Chapter 1 – Introduction to Cryptocurrencies
In this part of the guide, we’re going to provide a basic overview of what cryptocurrencies are, why they exist, and how they work. We’re going to assume you know virtually nothing about cryptocurrencies and bitcoin.
Here’s a look at what’s included in this chapter:
- What is Cryptocurrency? How cryptocurrency came to be and what the future may hold.
- What is Blockchain? How blockchain technology was created and why it has world-changing potential.
- What is Bitcoin? An overview of bitcoin, the world’s best-known and most popular cryptocurrency.
- How Are Bitcoin Prices Determined? Supply, demand, and the economics behind bitcoin prices.
- What are Altcoins? An overview of alternative cryptocurrencies, or altcoins, and why they’re important.
- What is Ethereum? An explanation of Ethereum, the world’s second largest cryptocurrency.
- Who is Satoshi Nakamoto? Everything we know about Satoshi Nakamoto – the mysterious, anonymous creator of bitcoin.
Whether you’re a total beginner or an intermediate user, you’re about to get a crash course in the world of bitcoin and cryptocurrencies.
What is Cryptocurrency?
A “cryptocurrency” is a combination of two words, including “cryptography” and “currency”. We call them cryptocurrencies because they’re digital tokens that can transfer value – like currency – while also being cryptographically secured.
Let’s break the word down into its two separate components:
Cryptography comes from the Latin word kryptos, which means “to hide”. “Graphy”, meanwhile, comes from the word graphie in French and German, which refers to the process of writing. That means cryptography roughly translates to “the process of writing in a hidden way.”
In ancient and medieval times, “crypts” were hidden beneath the ground to store things of value.
Today, cryptography is an entire field of study. You can read textbooks on cryptography. You can devote your life to researching cryptography. You can get a degree in cryptography.
Modern cryptography is more advanced than it’s ever been at any point in human history. Today, cryptography is the science of writing codes that can be decoded by someone with special access. Modern cryptography originated during World War II, when world powers depended on cryptography to keep radio signals safe. Radio signals could be intercepted by anyone with a receiver, but encrypted radio traffic was meaningless without a decryption key.
Currency is a monetary token that can be used to store wealth or transfer value. You can hold your wealth in a currency like the US Dollar, for example, or buy a croissant in Paris using the Euro.
As human society developed, the need for a standard exchange unit became increasingly apparent. In ancient times, we relied on the barter system to exchange value. Someone might trade 10 goats for 1 cow, for example. Today, we use currency to complete a similar transfer of value.
For much of human history, our currency had inherent value. Ancient civilizations used gold and silver coins, for example. These gold and silver coins had inherent value: you could melt the coins into gold and silver to capture that value. Over time, countries realized it wasn’t ideal to walk around with thousands of heavy gold coins in your pocket, so they began introducing paper notes. Between 1882 and 1933, for example, the United States used gold certificates as paper currency. These certificates were freely convertible into gold coins. Eventually, the currencies on many major world powers were backed by the value of gold. They were “gold backed” currencies.
In the 1970s, things changed. Under the Bretton Woods agreement, countries decided to abandon the gold standard. Overnight, currencies like the US Dollar and Great Britain Pound became backed by no physical material. At this point, these currencies became “fiat” currencies. Fiat is the Latin word for “by decree”. These currencies had no inherent value. Their value came “by decree” from the government.
The departure from gold-backed currency is one of several factors that played a role in the invention of cryptocurrencies.
The Invention of Cryptocurrencies
During the 1990s and early 2000s, countless companies and individuals were trying to take advantage of the potential power of the amazing new invention called the internet. Long before bitcoin was invented in 2008, others had tried – and failed – to launch a secure, electronic type of money.
There were varying degrees of success. Computer scientist Nick Szabo, for example, created “Bit Gold” in 1998. Today, Bit Gold can be seen as a direct precursor to bitcoin’s architecture – although the project was never launched.
Meanwhile, in 2004, American computer scientist Hal Finney published the first proof of work-style algorithm online.
The first official cryptocurrency, however, appeared online in 2008 when Satoshi Nakamoto published his bitcoin whitepaper. That whitepaper explains the basic functions of bitcoin and how it worked. By January 2009, Satoshi Nakamoto’s bitcoin network had launched. It’s been running ever since.
As of 2018, there are 2000+ cryptocurrencies. Bitcoin continues to be the largest and best-known cryptocurrency – but it’s far from the only one. Bitcoin opened the floodgates to a new world of financial innovation.
The person credited with inventing the World Wide Web, Tim Berners-Lee, is a known public figure who had a proven impact on the world. He created the World Wide Web and look where we are today.
Satoshi Nakamoto may have a similar impact on society – but we may never know his, her, or their identity.
Satoshi published the bitcoin whitepaper online in October 2008. By January 2009, the network had launched, and Satoshi continued to actively develop the project. Satoshi held control over the bitcoin code repository, the Bitcoin.com domain, and other data related to the development of bitcoin. In 2011, however, Satoshi stopped contributing to the project and handed all development materials to another programmer. Satoshi never publicly contributed to the project again.
The mystery of Satoshi Nakamoto is one of the most intriguing parts about bitcoin. We’ll talk more about Satoshi Nakamoto’s identity later in this chapter.