Crypto. Blockchain. Bitcoin. Ledgers. Miners. You’ve heard the words but couldn’t describe what they mean if your life depended on it. So, let’s break it down! In this blog, you’re going to learn all the basics of cryptocurrency and how you can use it yourself.
Cryptocurrency 101: The Basics
Once you get the basics down, crypto will seem far less mysterious. Here are some of the more important details you need to know.
What is Crypto?
A cryptocurrency is a digital or virtual asset. “Crypto” comes from “cryptography,” which is what secures the asset. Cryptocurrencies exist on a network that’s spread out across many, many computers.
Crypto is built on blockchain technology. This type of technology is a ledger that controls the process of recording transactions and assets within the currency’s network. Every single time there’s a crypto transaction (meaning that someone buys, sells, or trades), it’s recorded on the ledger. We call it “blockchain” because every time a transaction occurs, the data is recorded as a block. That block is connected to the one before it and eventually, the one after it. So, these transactions ultimately form a neverending chain. It literally connects us all.
We don’t know who exactly invented cryptocurrencies. However, Bitcoin — the first currency — was announced in a paper published in 2008 by a mysterious figure known as Satoshi Nakamoto. However, this is merely a pseudonym. Although there are various theories, we still don’t know the true identity — or identities — of the person or people behind the first ever cryptocurrency. Shockingly, no one has wanted to take credit for it (yet).
Are There Different Types of Cryptocurrencies?
Yes! You’re likely the most familiar with Bitcoin, and for a good reason. It was the first and remains the most popular digital currency. But since its inception in 2008, others have popped up along the way (and will likely continue to do so). These include:
Some currencies are clones of Bitcoin, while others were created from scratch.
What are the Benefits of Cryptocurrencies?
There are several elements that make cryptocurrencies unique. For starters, they are decentralized. This means that there’s no overarching party that controls them, including the government. Think about it: Sometimes, if you want to send someone money, it has to go through the bank first. That’s not the case with crypto. Nobody is involved in the transaction except you and the business or individual you’re sending crypto to or receiving crypto from. Plus, since it’s decentralized, crypto can’t collapse at a single point of failure. In a sense, crypto exists everywhere and nowhere.
Secondly, because they’re secured by cryptography and are based on blockchain technology, it’s nearly impossible to hack, defraud, or double-spend using crypto. We can easily argue that it’s safer than carrying around a wad of cash or swiping your card and entering your PIN. (Did you know that approximately 35% of credit cardholders in the US experienced fraud in 2019?)
And third, because of the technology supporting cryptocurrencies, it’s faster and cheaper to complete a transaction compared to a traditional financial institution. Assets can be sent anywhere in the world (as long as both parties have an internet-enabled device), and the transaction is complete usually within seconds. While there’s still a fee, it’s tiny in comparison to what a financial institution would typically charge you.
We’d be remiss if we didn’t talk about the investment opportunities, as well. While the price of crypto can be incredibly volatile (more on that in a moment), people who have invested at the right time have walked away with a quite lucrative return. And the opportunity is still there. It largely comes down to timing.
What are the Downsides of Crypto?
Like most things in life, crypto has advantages and drawbacks.
As with any form of investing, there’s always a risk. Because the worth of crypto can skyrocket or crash within a matter of hours, your investment could suddenly be worth nothing, or it could be worth millions. Again, investing with crypto takes time, patience, and strategy!
Also, although it was initially designed to be an alternative form of cash, because of its volatility, paying for (or getting paid for) products and services using crypto isn’t the most reliable method. Imagine buying a $300 TV with crypto, and the next day, the value tanks. The store lost money. Conversely, imagine you paid with crypto, and the next day, the price shot up. In that case, you lost money. $300 yesterday is now worth a lot more today, because of that fluctuation.
And lastly, while cryptocurrencies are incredibly secure, like any type of financial transaction, it's still possible for them to be used for criminal activity. And what you have to be careful of is the fact that transactions can’t be reversed. Once you send someone money, it’s done. This is why you want to be very careful not to let anyone else get a hold of your wallet address, which is the string of characters that allows access to your assets.
What Does the Future of Cryptocurrencies Look Like?
Well, we can say one thing for certain: Crypto probably isn’t going anywhere anytime soon (or, ever). Lawmakers are working hard to stabilize crypto, which, in the future, could make it even more attractive for investors, as well as make it more feasible as another form of payment. It’s young and still a bit of an enigma, which means we can expect it to evolve over time, and perhaps quite dramatically. But without a doubt, there is no turning back from crypto.