Today, there are thousands of cryptocurrencies, but they can all trace their origins to one, Bitcoin, which was created in 2008.
Here is a look at some of the basics about cryptocurrencies, largely based on information found at Schwab.com, an international financial services company, and Coinbase.com, an online cryptocurrency exchange and information platform.
According to both Schwab and Coinbase, Bitcoin traces its roots to a founder—either an anonymous person or a group of people—that goes by the made-up name of Satoshi Nakamoto. Nakamoto created the open-source computer program that runs most cryptocurrencies, including Bitcoin. The concept was considered revolutionary in computer programming.
The idea was that a digital payment platform could be created to make secure online payments between two parties worldwide without the need for a third-party intermediary like a bank. The underlying blockchain technology is considered safe because there is no need for a user to provide sensitive personal information when making a transfer like they would with a bank account, credit card or other electronic payment platforms such as PayPal.
The underlying technology
At its basic, blockchain technology stores information in blocks that are then chained together in chronological order. Once a block is created, it cannot be altered.
“Every transaction involving Bitcoin is tracked on the blockchain, which is similar to a bank’s ledger, or log of customers’ funds going in and out of the bank. In simple terms, it’s a record of every transaction ever made using Bitcoin,” according to Coinbase. “Unlike a bank’s ledger, the Bitcoin blockchain is distributed across the entire network. No company, country, or third party is in control of it; and anyone can become part of that network.”
Money, digital cash and cryptocurrencies
Schwab describes the distinction between fiat currencies, digital cash platforms such as PayPal and cryptocurrencies. Fiat currencies such as dollars and euros are issued by governments as money. PayPal and similar services transfer digital money with electronic payments but use fiat currencies managed by central banks. Cryptocurrencies, such as Bitcoin, are managed by technology.
For international transfers between countries, there is no tie to a fiat currency, which is another way that transactions can be facilitated conveniently and instantaneously. However, to exchange the cryptocurrency into a fiat currency, one method would be to use an exchange service that will do so for a fee, such as through Coinbase or Bitcoin.com.
Cryptocurrencies can work like money in that merchants and companies can accept cryptocurrencies for payments. However, few merchants or companies currently accept them, although that is changing.
Traded like stocks
Bitcoin and other cryptocurrencies are traded like stocks, where the prices can fluctuate greatly. For Bitcoin, the value is based on what the market offers and the promise that only 21 million Bitcoin will be created, which creates a scarcity. People also can buy fractions of a Bitcoin, according to Coinbase.
Schwab offers this analogy: “Like any traded item—think baseball cards—the value depends on supply and demand; the fewer units available, the higher the price buyers are willing to pay.”
Coinbase makes the point that most stock investors would understand: “Like any other asset, you can make money by buying Bitcoin low and selling high, or lose money in the inverse scenario.”
Schwab offers other cautions.
“Schwab continues to monitor cryptocurrencies as regulations and technology evolve,” said a Schwab newsletter directed to clients. “While some traders may make money on the change in price of Bitcoin or other cryptocurrencies, we suggest that most investors treat them as a speculative asset class primarily for trading with money outside a traditional long-term portfolio.”
Today, Bitcoin, Ethereum and Litecoin are among the more well-known cryptocurrencies, according to Schwab and Coinbase.
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