The Rise of Cryptocurrency

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This is the first blog article in a series of posts that will discuss the new trend of cryptocurrency.

Cryptocurrency as a Medium of Exchange

Cryptocurrency is a new term that refers to a digital asset that operates as a medium of exchange. It is similar to traditional currency like the U.S. dollar or the Japanese yen.  Because cryptocurrency has now been accepted as a medium of exchange, it allows holders of that particular currency to exchange it in an identical manner to traditional money.  Cryptocurrency has also been broadly referred to as digital or virtual currencies.  These currency systems rely on decentralized control as opposed to the centralized banking systems that traditional currency currently relies upon.  This means that each cryptocurrency operates using a block train, which is a public transaction database, functioning as a distributed ledger.

Regulation of Bitcoin and Other Alternative Coin

Created in 2009, Bitcoin has become the most visible and widely recognized decentralized cryptocurrency.  Although others have surfaced, most are just generically referred to as "altcoins" because they are just considered "alternative coin."

The unique thing about decentralized cryptocurrency is that the currency supply itself is self-producing.  This differs from traditional currency, which must rely on centralized banking systems.  For example, in the United States, the American dollar must rely on the Federal Reserve to regulate and control the supply and demand of federal currency.

This contrasts with cryptocurrency, which relies on its own community for regulation.  The community, generally referred to as miners, are simply members of the general public that use their own personal computers to validate and timestamp the cryptocurrency transactions.  These transactions are then added to a public ledger in accordance with standards set by that specific community.  The security of the cryptocurrency system relies on miners being financially incentivized to maintain the accuracy of the ledger.

The Value of Digital Currency

By nature, cryptocurrencies decrease in production and ultimately cap out; like precious metals that would be found in nature, cryptocurrencies are considered resources that will eventually dry up.  But unlike their traditional counterparts, cryptocurrencies are considerably more difficult to track down and be seized upon by law enforcement.  As such, hackers and other nefarious organizations have sometimes requested payment in digital currencies in lieu of traditional currency.

Because the rate at which digital currencies can be mined varies wildly and sometimes unexpectedly, the value of the virtual currency often changes.  Moreover, to truly understand the way digital currency works, one must also understand "blockchains" and how they validate the digital currency system.

"Blockchains" in itself can be rather complex to understand, and as such, will be discussed in next week's blog post.

More from this series: Blockchain Technology and How it Relates to Virtual Currencies The Perils of Cryptocurrency and Blockchain Technology The Intersection of Cryptocurrency and Intellectual Property Law

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