Cryptocurrency vs. Blockchain
It is important to distinguish between cryptocurrencies and blockchain technology. Not all cryptocurrencies operate on a blockchain, and not all blockchains utilize cryptocurrencies as part of their design.
A cryptocurrency is a form of digital currency that is created, maintained, and secured with strong cryptography. This makes its transactions extremely difficult to hack or manipulate. Unlike other forms of digital assets—like the gold traded on exchanges, money used in online games, or unique virtual assets like company-managed loyalty points—a cryptocurrency is typically censorship-resistant because it is not controlled by a central authority. This inverts the old currency paradigm, whereby currency was created and issued by government monetary authorities and controlled by central banks, such as the United States Federal Reserve.
Cryptocurrency vs. Traditional Currency
Traditional forms of currency are known as fiat currency, because they are supported solely by the authority of its issuing government as opposed to commodity currency which is backed by physical assets, such as gold.
Governments that issue currency without the backing of any physical asset do so by fiat, and if they are unable to support their national currency by military or economic might, those currencies can lose much or all of their intrinsic value.
For example, Zimbabwe attempted to fight internal economic problems in the early part of the 20th century by printing more of its national fiat currency. However, since the country lacked the power to enforce its currency values internally or on the international stage, the printed notes quickly became all but worthless. Zimbabwe was eventually forced to abandon its currency and has effectively lost the ability to issue or control the value of its own banknotes. Its citizens now use several foreign currencies, including the U.S. dollar and the Chinese yuan, as legal tender.
Historically, most governments have tied the value of their issued currencies to a certain amount of gold, which was known as the gold standard. The gold standard fell out of practice during the Great Depression as countries found themselves hamstrung in their efforts to combat economic decline by the amount of gold in their reserves. The gold standard was abandoned worldwide in the 1970s after U.S. President Richard Nixon ended a policy that allowed other countries to convert their supplies of U.S. dollars to gold.
Cryptocurrencies and Bitcoin
Bitcoin is generally considered the first modern cryptocurrency because it was the first digital currency designed to operate in a fully decentralized manner without the need for a central authority. Earlier attempts at creating cryptocurrencies failed due to lack of public trust and inadequate technology to ensure proper operation. It was simply not possible to create an effective and functional distributed cryptocurrency with the technology and connection speeds of the 1990s. Bitcoin’s creation also produced the world’s first functional blockchain.
The Value of Cryptocurrencies
Modern cryptocurrencies are often broadly exchangeable for fiat currencies, particularly if the cryptocurrency enjoys widespread recognition and can be bought or sold on a cryptocurrency exchange. They may have free-floating values that are calculated, similarly to share prices on the stock market, as a function of their relative supply and demand at any given time. Some cryptocurrencies attempt to “peg,” or link, their values to the value of something else, like Bitcoin or the U.S. dollar.