“What is Cryptocurrency?” seems like a simple question, but it is impossible to give a simple answer. The concept of crypto is relatively new, having only been around since 2008, when Satoshi Nakamoto’s now famous white paper that launched Bitcoin (BTC) to an unsuspecting world was published. However, over the next few years it grew and changed rapidly, and now crypto is the foundation of an industry that employs thousands of people and generates enormous wealth for many.
The roots of speech
At its most basic, the term “crypto” is short for “cryptocurrency,” a word used to describe Bitcoin initially due to its use of cryptography in mining. Cryptography is all about solving puzzles and breaking codes. This is something that computers are very good at, and bitcoin is mined by having these computers solve complex and increasingly difficult problems. Thus, bitcoin was a cryptocurrency – a cryptocurrency. There are two parts, however, “crypto” and currency”, and the second part is also important. Bitcoin was designed as a currency, a medium of exchange, something that could be used to buy goods and services.
Decentralization and disinflation
For Bitcoin purists, part of Bitcoin’s appeal was that it was a decentralized digital currency that offered the ability to replace so-called fiat currencies, those controlled by governments and central banks, with a currency created and controlled by its users. For them, it also had the advantage of being disinflationary. There was a pre-set limit to the number of bitcoins that could exist and mining them became increasingly difficult over time. This meant that a bitcoin would, assuming some degree of adoption, inevitably become more valuable over time.
As an economy grows, there are more goods and services available. In a traditional economy, which is overtaken by governments and central banks increasing the money supply, essentially printing more money. When this happens, the real value of each monetary unit, say each US dollar, decreases. That’s why the same house that would have cost your parents about $50,000 when they bought it can now cost $500,000 or more, and a loaf of bread, which cost 25 cents in the 1970s, now costs $3 to $5.
Bitcoin is in some ways the opposite of traditional currencies like the US dollar. They lose value as more are printed, driving up the price of goods and services in dollars, while Bitcoin gains in value. If you keep a dollar, it will buy a lot less after, say, fifty years. If you hold on to a bitcoin, despite the volatility, it will buy more.
Over time, however, the term “crypto” has come to refer to just about any digital token, some of which are not intended to be currencies. Many tokens issued today are not crypto-mined. Rather, their supply and value is tied to an actual function, and cryptography is only used to protect the blockchain that records transactions. These are known as utility tokens, and their value and issuance can be based on things like loan volume or practical applications.
Obviously, the common usage of the word has now deviated from its roots. It has come to describe any currency or token issued outside the confines of governments or central banks around the world. Any financial business that exists outside of these same boundaries is called decentralized finance, or challenge, companies and is considered part of the crypto industry. Also in this case, however, their relationship with cryptocurrencies in the literal sense of the word is sometimes at best tangential.
So what is crypto?
As you can see, “What is crypto?” is far from being as simple a question as it seems. For purists and pedants, it designates currencies whose discovery is dependent on cryptography. But language is not a constant, and it evolves at all times and especially rapidly when it comes to describing a new concept. The use of the term “crypto” is still evolving and will likely continue to do so for some time. Yet, for now, at least, it is best defined as a currency that exists outside of traditional monetary systems and uses blockchain for record keeping, and an industry based on these products.
*Want more of that stuff? In addition to writing for Nasdaq, Martin Tillier is head of research for SmartFia crypto company that funds loans to small businesses, and its work for them can be found by clicking here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.