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Introduction to cryptocurrencies: The origin
The world of investments is constantly evolving, is it not? New assets are introduced with time, and investor preferences keep changing year after year. One of the key turning points in the world of modern investments was the introduction of cryptocurrencies. The Bitcoin bubble is probably what first comes to your mind right now.
But looking back, what really was the origin of these virtual currencies? And what are they, in the first place? Let’s take a closer look at these details.
What is cryptocurrency?
The logical place to start off at is the most fundamental question - what is the meaning of cryptocurrency? Simply put, cryptocurrencies are digital or virtual currencies that are verified and maintained by a decentralized system, instead of a centralized authority. The Indian rupee, for instance, is a physical currency for which the centralized authority is the Reserve Bank of India. But for cryptocurrencies, no such authority exists.
They are secured, instead, by cryptography - which is a technology that ensures anonymity of the transactions used to generate the currency. That’s what puts the ‘crypto’ in cryptocurrency. And because cryptography is highly secure, it is impossible to counterfeit cryptocurrencies.
Introduction to cryptocurrency: Where did it all begin?
The popularity that cryptocurrencies enjoy today may be relatively new. But their history can be traced back over several decades. In the late 1900s, American cryptographer David Chaum developed two cryptographic systems - eCash and DigiCash. These systems could make economic transactions secure and confidential.
And in 1998, the term ‘cryptocurrency’ was coined. Wei Dai, a computer scientist, was the brain behind developing a new method of payment - with two defining characteristics:
- The usage of a cryptographic system
Sounds just like cryptocurrency as we know it today, right? So, that was the origin of the concept of this virtual currency. But what about Bitcoin, the first cryptocurrency that was actually developed?
The credit for that goes to Satoshi Nakamoto, who is presumed to have invented the Bitcoin in 2009, in response to the global financial crisis of 2008. The crisis impacted millions of people, and that’s what is believed to have driven Nakamoto to create a novel way of payment - one that was decentralized and could be used across borders.
How is cryptocurrency mined?
Physical coins are minted. Cryptocurrencies, on the other hand, are generally mined. Mining is the process of solving cryptographic equations using computers with a high processing capacity. Miners validate blocks of data on the blockchain - which is the public ledger on which new records are added. In return, miners are paid in cryptocurrency. This way, new virtual currency is put out into circulation.
What is market capitalization in cryptocurrency?
You’ve heard of market cap in the context of equity, right? But what is market capitalization in cryptocurrency? Similar to equity market cap, the market capitalization of cryptocurrency is the total value of all the coins that have been mined. There’s a simple formula for this.
Market cap of a cryptocurrency = The number of coins in circulation x Current market price of one coin
And just like how you have large-cap, mid-cap and small-cap stocks, you also have a similar classification for these digital currencies. Take a look at how this works.
- Large-cap cryptocurrencies:
Currencies with a market cap of more than $10 billion are classified as large-cap. Bitcoin and Ethereum are some examples of this kind. They are considered as low risk assets.
- Mid-cap cryptocurrencies:
Mid-cap currencies have a market cap between $1 billion and $10 billion. Currencies in this category have higher risk combined with a lot of unexplored potential.
- Small-cap cryptocurrencies:
Cryptocurrencies with a market cap less than $1 billion are small-cap. They are greatly impacted by market sentiment and other events.
So, that brings this chapter on an introduction to cryptocurrencies to a close. Up next, we’ll be taking a closer look at what the future of this futuristic asset looks like. Head to the next chapter to find out all about that.
A quick recap
- Cryptocurrencies are digital or virtual currencies that are verified and maintained by a decentralized system, instead of a centralized authority.
- They are secured, instead, by cryptography - which is a technology that ensures anonymity of the transactions used to generate the currency.
- In the late 1900s, American cryptographer David Chaum developed two cryptographic systems - eCash and DigiCash.
- These systems could make economic transactions secure and confidential.
- And in 1998, the term ‘cryptocurrency’ was coined.
- Like equity, crypto also has a market cap, which is essentially the total value of all the coins that have been mined.
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