What are cryptocurrencies?

Cryptocurrencies are digital currencies which can be used to digitally transfer

money to another person safely, without having to use intermediaries or

trusted third parties, like a bank or Visa, e.g., to verify that you have sent the

money and the money is now no longer yours. You might want to read that

sentence again, slowly. In addition, it does it much faster at a fraction of the

cost because it does away with unnecessary and expensive transaction fees.

Why 'crypto'?

The way digital currencies provide safety is two-fold. The first is that it uses

Encryption technology (hence the name cryptocurrency).

What is the blockchain?

The second way is to have a public ledger, where all the transactions are kept.

Thousands of computers around the world are linked together to display this

ledger. They refresh and update every few minutes. This network of computers

all linked together in this way is called the blockchain. You can trust it because

it means that each transaction has been verified again and again by all the

computers (the blockchain). With thousands of computers linked up all over

the world saying the same thing, the ledger’s integrity is upheld. Each

cryptocurrency can have its own blockchain, although some are shared.

How does this work?

Imagine I send you 10 dollars and you send the 10 dollars to someone else.

Somehow someone has to keep track of these transactions, to avoid forgeries

or anyone claiming they haven’t received the money. In the past, Central Banks

or banks have kept details of the transaction on something called a ledger. This

is based on a centralised system. With Bitcoin, currently the main digital

currency, the whole system was turned on its head. Instead of a centralised

system controlling the ledger, now thousands of computers, all around the

world, each keep a copy of this Ledger. Every single transaction is kept there,

from the beginning to present day. This is a decentralised system, called the

‘blockchain’.

Please note that money in itself does not have any intrinsic value – it is only

because we believe that it has value that it is worth anything. Money is just a

tracking system – we track what we own and what we owe. This is called a

ledger. Whatever form of money exists, we give it value because of its utility as

a ledger (or tracking system of who owes what). That’s what the blockchain is –

a giant decentralised ledger