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What is cryptocurrency?

What is cryptocurrency?

Cryptocurrency is often defined as a "digital asset" or “virtual currency," but it's important to remember that these days, nearly all currency has the potential to be used online in the digital world.

That wasn't always the case. Once upon a time, money was only something you could hold in your hand. You'd store your coins and bills somewhere safe — whether at home or in a bank — and use them when you needed to pay for goods or services.

As the banking system matured, there was no need to withdraw physical money to pay for your expenses. Instead, you could write a check or use a credit card. Your bank — acting as a middleman — would then transfer the funds from your account to the recipient's.

Technology changed the nature of the game even further, turning money into something completely abstract. Today, you don't even need to present a credit card or a check to a seller in order to pay them. You can simply type a few numbers on a website and click your way to payment online or tap your phone at the grocery store to pay from your virtual wallet.

So what's new or special about cryptocurrency?

A cryptocurrency is a form of peer-to-peer payment that is issued and circulates without the need for a central monetary authority such as a government or a central bank. While certain currency can be virtual in today's modern world, cryptocurrency can only be virtual; there's no such thing as a physical bitcoin or dogecoin or any other cryptocurrency.

As virtual-only currency, cryptocurrency aims to optimize the databases that track our money in a number of ways. First, cryptocurrency records are incredibly secure; they utilize cryptography to build something called a blockchain — a digital ledger of transactions that's distributed across multiple locations and is notoriously difficult to hack.

Second, the digital ledger is usually decentralized, meaning there's no need for middlemen. Instead of transactions being recorded on one central system, they're across multiple nodes of a computer network. The ledger is permanent and not editable to prevent any manipulation.

Even though cryptocurrencies can be exchanged for goods and services, today they are often viewed more as a store of value. According to a 2021 Bakkt Survey of 2,000 U.S. consumers, 48% of people invested some amount of money in cryptocurrency in 2021. Of those who own cryptocurrencies, 58% said it was for a long-term investment1.

Who controls the supply of cryptocurrency?

Nobody and everybody. That's one of the reasons people find it so appealing.

With traditional national currencies, central banks can determine everything from target interest rates to how much money they'll print. Some people see that potential for interference as a built-in risk to the traditional financial system. Many worry that governments in deep debt could be tempted to print large sums of money that would lead to inflation.

Bitcoin, on the other hand, is “mined" by the public, and the cap is coded. There will only ever be 21 million bitcoins in existence, and some other cryptocurrencies also have hard caps or caps on the rate of inflation.

Who invented cryptocurrency?

Many of the prevailing ideas about cryptocurrency come from Satoshi Nakamoto, considered the “founding father" of the world's first viable cryptocurrency, Bitcoin. Nakamoto — a pseudonym that some people believe may actually represent a group of people — authored a white paper in 2008 that detailed its major principles.

Today, there are more than 8,000 types of cryptocurrencies2. They differ slightly in how they're developed and what they're used for, but they all share a common cause: to offer an alternative to “traditional" currencies.

This does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment, including any of the product(s) mentioned herein, or an invitation, offer or solicitation to engage in any investment activity. This information is provided solely on the basis that you will make your own investment decisions, and Bakkt does not take account of any investor's investment objectives, particular needs, or financial situation. It is strongly recommended that you seek professional investment advice before making any investment decision.

1Bakkt. U.S. Consumer Crypto Survey, September 2021. Accessed Feb. 7, 2022.

2S&P Global. S&P Cryptocurrency Indices. Accessed Feb. 7, 2022.