Let’s dive right into the world of Bitcoin! But first, let’s define these three terms: Fiat Money, Digital Currency, and Cryptocurrency.
Fiat money is any type of currency issued by a central government. This type of currency is not backed by a physical commodity. Its value is primarily based on people’s trust in the government’s ability to maintain it. Some examples of fiat money are the Philippine Peso (PHP), United States Dollar (USD), European Dollar (EUR), or Japanese Yen (JPY).
Digital currency is any type of currency that is managed, stored, and exchanged on digital computer systems, especially online. Common types are the virtual pesos you store on GCash, PayMaya, Unionbank, or even the remaining balance on your Grab wallets.
Last but certainly not least, Cryptocurrency is a type of digital currency based on cryptography. It’s peer-to-peer and is usually decentralized. Don’t worry, we’ll get to those later!
Cryptocurrency is a type of digital currency. However, it’s not directly synonymous with it. Therefore, all cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
Other types of digital currencies are “virtual currencies” like Lazada Reward Points and central bank digital currencies, which are digital money issued by the government.
Ready to take it further? Let’s begin by breaking the term down to its root words: crypto and currency.
Crypto is derived from the word cryptography, which refers to the practice of techniques for secure communication in the presence of adversaries or bad actors. Simply put, cryptography is the practice of hiding information.
Here’s an example of how cryptography works:
Let’s say Pedro wants to send Darna a secret message that only Darna can read. To do this, they both must memorize the table below.
As Pedro sends “ADC” to Darna, Darna will interpret it as 143.
This way, Pedro and Darna can safely communicate with one another without having to worry about other people understanding what they are talking about.
The example above is a simplified case of cryptography. What Bitcoin uses is what you call asymmetric cryptography. We’ll cover this in a later chapter.
Currency, on the other hand, is a medium of exchange and a money system used most commonly within countries and nations. Examples of these are the Philippine Peso (PHP), United States Dollar (USD), European Dollar (EUR), or Japanese Yen (JPY).
With all of this said, we can now put them together and come up with a simple, singular definition:
A cryptocurrency is a type of digital currency secured by cryptography — making it nearly impossible to counterfeit or hack.
Usually, cryptocurrencies are blockchain-based, which makes most of them decentralized.
Blockchain - the technology behind Bitcoin.
Decentralized - the state of having no one entity in control.
We'll tackle those terms a bit more later on. For now, congratulate yourself for knowing the definition of cryptocurrency!
In the next lesson, we'll take a brief look at the history of Bitcoin and how it all started.