are used for proof-of-work include
CryptoNight,
Blake
Blake is a surname which originated from Old English. Its derivation is uncertain; it could come from "blac", a nickname for someone who had dark hair or skin, or from "blaac", a nickname for someone with pale hair or skin. Another theory, presum ...
,
SHA-3, and
X11.
Another method is called the
proof-of-stake
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of p ...
scheme. Proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it. Some cryptocurrencies use a combined proof-of-work and proof-of-stake scheme.
Mining
On a blockchain, ''mining'' is the validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases
transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as
FPGAs and
ASIC
An application-specific integrated circuit (ASIC ) is an integrated circuit (IC) chip customized for a particular use, rather than intended for general-purpose use, such as a chip designed to run in a digital voice recorder or a high-efficien ...
s running complex hashing algorithms like SHA-256 and
scrypt.
This
arms race
An arms race occurs when two or more groups compete in military superiority. It consists of a competition between two or more states to have superior armed forces; a competition concerning production of weapons, the growth of a military, and t ...
for cheaper-yet-efficient machines has existed since Bitcoin was introduced in 2009.
With more people venturing into the world of virtual currency, generating hashes for validation has become more complex over time, forcing miners to invest increasingly large sums of money to improve computing performance. Consequently, the reward for finding a hash has diminished and often does not justify the investment in equipment and cooling facilities (to mitigate the heat the equipment produces), and the electricity required to run them. Popular regions for mining include those with inexpensive electricity, a cold climate, and jurisdictions with clear and conducive regulations. By July 2019, Bitcoin's electricity consumption was estimated to be approximately 7 gigawatts, around 0.2% of the global total, or equivalent to the energy consumed nationally by Switzerland.
Some
miners pool resources, sharing their
processing power
In computing, computer performance is the amount of useful work accomplished by a computer system. Outside of specific contexts, computer performance is estimated in terms of accuracy, efficiency and speed of executing computer program instruction ...
over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a
block
Block or blocked may refer to:
Arts, entertainment and media Broadcasting
* Block programming, the result of a programming strategy in broadcasting
* W242BX, a radio station licensed to Greenville, South Carolina, United States known as ''96.3 ...
. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work.
, the Chinese Government has halted trading of virtual currency, banned initial coin offerings and shut down mining. Many Chinese miners have since relocated to Canada and Texas. One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices. In June 2018,
Hydro Quebec
Hydro from Ancient Greek word ὕδωρ (húdōr), meaning ''water''.
Hydro may also refer to:
Energy technologies
* Water-derived power or energy:
** Hydropower, derived from water
** Hydroelectricity, in electrical form
* "Hydro", AC mains ...
proposed to the provincial government to allocate 500 megawatts of power to crypto companies for mining. According to a February 2018 report from ''
Fortune
Fortune may refer to:
General
* Fortuna or Fortune, the Roman goddess of luck
* Luck
* Wealth
* Fortune, a prediction made in fortune-telling
* Fortune, in a fortune cookie
Arts and entertainment Film and television
* ''The Fortune'' (1931 film) ...
'', Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity.
In March 2018, the city of
Plattsburgh, New York put an 18-month
moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city. In 2021,
Kazakhstan became the second-biggest crypto-currency mining country, producing 18.1% of the global hash rate. The country built a compound containing 50,000 computers near
Ekibastuz
Ekibastuz ( kk, Екібастұз, translit=Ekıbastūz, , ەكئباستۇز; russian: Экибастуз) is a city in Pavlodar Region, northeastern Kazakhstan. The population was Ekibastuz is served by Ekibastuz Airport.
History
The history ...
.
GPU price rise
An increase in cryptocurrency mining increased the demand for
graphics cards (GPU) in 2017. The computing power of GPUs makes them well-suited to generating hashes. Popular favorites of cryptocurrency miners such as Nvidia's
GTX 1060 and
GTX 1070 graphics cards, as well as AMD's RX 570 and RX 580 GPUs, doubled or tripled in priceor were out of stock. A GTX 1070 Ti which was released at a price of $450 sold for as much as $1,100. Another popular card, the GTX 1060 (6 GB model) was released at an
MSRP of $250, and sold for almost $500. RX 570 and RX 580 cards from
AMD
Advanced Micro Devices, Inc. (AMD) is an American multinational semiconductor company based in Santa Clara, California, that develops computer processors and related technologies for business and consumer markets. While it initially manufact ...
were out of stock for almost a year. Miners regularly buy up the entire stock of new GPU's as soon as they are available.
Nvidia
Nvidia CorporationOfficially written as NVIDIA and stylized in its logo as VIDIA with the lowercase "n" the same height as the uppercase "VIDIA"; formerly stylized as VIDIA with a large italicized lowercase "n" on products from the mid 1990s to ...
has asked retailers to do what they can when it comes to selling GPUs to gamers instead of miners. Boris Böhles, PR manager for Nvidia in the German region, said: "Gamers come first for Nvidia."
Wallets
A
cryptocurrency wallet
A cryptocurrency wallet is a device, physical medium, program or a service which stores the public and/or private keys for cryptocurrency transactions. In addition to this basic function of storing the keys, a cryptocurrency wallet more often al ...
is a means of storing the
public and private "keys" (address) or seed which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.
There exist multiple methods of storing keys or seed in a wallet. These methods range from using paper wallets (which are public, private or seed keys written on paper), to using hardware wallets (which are hardware to store your wallet information), to a digital wallet (which is a computer with a software hosting your wallet information), to hosting your wallet using an exchange where cryptocurrency is traded, or by storing your wallet information on a digital medium such as plaintext.
Anonymity
Bitcoin is
pseudonymous
A pseudonym (; ) or alias () is a fictitious name that a person or group assumes for a particular purpose, which differs from their original or true name (orthonym). This also differs from a new name that entirely or legally replaces an individua ...
, rather than
anonymous
Anonymous may refer to:
* Anonymity, the state of an individual's identity, or personally identifiable information, being publicly unknown
** Anonymous work, a work of art or literature that has an unnamed or unknown creator or author
* Anony ...
; the cryptocurrency in a wallet is not tied to a person, but rather to one or more specific keys (or "addresses"). Thereby, Bitcoin owners are not immediately identifiable, but all transactions are publicly available in the blockchain. Still,
cryptocurrency exchanges
A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may acce ...
are often required by law to collect the personal information of their users.
Some cryptocurrencies, such as
Monero,
Zerocoin,
Zerocash, and
CryptoNote, implement additional measures to increase privacy, such as by using
zero-knowledge proofs.
Economics
Cryptocurrencies are used primarily outside banking and governmental institutions and are exchanged over the Internet.
Block rewards
Proof-of-work cryptocurrencies, such as Bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.
The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.
The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities. Some sources claim that the current Bitcoin design is very inefficient, generating a welfare loss of 1.4% relative to an efficient cash system. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 Million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using Bitcoin as a means of payment. However, the efficiency of the Bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.
Transaction fees
Transaction fees for cryptocurrency depend mainly on the
supply
Supply may refer to:
*The amount of a resource that is available
**Supply (economics), the amount of a product which is available to customers
**Materiel, the goods and equipment for a military unit to fulfill its mission
*Supply, as in confidenc ...
of network capacity at the time, versus the
demand from the currency holder for a faster transaction. The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest. Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.
For
Ether
In organic chemistry, ethers are a class of compounds that contain an ether group—an oxygen atom connected to two alkyl or aryl groups. They have the general formula , where R and R′ represent the alkyl or aryl groups. Ethers can again b ...
, transaction fees differ by computational complexity, bandwidth use, and storage needs, while Bitcoin transaction fees differ by transaction size and whether the transaction uses
SegWit
Segregated Witness, or SegWit, is the name used for an implemented soft fork change in the transaction format of Bitcoin.
The formal title "Segregated Witness (Consensus layer)" had Bitcoin Improvement Proposal number BIP141. The declared purpo ...
. In September 2018, the median transaction fee for Ether corresponded to $0.017, while for Bitcoin it corresponded to $0.55.
Some cryptocurrencies have no transaction fees, and instead rely on
client-side
Client-side refers to operations that are performed by the client in a client–server relationship in a computer network.
General concepts
Typically, a client is a computer application, such as a web browser, that runs on a user's local com ...
proof-of-work as the transaction prioritization and anti-spam mechanism.
Exchanges
Cryptocurrency exchanges allow customers to trade cryptocurrencies for other assets, such as conventional
fiat money
Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was somet ...
, or to trade between different digital currencies.
Crypto marketplaces do not guarantee that an investor is completing a purchase or trade at the optimal price. As a result, many investors take advantage of this by using
arbitrage
In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...
to find the difference in price across several markets.
Atomic swaps
Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.
ATMs
Jordan Kelley, founder of
Robocoin, launched the first
Bitcoin ATM Bitcoin ATMs (Automated Teller Machine) are kiosks that allows a person to purchase Bitcoin and other cryptocurrencies by using cash or debit card. Some Bitcoin ATMs offer bi-directional functionality enabling both the purchase of Bitcoin as well a ...
in the United States on 20 February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.
Initial coin offerings
An
initial coin offering (ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada, have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ether.
According to
PricewaterhouseCoopers, four of the 10 biggest proposed initial coin offerings have used
Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency
FINMA
The Swiss Financial Market Supervisory Authority (FINMA) is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers, as well as other fi ...
stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.
Price trends
The
market capitalization of a cryptocurrency is calculated by multiplying the price by the number of coins in circulation. The total cryptocurrency market cap has historically been dominated by Bitcoin accounting for at least 50% of the market cap value where altcoins have increased and decreased in market cap value in relation to Bitcoin. Bitcoin's value is largely determined by speculation among other technological limiting factors known as blockchain rewards coded into the architecture technology of Bitcoin itself. The cryptocurrency market cap follows a trend known as the "halving", which is when the block rewards received from Bitcoin are halved due to technological mandated limited factors instilled into Bitcoin which in turn limits the supply of Bitcoin. As the date reaches near of a halving (twice thus far historically) the cryptocurrency market cap increases, followed by a downtrend.
By June 2021, cryptocurrency had begun to be offered by some wealth managers in the US for
401(k)
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodical employee contributions come directly out of their ...
s.
Volatility
Cryptocurrency prices are much more volatile than established financial assets such as
stocks. For example, over one week in May 2022, Bitcoin lost 20% of its value and Ethereum lost 26%, while
Solana and
Cardano lost 41% and 35% respectively. The falls were attributed to warnings about inflation. By comparison, in the same week, the
Nasdaq tech stock index fell 7.6 per cent and the
FTSE 100
The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the "Footsie" , is a share index of the 100 companies listed on the London Stock Exchange with (in principle) the highest marke ...
was 3.6 per cent down.
In the longer term, of the
10 leading cryptocurrencies identified by the total value of coins in circulation in January 2018, only four (Bitcoin, Ethereum, Cardano and
Ripple
Ripple may refer to:
Science and technology
* Capillary wave, commonly known as ripple, a wave traveling along the phase boundary of a fluid
** Ripple, more generally a disturbance, for example of spacetime in gravitational waves
* Ripple (electri ...
(XRP)) were still in that position in early 2022. The total value of all cryptocurrencies was $2 trillion at the end of 2021, but had halved nine months later. The Wall Street Journal has commented that the crypto sector has become “intertwined” with the rest of the capital markets and “sensitive to the same forces that drive tech stocks and other risk assets”, such as inflation forecasts.
Databases
There are also ''centralized'' databases, outside of blockchains, that store crypto market data. Compared to the blockchain, databases perform fast as there is no verification process. Four of the most popular cryptocurrency market databases are CoinMarketCap, CoinGecko, BraveNewCoin, and Cryptocompare.
Social and political aspects
According to Alan Feuer of ''
The New York Times'',
libertarians and
anarcho-capitalist
Anarcho-capitalism (or, colloquially, ancap) is an anti-statist, libertarian, and anti-political philosophy and economic theory that seeks to abolish centralized states in favor of stateless societies with systems of private property enf ...
s were attracted to the philosophical idea behind Bitcoin. Early Bitcoin supporter
Roger Ver
Roger Keith Ver (born 27 January 1979) is an early investor in Bitcoin, Bitcoin-related startups and an early promoter of Bitcoin. Ver has sometimes been referred to as "Bitcoin Jesus". He now primarily promotes Bitcoin Cash as Ver sees it as f ...
said: "At first, almost everyone who got involved did so for philosophical reasons. We saw Bitcoin as a great idea, as a way to separate money from the state." Economist
Paul Krugman argues that cryptocurrencies like Bitcoin are "something of a cult" based in "paranoid fantasies" of government power.
Nigel Dodd argues in ''The social life of Bitcoin'' that the essence of the Bitcoin ideology is to remove money from both social and governmental control. Dodd discusses the ''"Declaration of Bitcoin's Independence"'', a message of crypto-anarchism with the words: "Bitcoin is inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions because Bitcoin is fundamentally humanitarian."
David Golumbia says that the ideas influencing Bitcoin advocates emerge from right-wing extremist movements such as the
Liberty Lobby and the
John Birch Society
The John Birch Society (JBS) is an American right-wing political advocacy group. Founded in 1958, it is anti-communist, supports social conservatism, and is associated with ultraconservative, radical right, far-right, or libertarian ideas.
T ...
and their anti-Central Bank rhetoric, or, more recently,
Ron Paul and
Tea Party-style libertarianism.
Steve Bannon
Stephen Kevin Bannon (born November 27, 1953) is an American media executive, political strategist, and former investment banker. He served as the White House's chief strategist in the administration of U.S. president Donald Trump during th ...
, who owns a "good stake" in Bitcoin, sees cryptocurrency as a form of disruptive populism, taking control back from central authorities.
Bitcoin's founder,
Satoshi Nakamoto has supported the idea that cryptocurrencies go well with libertarianism: "It's very attractive to the libertarian viewpoint if we can explain it properly." Nakamoto said in 2008.
According to the
European Central Bank, the decentralization of money offered by Bitcoin has its theoretical roots in the
Austrian school of economics
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian school ...
, especially with
Friedrich von Hayek
Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...
in his book ''Denationalisation of Money: The Argument Refined'', in which Hayek advocates a complete
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ...
in the production, distribution and management of money to end the monopoly of
central banks
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ...
.
Increasing regulation
The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The
Financial Action Task Force (FATF) has defined cryptocurrency-related services as "virtual asset service providers" (VASPs) and recommended that they be regulated with the same
money laundering (
AML) and
know your customer (KYC) requirements as financial institutions.
In May 2020, the Joint Working Group on interVASP Messaging Standards published "IVMS 101", a universal common language for communication of required originator and beneficiary information between VASPs. The FATF and financial regulators were informed as the data model was developed.
In June 2020, FATF updated its guidance to include the "Travel Rule" for cryptocurrencies, a measure which mandates that VASPs obtain, hold, and exchange information about the originators and beneficiaries of virtual asset transfers. Subsequent standardized protocol specifications recommended using
JSON for relaying data between VASPs and identity services. As of December 2020, the IVMS 101 data model has yet to be finalized and ratified by the three global standard setting bodies that created it.
The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets (MiCA), which aimed to provide a comprehensive regulatory framework for digital assets in the EU.
On 10 June 2021, the
Basel Committee on Banking Supervision proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold Bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation.
The IMF is seeking a co-ordinated, consistent and comprehensive approach to supervising cryptocurrencies.
Tobias Adrian
Tobias Adrian (born 23 July 1971) is a German and American economist who has been Financial Counsellor of the International Monetary Fund and Head of their Monetary and Capital Markets Department since 2017. He was previously employed at the Fed ...
, the IMF's financial counsellor and head of its monetary and capital markets department said in a January 2022 interview that "Agreeing global regulations is never quick. But if we start now, we can achieve the goal of maintaining financial stability while also enjoying the benefits which the underlying technological innovations bring,"
United States
In 2021, 17 states passed laws and resolutions concerning cryptocurrency regulation. The
U.S. Securities and Exchange Commission (SEC) is considering what steps to take. On 8 July 2021,
Senator Elizabeth Warren
Elizabeth Ann Warren (née Herring; born June 22, 1949) is an American politician and former law professor who is the senior United States senator from Massachusetts, serving since 2013. A member of the Democratic Party and regarded as a pr ...
, part of the
Senate Banking Committee, wrote to the chairman of the SEC and demanded that it provide answers on cryptocurrency regulation by 28 July 2021, due to the increase in cryptocurrency exchange use and the danger this poses to consumers. On 17 February 2022, the Justice department named Eun Young Choi as the first director of a National Cryptocurrency Enforcement Team to aid in identification of and dealing with misuse of cryptocurrencies and other digital assets.
China
In September 2017, China banned
ICOs to cause
abnormal return In finance, an abnormal return is the difference between the actual return of a security and the expected return. Abnormal returns are sometimes triggered by "events." Events can include mergers, dividend announcements, company earning announcemen ...
from cryptocurrency decreasing during announcement window. The liquidity changes by banning ICOs in China was temporarily negative while the liquidity effect became positive after news.
On 18 May 2021, China banned financial institutions and payment companies from being able to provide cryptocurrency transaction related services. This led to a sharp fall in the price of the biggest
proof of work
Proof of work (PoW) is a form of cryptographic proof in which one party (the ''prover'') proves to others (the ''verifiers'') that a certain amount of a specific computational effort has been expended. Verifiers can subsequently confirm this expe ...
cryptocurrencies. For instance,
Bitcoin fell 31%,
Ethereum fell 44%,
Binance Coin fell 32% and
Dogecoin fell 30%. Proof of work mining was the next focus, with regulators in popular mining regions citing the use of electricity generated from highly polluting sources such as coal to create Bitcoin and Ethereum.
In September 2021, the Chinese government declared all cryptocurrency transactions of any kind illegal, completing its crackdown on cryptocurrency.
United Kingdom
In the United Kingdom, as of 10 January 2021, all cryptocurrency firms, such as exchanges, advisors and professionals that have either a presence, market product or provide services within the UK market must register with the
Financial Conduct Authority. Additionally, on 27 June 2021, the financial watchdog demanded that
Binance, the world's largest cryptocurrency exchange, cease all regulated activities in the UK.
South Africa
South Africa, which has seen a large number of scams related to cryptocurrency, is said to be putting a regulatory timeline in place that will produce a regulatory framework. The largest scam occurred in April 2021, where the two founders of an African-based cryptocurrency exchange called Africrypt, Raees Cajee and Ameer Cajee, disappeared with $3.8 billion worth of
Bitcoin.
Additionally, Mirror Trading International disappeared with $170 million worth of cryptocurrency in January 2021.
South Korea
In March 2021, South Korea implemented new legislation to strengthen their oversight of digital assets. This legislation requires all digital asset managers, providers and exchanges to be registered with the Korea Financial Intelligence Unit in order to operate in South Korea.
Registering with this unit requires that all exchanges are certified by the Information Security Management System and that they ensure all customers have real name bank accounts. It also requires that the CEO and board members of the exchanges have not been convicted of any crimes and that the exchange holds sufficient levels of deposit insurance to cover losses arising from hacks.
Turkey
On 30 April 2021, the
Central Bank of the Republic of Turkey
The Central Bank of the Republic of Turkey, CBRT ( tr, Türkiye Cumhuriyet Merkez Bankası, TCMB, literally "The Turkish Republic Central Bank") is the central bank of Turkey. Its responsibilities include conducting monetary and exchange rate pol ...
banned the use of cryptocurrencies and cryptoassets for making purchases on the grounds that the use of cryptocurrencies for such payments poses significant transaction risks.
El Salvador
On 9 June 2021,
El Salvador announced that it will adopt
Bitcoin as legal tender, the first country to do so.
India
At present, India neither prohibits nor allows investment in the cryptocurrency market. In 2020, the Supreme Court of India had lifted the ban on cryptocurrency, which was imposed by the Reserve Bank of India. Since then, an investment in cryptocurrency is considered legitimate, though there is still ambiguity about the issues regarding the extent and payment of tax on the income accrued thereupon and also its regulatory regime. But it is being contemplated that the Indian Parliament will soon pass a specific law to either ban or regulate the cryptocurrency market in India. Expressing his public policy opinion on the Indian cryptocurrency market to a well-known online publication, a leading
public policy
Public policy is an institutionalized proposal or a decided set of elements like laws, regulations, guidelines, and actions to solve or address relevant and real-world problems, guided by a conception and often implemented by programs. Public ...
lawyer and Vice President of
SAARCLAW (South Asian Association for Regional Co-operation in Law)
Hemant Batra
Hemant Batra (born 15 August 1967) is an Indian business, public policy, corporate and commercial senior practicing lawyer, newspaper – columnist writer author, TV anchor/Host, public speaker, commentator (law & public policy), mentor, and leg ...
has said that the "cryptocurrency market has now become very big with involvement of billions of dollars in the market hence, it is now unattainable and irreconcilable for the government to completely ban all sorts of cryptocurrency and its trading and investment". He mooted regulating the cryptocurrency market rather than completely banning it. He favoured following
IMF and
FATF
The Financial Action Task Force (on Money Laundering) (FATF), also known by its French name, ''Groupe d'action financière'' (GAFI), is an intergovernmental organisation founded in 1989 on the initiative of the G7 to develop policies to combat m ...
guidelines in this regard.
Legality
The
legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of Bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool. While some countries have explicitly allowed their use and trade, others have banned or restricted it. According to the
Library of Congress in 2018, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.
In the United States and Canada, state and provincial securities regulators, coordinated through the
North American Securities Administrators Association, are investigating "Bitcoin scams" and
ICOs in 40 jurisdictions.
Various government agencies, departments, and courts have classified Bitcoin differently.
China Central Bank banned the handling of Bitcoins by financial institutions in
China in early 2014.
In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using the
Russian ruble
''hum''; cv, тенкĕ ''tenke''; kv, шайт ''shayt''; Lak: къуруш ''k'urush''; Mari: теҥге ''tenge''; os, сом ''som''; tt-Cyrl, сум ''sum''; udm, манет ''manet''; sah, солкуобай ''solkuobay''
, name_ab ...
while nonresidents are allowed to use foreign currency. Regulations and bans that apply to Bitcoin probably extend to similar cryptocurrency systems.
In August 2018, the
Bank of Thailand
The Bank of Thailand (BOT) ( Abrv: ธปท.; th, ธนาคารแห่งประเทศไทย, ) is the central bank of Thailand.
History
The Bank of Thailand (BOT) was first set up as the Thai National Banking Bureau. The Bank ...
announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).
Advertising bans
Cryptocurrency advertisements have been banned on the following platforms:
*
Google
*
Twitter
*
Facebook
*
Bing
Bing most often refers to:
* Bing Crosby (1903–1977), American singer
* Microsoft Bing, a web search engine
Bing may also refer to:
Food and drink
* Bing (bread), a Chinese flatbread
* Bing (soft drink), a UK brand
* Bing cherry, a variet ...
*
Snapchat
*
LinkedIn
*
MailChimp
*
Baidu
Baidu, Inc. ( ; , meaning "hundred times") is a Chinese multinational technology company specializing in Internet-related services and products and artificial intelligence (AI), headquartered in Beijing's Haidian District. It is one of the la ...
*
Tencent
Tencent Holdings Ltd. () is a Chinese multinational technology and entertainment conglomerate and holding company headquartered in Shenzhen. It is one of the highest grossing multimedia companies in the world based on revenue. It is also the w ...
*
Weibo Weibo may refer to:
* Microblogging in China, or China-based microblogging services (), including:
** NetEase Weibo (), launched by NetEase
** People's Weibo (), launched by ''People's Daily''
** Phoenix Weibo (), launched by Phoenix Television
** W ...
*
Line
Line most often refers to:
* Line (geometry), object with zero thickness and curvature that stretches to infinity
* Telephone line, a single-user circuit on a telephone communication system
Line, lines, The Line, or LINE may also refer to:
Art ...
*
Yandex
U.S. tax status
On 25 March 2014, the United States
Internal Revenue Service (IRS) ruled that Bitcoin will be treated as property for tax purposes. Therefore, virtual currencies are considered commodities subject to capital gains tax.
The legal concern of an unregulated global economy
As the popularity and demand for online currencies has increased since the inception of Bitcoin in 2009, so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.
[ALI, S, T; CLARKE, D; MCCORRY, P;
Bitcoin: Perils of an Unregulated Global P2P Currency
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Newcastle upon Tyne: Newcastle University: Computing Science, 2015.
(Newcastle University, Computing Science, Technical Report Series, No. CS-TR-1470)]
Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and
launder_money_
Money_laundering_is_the_process_of_concealing_the_origin_of_money,_obtained_from_illicit_activities_such_as_drug_trafficking,_corruption,_embezzlement_or_gambling,_by_converting_it_into_a_legitimate_source._It_is_a_crime_in_many_jurisdictions__...
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