I’m new to cryptocurrency. What in the world is this cryptocurrency I’ve been hearing about? Is it a Ponzi scheme? Is it legitimate or will it go the way of the VHS and cassette tapes? Hey, it’s okay, I still have some as well. In fact, my daughter tells me that mixtapes are making a comeback.
People often ask me what cryptocurrency really is and I usually respond with this question:
“Do you remember back in 1994 when someone was trying to explain the world wide web to you?”
Okay, the whole idea for cryptocurrency was conceived in January 2009 when a guy named Satoshi Nakamoto ran a complex cryptographic algorithm (a really tough math problem, like way harder than that college calculus you barely got by in) that mined the first Bitcoins. To learn more about mining, click here.
To this very day, there is quite a debate about who the pseudonymous Nakamoto actually is. Some people have claimed to be him, but no one has actually shown proof. They say he has over 1 million bitcoins. A few programmers and techies dabbled in it and eventually someone traded 10,000 bitcoins (BTC) for a couple of pizzas from Papa Johns. (BTC is the symbol for Bitcoin. Think New York Stock Exchange ticker symbols.) At today’s BTC value of around $1,800 (USD) per BTC, that makes it the most expensive pizza ever bought at around $18 million USD!
Bitcoin uses something called “open source” which is a decentralized development model that encourages open collaboration. Open source is used in almost every industry from software to beer to pharmaceutical companies. This helps moves things along quicker (think Wikipedia).
A cryptocurrency (also referred to as digital currency) relies on cryptography (a fancy way for saying the study of techniques for secure communication). Even Julius Caesar was using these techniques back in his day. This is used for chaining together digital signatures of token transfers. This is accomplished by peer-to-peer networking. That simply means that everyone involved has equal access and there is no centralized administrative system. Think Napster the old music file sharing site.
One of the biggest advantages to cryptocurrency is decentralization. Who can forget the financial crisis of 2007? I was laid off during the great recession and I’m sure many can relate to that as well. Did you know that centralized regulation required banks to make loans to people they knew wouldn’t be able to afford them? Well, we all know how that ended.
No one government or corporation can control cryptocurrencies. This means that the federal reserve can’t step in and do another round of quantitative easing like it does with the USD. That’s when they attempt to lower interest rates and increase the money supply. Cryptocurrencies don’t allow for this as no one person, government or corporation has control over them. Their decentralized nature ensures that there is no single target to hack, and the block chain itself ensures that no double-spending can happen as is quite common with credit card transactions.
All transaction data is permanently recorded in files called blocks. The ongoing master ledger for all transactions is called the block chain. Each block of verified transactions get added to the end of the block chain. A block gets added to the chain about once every ten minutes. Every transaction has to verified a number of times (typically 6) in a block. Merchants and exchanges who accept bitcoins as payment can set their own threshold as to how many blocks are required until funds are considered confirmed. This eliminates fraudulent transactions because the hashing power (click link to learn how digital coins are created) needed is so great that a hacker wouldn’t be able to accomplish anything.
If that all sounds to complicated, think of it like this: Because math is involved, every 10 minutes that pass make the transaction exponentially harder to hack because of the immense computing power that it would require. That makes it mind boggling safer than a credit card transaction that can take weeks for a bank to research and overturn.
Another advantage is that more and more merchants and countries are starting to accept it worldwide as a mainstream type of currency. In countries like Japan and the Czech Republic, it is now being treated like a fiat currency. A fiat currency is legal tender whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro and many other major world currencies.
If your head is hurting right now, believe me, I understand. Let’s do a quick recap:
A cryptocurrency is a type of digital currency. The name crypto is used because it is relies on the cryptography technique of using those crazy hard math problems to solve (algorithms)
A virtual currency, by the way, falls under the umbrella of digital currency. Virtual currency’s tend to have limited, specific values. Examples would be all those Facebook games like Candy Crush where you can buy and send gifts
Decentralization – no one group controls it or can manipulate it
Security – because of the intense computing power needed to hack it
Acceptability – more merchants are accepting it worldwide everyday
Bitcoin is the most popular and valued the highest, but there are some serious competitors out there now like Ethereum, Ripple, Litecoin, and Dash to name a few
There are over 850 cryptocurrencies out there and most of them are nearly worthless
We will get more into the number of currencies and coins out there on the market later. To view a list of all of them, Coin Market Cap is a great resource. Here is a funny article from Bloomberg talking about people who recently had their computers hacked. The hackers wanted the victims to pay in BTC. Why did many people not pay up even though the hackers wanted a relatively small amount from each victim? Because they said Bitcoin is too hard to understand how it worked!
While doing this on your own can be daunting, I will show you how easy it is to setup a secure digital wallet to buy and sell online. When you are ready to give it a shot, click here. (Don’t worry, clicking this doesn’t sign you up for anything, it simply takes you to another article where I will go into further details.)
Keep in mind, I always encourage you to start off with a small amount that you are comfortable investing.
Trading and investing in digital assets like Bitcoin and other altcoins is highly speculative and comes with many risks. This analysis is for informational purposes only and should not be considered investment advice. Past performance is not necessarily indicative of future results.