Well, well...It's time to break things down.
This is a topic that’s stirring up lots of interest around the world… but also great uncertainty.
Some people say it’s the new gold, while others argue it’s nothing more than a fad that will crash and burn.
But, is it something that should matter to you? Yes!
Not only because you’ll find out whether or not you should invest in cryptocurrency, but because it’s important that you know about this increasingly relevant phenomenon in order to understand why it’s become so popular, and to find out if it could be valuable to you.
So, in this post, we’ll explain the basics of cryptocurrency in layman’s terms.
What Is Cryptocurrency?
It’s an intangible, virtual currency.
There are currently various different kinds of cryptocurrency, and each one has a different use, practically-speaking (you can see all the cryptocurrencies and their practical uses here). Each one is designed to solve very specific problems and meet specific needs.
Cryptocurrencies also use different types of algorithms and systems.
So, you’re probably asking yourself what makes these digital currencies valuable. It’s trust! Also, supply and demand, which is what really determines a currency’s value.
Cryptocurrencies usually have 3 main characteristics:
- They’re decentralized. This means they aren’t governed or managed by any one person, financial institution or governmental entity.
- They’re international. They let you make transactions around the world via internet.
- Cryptography principles are used to ensure the transaction security… which is why “crypto” appears in “cryptocurrency”. Cryptography ensures transaction authenticity and is directly linked to the creation of new digital currencies, which are essentially programming codes with a monetary value attached to them.
What Are The Advantages Of These 3 Characteristics?
Great question! Thanks to the key features mentioned above, cryptocurrencies have some very attractive benefits, which include:
Security and control over your money. The transactions are protected by military-grade encryption. No one can charge you or make payments in your name without your permission.
Fast payment anywhere, at any time. International transactions can be made on weekends and are cleared much faster than they would be if a bank was involved. The payments go through in seconds or a few minutes, at most. The recipient can choose which platform or application they would like to receive the money on (commonly known as their “wallet”).
Very low or nonexistent commissions. Most cryptocurrencies let you send and receive payments at almost no cost. In certain cases, like when a small amount is being sent, it’s free to send and receive the money. But you may also choose to pay a small fee to have the transaction prioritized and compensate the people who run the network with a little something.
You protect your identity. There’s no credit card number someone can use to steal your identity. In fact, you can even make a payment without revealing your identity, like paying in cash.
All That Glitters Is Not Gold…
You’ve probably heard some of the downsides of using cryptocurrencies.
“Due to the anonymity of the transaction, it’s been used to launder money by those that use organized crime to transfer illegal funds from one place to another.”
That’s one of the most common objections to using cryptocurrencies, while another is the high volatility of the money. It can dramatically increase or decrease in value from one day to the next…
If you’re trying to decide whether or not to invest in these currencies, check out this article, which covers the pros and cons in more detail.
How Did Cryptocurrency Come About And Why?
Cryptocurrency came about as an initiative whose main aims were decentralization, transparency, and community.
As previously mentioned, neither a third party nor intermediary is required, so anyone around the world can make a transfer.
This is known as a peer-to-peer network, and is what Bitcoin—the most popular cryptocurrency—uses to move money around.
Bitcoin is not only the most famous cryptocurrency, but it was the first.
So, in order to understand cryptocurrency’s origins, it’s important to talk about Bitcoin, which first appeared almost 10 years ago, and its history.
No one knows for sure who created Bitcoin… but the person, or group of people, who created it remains hidden behind the pseudonym “Satoshi Nakamoto.
In 2008, some cryptographers received a document putting forward the idea from someone using that name.
And the first person to buy something using bitcoins was Laszlo Hanyecz, who paid 10,000 bitcoins (or BTC) to order a pizza.
Back then, a BTC was worth 0.0025 USD. Now, that number of bitcoins is worth over 33.5 million USD… Which would have made Laszlo a millionaire.
How Does Cryptocurrency Transfer Work?
First, it’s important to mention that there are authorized exchange houses where you can buy and sell cryptocurrency in exchange for euros, dollars or other local currencies.
Sending bitcoins is as easy as sending an email to a friend.
The process varies by cryptocurrency and the platform used, but the most common process goes something like this:
To make transactions, you have to choose a virtual wallet compatible with the cryptocurrency in question. This wallet is saved on your cell phone or computer.
A bitcoin transaction starts with a request.
To send bitcoins, all you have to do is enter the wallet number or ID of the recipient and then send the amount. The request is then sent through a worldwide network known as nodes.
The money is sent from your ID or the unique address assigned to you (your actual name never appears so it's anonymous) to the ID or unique address of the recipient. There’s no other intermediary.
The person you send the money to will receive it and it will go straight to their wallet.
Did you know that you can use bitcoins to pay for products or services? There is an increasing number of services and businesses around the world that accept bitcoins.
The Bitcoin network is secure thanks to people called “miners.” Miners are expert programmers from around the world in charge of solving complex mathematical problems to verify and validate the transactions.
In exchange for this work, the miners are compensated with bitcoins. After the transactions are verified, they’re recorded and registered in a database known as blockchain. The blockchain is a public distributed ledger or log of all the transactions made and stops transactions from being altered once they’ve been published.
The transactions are combined to create an integrated block, like a chain, which leaves a permanent record of all the transactions ever made.
And it’s impossible to falsify or corrupt this ledger because there’s a copy of it on thousands of computers around the world.
Lastly, it’s worth mentioning that the number of bitcoins available is limited. Only 21 million can be created, and there are currently already just over 16.5 million.
However, what a bitcoin is worth will always be subjective as its value is directly linked to the perception of its owner.
What Do You Think Of The Amazing World Of Cryptocurrency?
Interesting? Controversial? Difficult to understand? Or all of the above?
No matter what you think about it, one thing is for sure: a new financial ecosystem is beginning to flourish…
And while some say it’s the new gold, others say it’s worthless. In the end, only time will tell.
We hope this article helped you understand the basics of cryptocurrencies.
And we think we can all agree in one thing: it’s quite an intricate topic.
If you’re interested in this subject or you’re thinking about investing in it, subscribe to our blog because we’ll be writing more advanced posts on it soon. We’ll also provide you with advice on how to invest in the best option for you.
Feel free to ask us any question or just let us know what you think in the comments section below!