Laszlo Hanyecz writes in his Twitter profile: “I am the person who bought the 10000btc [bitcoin] pizza eight years ago. I am poor now”. Indeed, in 2010, he bought two pizzas with an amount in the cryptocurrency bitcoin valuing $41 back then. Today the same sum in bitcoin would be worth millions of dollars. Cryptocurrencies’ mechanism permits these value rollercoasters.
Cryptocurrencies are digital currencies secured by (and authenticated with) cryptography. Yet, not all cryptocurrencies have the same characteristics. Some have a more stable value because they are related to fiat currencies. Others are more speculative assets because they rely essentially on market fluctuations.
There are two classes of cryptocurrency:
- Decentralised Cryptocurrencies
The most popular decentralised cryptocurrencies are Bitcoin and Ethereum. They operate on a permissionless ledger because there isn’t any authority checking them. They are maintained and modified by the public without relying on intermediaries. They are used mainly as a store of valuable coins. Indeed, they are considered unfit for payments because of the high volatility and challenges in regulatory compliance. They predominantly guarantee anonymity, meeting cybercriminals’ needs, such as in case of money laundering or ransom payments.
Diem (proposed by social media company Meta) and Ripple are the most common centralised cryptocurrencies. They operate on a permissioned ledger because they are managed by a private entity controlling participation and setting rules. They are primarily stablecoins tied to a single or basket of fiat currencies. They can be used for cross-border transactions. Some challenges remain, for example, the counterparty risk.