What is a crypto asset (virtual currency)? Explain from the basics about the features that you can not hear now!
“What is a crypto asset? How does it work?”
Four characteristics of crypto assets (virtual currencies)
Crypto assets have four main characteristics:
- ① It is a digital currency
- ② There is no central bank
- (3) Distributed management on the Internet
- ④ Managed by blockchain technology
Let’s take a look at what they are like, one by one.
① It is a digital currency
The first feature of crypto assets is that they are digital currencies. Digital currency, as the name suggests, refers to a currency that has been converted into digital data.
For example, in the case of the Japanese yen, you may imagine coins and banknotes such as 100-yen coins and 1,000-yen bills, but in the case of crypto assets, such a physical currency does not exist. Instead, with crypto assets, payments are processed as electronic data through the Internet.
Difference from electronic money
After hearing this, some people may think that crypto assets are similar to “electronic money” such as Suica and PayPay.
However, while the price of crypto assets such as Bitcoin fluctuates for each brand, electronic money is a digital currency based on the yen, so the price of the charged yen does not fluctuate. In addition, there are differences between the two, such as whether or not remittances can be made and the areas where they can be used.
Read More: What are the advantages of crypto assets (virtual currencies)? 5 Advantages and Future Potential
There is no central bank
Most of the currencies in circulation have their value guaranteed by the issuing government or central bank.
For example, if the Japanese yen is 10,000 yen, a 10,000-yen note printed with ink on paper is endorsed by the Japanese government as a guarantee that this note is worth 10,000 yen. The 10,000 yen note is circulated as a currency with an economic value of 10,000 yen because it is backed by the government.
However, crypto assets are not guaranteed by such countries or financial institutions. Nevertheless, as of April 2022, Bitcoin (BTC) , a representative crypto asset, has a value of about 5 million yen per unit in Japanese yen.
This means that there are so many people who recognize the value of Bitcoin (BTC), but it is also a sign that it has the trustworthy of its value.
So why is crypto-assets, which are not guaranteed by governments or financial institutions, so trusted and valued by so many people? One of the reasons is related to the decentralized management mechanism unique to crypto assets.
(3) Distributed management on the Internet
The traditional financial system is centralized.
For example, in a bank, cash is stored in a vault, and customer deposit information is stored on a secure server.
If a genius thief or hacker shows up and breaks into your vault or tamper with your deposit information, you can’t do anything. It’s not that simple, but if the place or system that stores your money or information is destroyed, it can become irreversible.
However, in the case of crypto assets, cash does not exist, so there is no need to install a large safe. Information on trading transactions and information on who owns how much cryptocurrency is also distributed and recorded on an unspecified number of terminals connected to the network and shared.
Even if part of it is tampered with, if you compare it with the information recorded on other terminals, you will immediately know that the data has been rewritten.
Therefore, if you try to tamper with cryptocurrency data illegally, you will have to infiltrate a huge number of terminals connected to the Internet and rewrite all the data.
Clearly, that is not realistic. Since crypto assets are built on such a mechanism, they have achieved extremely high reliability.
④ Managed by blockchain technology
Blockchain technology, also known as a distributed ledger, enables the decentralized management of crypto assets. It is called this because it encrypts cryptocurrency transaction information, puts it together into blocks, and connects them like a chain.
(However, some crypto-assets do not use blockchain technology, so the following explanation does not apply to all crypto-assets.)
For example, when Mr. A sends some cryptocurrency to Mr. B, the content of the transaction is verified to see if it was definitely done by Mr. A and the amount. Then, when it is confirmed that there is no mistake, the information is encrypted and connected to the end of the blockchain.
At that time, the information of the previous block connected to the chain is also encrypted and stored in the block. By doing this, it is possible to identify where the block is located on the chain, and if the location information is tampered with, it will be immediately apparent.
In this way, blockchain is highly resistant to the falsification of information, which is why it is an indispensable technology for crypto assets.
Differences between crypto assets (virtual currency) and cash/electronic money
What is the difference between crypto assets, cash and electronic money? ”
As I mentioned briefly earlier, here I will explain the characteristics of cash, electronic money, and crypto assets, which are often confused.
cash
Cash,” such as Japanese yen and US dollars, is issued and managed by the central bank. There are also physical entities, such as bills and coins.
Cash is a legal tender managed by a specific state, and is characterized by its coercive force (guaranteed by law as a means of payment).
Electronic money
“Electronic money” such as transportation IC cards (Suica, PASMO, etc.) and prepaid cards convert the value of money into data and use it by charging the card or smartphone.
Since it is data, it does not have a physical body, but it is tied to legal currency and has the same compulsory power as cash.
crypto assets
There is no issuer or central administrator, and the value is secured based on the trust of users around the world. Also, it does not have a physical entity and exists as electronic data on the Internet.
Unlike the other two currencies, cryptoassets are not guaranteed in value by any particular nation. However, it is possible to exchange it for another crypto asset or fiat currency through a crypto asset exchange or sales office.
