The term “digital currency” has made its way into the modern lexicon as new and seasoned investors alike flock toward this exciting new asset class. Digital currencies became especially prevalent in the media when Bitcoin rose to nearly $20k per coin at the end of 2017, with people rushing to take part in the “Crypto Gold Rush.”
Newcomers to digital currency often feel overwhelmed by the unfamiliar terms and technology. The easiest way to start learning about digital currency is with the most obvious question: What exactly is digital currency?
Does digital currency actually count as currency?
Many of us never stop and think about what “currency” really means, despite using it on a daily basis to pay for everyday necessities.
Currency is defined as something that is “in circulation as a medium of exchange and is generally used to obtain goods and services.” Currency usually exists in physical form, such as a coin, treasury note, or bank note. Traditional government-backed currencies are known as fiat currencies. This includes dollars, pennies, pounds, pesos, rubles, and so forth.
On the other hand, digital currency isn’t backed by a government, and it doesn’t exist in physical form. You can’t hold a Bitcoin in your hand, just as you can’t store it in a government-run bank.
Whether or not digital currency is really currency from a legal standpoint is still up for debate. Governments around the world are racing to implement regulations regarding the use of digital currency within their borders with questions such as:
- How do our citizens pay taxes on digital currency?
- What if they earned digital currency as income?
- What if they earned money trading digital currency? Where do capital gains come into play?
In the U.S., for example, there is a debate about whether digital currency is a security or an asset.
One fact remains, though: digital currency has real-world value (although it fluctuates) and can be used in exchange for goods and services. Even major retailers, such as Expedia, Red Bull, DISH Network, and Shopify accept digital currency as payment.
Why are they sometimes called “Cryptocurrencies?”
Digital currency uses a science called cryptography to function. Cryptography is a broad field and one that you’ve likely seen since childhood.
Merriam-Webster defines cryptography as:
“Secret writing, or the enciphering and deciphering of messages in secret code or cipher. Also, the computerized encoding and decoding of information.”
One basic example of cryptography are number puzzles that create phrases from corresponding letters of the alphabet. Another example are children’s secret decoder ring toys. Of course, the cryptography behind digital currency is a lot more complex than these basic examples.
What does blockchain have to do with digital currency?
You may have heard the word “blockchain” frequently used in conjunction with digital currency. Blockchain is the technological backbone of digital currencies. It involves a decentralized ledger of transactions, meaning it’s housed in multiple locations and maintained by a vast number of people, as opposed to being centralized under the control of one body, such as a bank or government. Blockchain has many use cases outside of digital currency, but its main (and vital) function is to keep digital currencies operating smoothly, such as Bitcoin.
What exactly is the blockchain?
We’ve already established that millions of Bitcoin users are in possession of a recorded copy of the blockchain. But what exactly is the blockchain?
The blockchain contains blocks of data (transactional data, in Bitcoin’s case) which are chained together in a specific order. This prevents people from tampering with the data in the network. It’s this decentralized nature of digital currency that continues to attract so many diehard users.
Verifying the legitimacy of transactions and chaining blocks together to make the blockchain requires something called a “cryptographic hash.” People within the digital currency community help verify transactions and add them to the blockchain in a process called mining, and they receive digital currency for their efforts. Miners use powerful computers to work toward this valuable cryptographic hash. This is what we do at HIVE. We support the digital currency ecosystem by serving as a blockchain infrastructure, which helps verify transactions and allows for the creation of even more coins via the process of mining. The infrastructure we provide allows people to buy and spend digital currency.
At first, it can be hard to understand how something completely virtual can hold such immense value. While there are many different digital currencies to choose from, these are the five most valuable digital currencies by market cap.
The most popular and most valuable digital currency is the one most people are familiar with: Bitcoin.
Bitcoin is the most recognizable digital currency to the general public for a good reason. Bitcoin paved the way for other digital currencies, like Ethereum, thanks to the blockchain technology protocols outlined in Satoshi Nakamoto’s seminal Bitcoin whitepaper.
At the time of this writing, the total market cap for all digital currencies listed on CoinMarketCap is $432,520,640,099. Digital currency undoubtedly has value in the modern financial ecosystem, and new uses and implementations are emerging every day that will continue to raise its adaptability, flexibility, and overall utility.