Cryptocurrency is a digital currency used like dollars, euros and yen. The difference is it uses an online ledger with strong cryptography to secure online transactions rather than the backing of a nation or federal bank.
Cryptocurrency can be bought and sold via cryptocurrency exchanges. It can also be "mined." Powerful computers with high-end GPU graphics cards mine cryptocurrency by performing complex math calculations to create coins.
Because cryptocurrency is not printed like dollars, each cryptocurrency has a limited supply, making them popular with investors. But cryptocurrency also has a certain amount of volatility, making it a risky investment. Bitcoin, for example, has a finite supply of 21 million coins. But as more are found and certain supply levels are reached, the value of the coins is cut in half.
Cryptocurrency is built using blockchain technology. Blockchain is a secure, distributed ledger that produces, tracks and manages digital currency. It was developed by a mysterious figure named Satoshi Nakamoto. No one knows Nakamoto's real identity or if it is one person or many.
Blockchain is a running digital receipt of all the transactions in the currency -- including who owns which currency and how much. The receipt is never trimmed, only added to for a complete history. The receipt is constantly verified by a decentralized network of computers to prevent fraud. This ensures the proper functioning and accounting of the currency.
There are many different cryptocurrencies on the market, but three of the most popular are Bitcoin, Ethereum and Dogecoin. Here are the differences between each.
Bitcoin is the first and most widely used of the cryptocurrencies. Bitcoin launched in January 2009 after the publication of Nakamoto's white paper describing a blockchain currency. It is now a globally traded financial asset with tens of billions of dollars of activity daily.
Bitcoin's network is decentralized, meaning no one controls or owns the Bitcoin network. Instead, the Bitcoin network consists of volunteers -- reportedly 80,000 -- who run open source software on their PCs called nodes. All Bitcoin transactions are recorded on a public ledger known as the blockchain.
Bitcoin has a fixed supply of 21 million coins -- compared to billions for other cryptocurrencies. As of this writing, Bitcoin's value is $48,000.
The reward for finding coins is ownership of them, which can add up for those who find many. While it is possible for someone to put their individual PC to work mining, this is big business and they would be competing with massive Bitcoin farms.
In 2012, 17-year-old Vitalik Buterin began writing for Bitcoin Magazine, suggesting improvements to the Bitcoin platform. When his advice went unanswered, he decided to create his own cryptocurrency: Ethereum.
Sometimes called "Blockchain 2.0," Ethereum is similar to Bitcoin but adds certain features, including:
- Conditional transactions. Transactions can only take place when certain conditions are met. These rules are called "smart contracts." Once the contract is written, it can't be changed. That's why they are called "trustless transactions." If the conditions of the contract aren't met, the currency exchange won't happen.
Like Bitcoin, Ethereum is a distributed network of nodes that verifies transactions and rewards miners with coins. As of this writing, each Ethereum coin is worth approximately $2,800. There is also no limit on the number of coins that can be mined, unlike Bitcoin.
Dogecoin is an example of how an internet meme can creep into the popular culture. "Doge" is a photo of a shiba inu dog named Kabosu with a peculiar expression on its face. The picture was usually accompanied by text in broken English, reflecting some kind of internal dialogue. This meme was so popular, it sold as a nonfungible token in June 2021 to the tune of 1,696.9 Ethereum -- worth approximately $4 million at the time of purchase.
When the creators of Dogecoin adopted Kabosu as its logo in 2013, they were being comical. And that's what makes Dogecoin stand out from the others. The community behind it doesn't take itself too seriously. Elon Musk was voted CEO by a Twitter poll after he showed support for Dogecoin and referred to himself as "The Dogefather."
Dogecoin was designed to be more approachable than other cryptocurrencies. It also has a theoretically unlimited supply. Dogecoin makes sure miners will always get enough rewards as an incentive to keep mining. The downside? As of September 2021, Dogecoins were worth around 24 cents each.
The coins are considerably easier to find than Bitcoin or Ethereum. But the real appeal is the goofy community.
The idea for the Dogecoin-Ethereum bridge came about when Ethereum creator Buterin said a bridge to Dogecoin would be amazing, and Musk agreed with him on Twitter.
The bridge does exactly what the name implies: It allows users to send Dogecoin from its native blockchain to the Ethereum blockchain, where it is converted into Ethereum tokens. Any token that accepts Ethereum will accept the converted Dogecoin. And the bridge works both ways, so converted Dogecoins can be converted back.
The primary benefit is Ethereum is much more widely used and accepted than Dogecoin, making for much faster transactions.
But building the bridge is easier said than done. The developer working on it said it is a work in progress. There is currently no release date.
Bitcoin and Ethereum are both established and popular cryptocurrencies, while Dogecoin remains something of a lighthearted hobby for Musk and the Doge community. But Doge is a good way to experiment with cryptocurrency and to learn it without taking great financial risk.