What are cryptocurrencies and how do they work?

This time it has been Facebook that has put digital currencies back in all the newspapers. The company plans to launch its own cryptocurrency, Libra, next year. This electronic currency will be backed by more than one hundred large financial companies such as MasterCard, Visa or PayPal. Its exit to the market is pending to solve some details about its management and regulation.

What are cryptocurrencies?

We define cryptocurrency as a digital currency or decentralized currency that is used to make financial transactions. It is good to know what it is and what it is for, but there are many currencies that are used to make transactions, the really innovative thing is that there is no identity behind that supports this currency and that is due to the strong cryptography that ensures financial transactions.

Cryptocurrencies are based on mathematics, cryptography, and computing power. Part of the technologies behind them are the so-called Blockchain , or blockchain that allows the transfer of a value or asset from one place to another without the help of third parties.

One more form of payment

The concept of cryptocurrency is synonymous with digital cash. They are virtual currencies that can be exchanged and operated like any other currency, but there is no central authority behind them. There are no countries, governments or banks that regulate and control them.

Although some, a minority, consider them a substitute for traditional money, at the moment it coexists with other traditional types of money (merchandise money, legal money or fiat money, bank money or promissory notes, among others). In the case of Spain, the Ministry of Finance has taken the first steps to regulate its use and declare the movements and benefits obtained from its speculation. It can be used in many digital stores and even in some physical ones in Madrid and Barcelona,  as another form of payment. To pay at an establishment with Bitcoins you will need a debit card associated with your account of these cryptocurrencies and you can use it as one more card, in merchants that accept Bitcoins.

The most popular cryptocurrencies

You surely know Bitcoin , a currency without banks or commissions, which cannot be counterfeited and has high volatility. The amount of bitcoins is limited to 21 million. This coin is the best known, as it was the first one created in 2009, but there are many others such as: Lisk, Cardano, Electroneum, Dash, Qtum, Komodo, Waves or Vetchain.

Among the best known cryptocurrencies:

  • Litecoin: It is a cryptocurrency created by Charlie Lee, based on blockchain in 2011. The speed of transactions is higher and it is easier to operate with it. It is a long term investment.
  • Ether: is the currency of the Ethereum platform. It is a decentralized platform that was created in 2015, the cryptocurrency is Ether, from which all transactions are recorded in a shared digital book. Like the previous ones, it works with blockchain. It is used to make smart contracts, transactions are faster than in bitcoin, and Ether is infinite.
  • Ripple: based on free software pursues the development of a credit system. It was created in 2012 in the Opencoin company. 
  • Libra: It is the cryptocurrency created by Facebook that has put these currencies back in the media spotlight. It is based on blockchain technology and its release is scheduled for 2020, after its regulation is managed.

Operation and regulation

Cryptocurrencies work in a distributed way based on nodes that collaborate with each other. The content files are scattered among tens of thousands of computers that collaborate without knowing each other. The value is inserted through conventional currencies and is not exclusively linked to the behavior of a specific economy, although changes in interest rates and the increase in monetary reserves have an indirect effect on its value.

Cryptocurrencies are difficult to regulate, it is difficult to set rules from a legal point of view without a central authority. Its use is opaque and poorly traceable. Unlike conventional transactions, where financial institutions are required to trace all movements. The downside of this is that cryptocurrencies open doors to the trading of weapons, drugs, contraband and other illicit businesses, which do not want their transactions to be tracked.