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With all the headlines that Cryptocurrencies have been making, now with Tesla investing about $1.50 billion into Bitcoin, let's take a deeper dive into it.
We’ll discuss the most popular form of Cryptocurrency, Bitcoin, along with why cryptocurrency has had so much hype recently. Let’s dive in!
Cryptocurrency is a new type of currency that only exists ONLY online.
So yeah… that means that Bitcoins aren’t actual coins at all...!
Certainly it’s true that a lot of our "money" exists purely online as zeros and ones (ACH transfers, for instance), the traditional “fiat currencies”, such as the U.S. dollar, is run by the government.
Instead of being issued by a central government, cryptocurrencies are issued by a network of anonymous computers that, together, manage the total amount of currency available.
This is called a Peer To Peer network because all of the participants communicate directly with each other instead of through a central overseer, like a bank.
They also oversee the transactions securely, without the need for human oversight.
There are many types of cryptocurrencies. In fact, anyone can create a cryptocurrency!
Of course, people have to be interested in it for it to gain any real value.
And that’s the tricky part… while the basic idea behind cryptocurrency is quite sound, the way people use it can get somewhat complicated.
As of September 2020, there were 6,955 cryptocurrencies.
Together, they combined for a total market cap of over $1 trillion. The most popular cryptocurrency is Bitcoin, which has enjoyed a lot of attention since being created in 2009.
Other popular cryptocurrencies include Ethereum, Litecoin, Tron, Chainlink, Binance Coin and more.
In short, we all “agree” that fiat currencies are valuable. They don’t actually represent anything of value, and they aren’t backed by a commodity (like gold).
This has worked out pretty well for us so far… but it does come with its fair share of risks. As we’ve seen, some currencies can suddenly lose their value if people lose faith in the government that issues them since part of their value derives from faith in the government.
Take, for example, the Venezuelan Bolívar which it lost 99% of its value in 2019! The U.S. dollars has become responsible for more than 70% of transactions in the country, because people simply can’t trust that the Bolívar will keep its value.
Of the 750 currencies that have existed since 1700, only 20% have remained and all of the 20% have been devalued in some way.
This is where cryptocurrency comes in.
Instead of relying on a central government, cryptocurrencies uses blockchain to create a decentralized currency.
Right now cryptocurrencies are still volatile, because the only way we know to evaluate them is by comparing them to… yup, fiat currency!
Cryptocurrencies are essentially “rewards” for those who participate in creating the blockchain network that oversees them.
As we know, computers manage cryptocurrencies. That requires a lot of power… and if only one computer were running the show, it wouldn’t be nearly as secure.
That’s why cryptocurrencies are given out to the computers that help create the secure blockchain network. The act of contributing computer power to a cryptocurrency network is called “mining” (similar to mining for gold).
Computers that are “mining” are essentially performing complicated mathematical tasks that require a lot of computer power. These tasks verify every action that occurs on the cryptocurrency network, such as a transfer of coins from one user to another.
Because this requires a lot of computer power, the computers that participate are offered a small amount of cryptocurrency as a reward. It’s usually randomly assigned based on how “hard” your computer is working.
That’s how cryptocurrency is created. Right now, cryptocurrency’s value is based on how much people are willing to pay for it using fiat currency. This means most cryptocurrencies are quite unstable right now, since they haven’t had time to mature. There is still a lot of speculation as to how valuable a cryptocurrency like Bitcoin may be in the long run. That’s why it changes price so often.
Cryptocurrencies are stored in digital “wallets”, which are represented by a unique identifying number, or “address”. These are quite secure, as they contain no identifying information… in fact, they can even be lost for good! If you lose the unique identifying number that “proves” you own a particular cryptocurrency, then there’s simply no way to recover it.
Thankfully, there are now many apps and companies that help users manage their “crypto wallets”, which lowers the risk of this happening. Of course, there have also been bad actors who have tried to take advantage of users. As such, you should only get involved in cryptocurrency if you know what you’re doing… or just want to invest a little bit because you’re curious.
Some have the belief that cryptocurrency will be the future of currency. By removing the need for trust, they believe in the protection that will prevent any major events that from compromising the financial network. This of course has yet to be proven.
It’s still very much in its infancy.
We don’t even know the identity of the person who created the first cryptocurrency, Bitcoin though there are theories that abound online.
We know that it was invented by someone that goes by “Satoshi Nakamoto” online.
He posted a manifesto and built the first network completely anonymously.
It makes sense, though, doesn’t it? The idea is that nobody should be in charge of the network.
It’s both all of us and none of us all at the same time!
This was a very basic explanation that we came up with, but it only covers the absolute essentials.
If you’re interested in learning more about this new form of money, check out some YouTube videos on the subject.