Cryptocurrency for Dummies
Your Ultimate Guide
Cryptocurrency for Dummies – Your Ultimate Guide
If you follow titans of industry such as Elon Musk on social media, you will probably notice a few tweets that vaguely promote cryptocurrencies such as Bitcoin and Ethereum. You may have also noticed that Musk, CEO of Tesla, recently changed his tune and decided that his company will no longer accept Bitcoins as payments for Tesla cars. You might have also noticed that shortly after that announcement, Bitcoin prices fell by more than 10%, and so did Tesla shares.
For the untrained eye, this might seem like just another stock market dance that only billionaires can benefit or hurt from at the end of it all. However, if you look keenly, you will notice that in the middle of it all is something rather peculiar and relatively new to the market – digital currency.
What is a cryptocurrency, and why is Bitcoin making millionaires or losing people a fortune day in and day out? Here is a quick lesson in cryptocurrency for dummies that will help simplify what might seem to many as a complicated software programing and engineering market space.
What Is Cryptocurrency?
Cryptocurrencies are a form of digital or virtual currency that is created by algorithms and relies on cryptography. This algorithm is designed to give or pay computers within a blockchain network that help verify these virtual transactions or mine these coins. Blockchain technology, in this case, refers to an extremely decentralized database that uses cryptography to ensure that the transactions within are secure.
In 2009, an anonymous individual named Satoshi Nakamoto (anonymous because his real-world identity is still unknown) created the first-ever digital currency known as Bitcoin. Simply put, this was a new form of digital money that could be used to buy and sell things on the internet. As its popularity grew, more and more real-world stores started accepting this form of currency as payment. The most notable of which, until recently, was Tesla.
You might be wondering: “I pay for things using my credit card all the time. Doesn’t that make my money a form of digital currency?”
While you can exchange your actual dollars into an equivalent digital value of it through various platforms, that money is still subject to a host of conditions that make using it rather expensive:
- There are many middlemen such as banks and card processors who take a cut from every transaction making this entire process more expensive than it should be
- What was considered futuristic payment systems such as wire transfer and credit card payments are quickly becoming vulnerable to theft and, therefore, outdated
- There are almost 3 billion people on the planet who are either unbanked or underbanked and can’t really access financial services such as credit cards and wire transfers
These are all problems that cryptocurrency aims to solve and what sets this type of digital currency apart from the usual type of currency, digital or otherwise.
History of Cryptocurrencies
Although Bitcoin is the brand name or coin that is synonymous with cryptocurrency, the concept of this kind of decentralized economy came about in the 80s. In 1983 a cryptographer and computer scientist named David Chaum created the very first digital currency called eCash.
While his theories were sound, it took more than a couple of decades of other cryptographers and computer scientists studying and analyzing it all before Satoshi Nakamoto actualized it and introduced the world to the very first functional virtual currency – Bitcoin.
Just as the inventor before, Nakamoto meant for Bitcoin to be a form of anonymous digital currency that is cryptographically secure. It was essentially designed to be used as the alternative medium of exchange.
The idea was that Bitcoin was to replace the inflation-prone, centralized and government-controlled currencies of the world. However, that reality is yet to be realized, and Bitcoin, along with other forms of digital currency, are today used as more of a store for value than they are a medium of exchange.
Mostly thanks to its success, Bitcoin has inspired the creation of a host of other cryptocurrencies referred to as “Alternative Cryptocurrencies,” “Alt Coins,” or “Alternative Bitcoins.”
Here is a shortlist of almost every other cryptocurrency that currently exists:
- Binance Coin
While most of these coins have performed very well in the market, they haven’t quite hit the heights that Bitcoin has; however, that remains to be seen thanks to different market forces.
The Basics of Cryptocurrencies
Typical fiat currencies are regulated by world governments and even reserved in central banks controlled by those very governments. This means that its value is hugely determined by a select few and an ever-changing regulatory environment. Also, many middlemen are determining just how expensive your transactions are going to be.
The main idea behind cryptocurrencies such as Bitcoin and the others is to get rid of this centralized control by world governments and cut out the middlemen (banks) and create a new digital finance landscape. This then leaves a pure money market that is not only accessible to all but also controlled by the people within the market. This can be achieved thanks to the blockchain technology that runs cryptocurrencies.
Unfortunately, even the most robust of cryptocurrencies still have a few issues. This is exactly what happened to Bitcoin, which was the only viable digital currency in the entire cryptocurrency market until 2011.
At this point, Bitcoin was virtual gold. However, users, enthusiasts, and mining mechanics started noticing a few issues with the coin. These included problems such as security, speed, and anonymity. That’s how alternative coins came to be.
Benefits of Cryptocurrency
You probably think that all this is well and good, but it still doesn’t feel like it’s worth trading your paper dollars for some virtual currency that hasn’t even been around for long enough. After all, you have known money your entire life, and as far as you’re concerned, it works just fine.
Here are some key benefits that cryptocurrency mining or cryptocurrency investing can bring to your life:
Minimize the Effects of Corruption
Governments and central banks currently have most of the sway when it comes to fiat currency. This kind of power can corrupt, and the wealthier governments use it to lord themselves over the less wealthy underlings.
The over 1,600 cryptocurrencies are completely unregulated by these governments and look to minimize, if not completely, eradicate this kind of corruption. It does so by empowering everyone within the blockchain network. Anyone who can mine or trade cryptocurrency has some level of control within the network.
Cuts Out the Middleman
When dealing with fiat currency, every single time you transact, there is a middleman, sometimes more than one, who gets a cut of that transaction. This inevitably makes that transaction much more expensive than it needs to be.
However, when trading cryptocurrencies, everyone in the blockchain is that middleman. Since this compensation is formulated quite differently from your typical fiat currency compensation, the cost is much lower, leaving you with more value.
You Have More Control Over Your Money
Whenever you hold your assets in the form of fiat money, you are at the mercy of your government. Not only does it determine the value of that money on any given day thanks to the economic decisions they make, but it also can decide whether or not you have access to it.
Governments freeze bank accounts and confiscate private assets all the time. This isn’t something that can happen within a blockchain network. Within the network, you have complete control of your money, and there is no chance of your cryptocurrency wallet unless you forget the password. This means that only you have access and control over your money.
Eliminates the Pitfalls of Money Printing
In many cases, when governments find themselves in dire financial straits, one option is to print more money. While this may, in the short term, bail them out of debt, it will devalue the local currency. The more this happens, the more the countries inflation rate grows, and eventually, the citizenry can’t afford to buy basic commodities. Their currency becomes worth less than a roll of toilet paper.
However, when dealing with cryptocurrencies, each currency has a specific number of available coins that can ever be mined. For Bitcoin, that number is 21 million. Once all these coins have been mined, Satoshi Nakamoto can’t just decide to create more. This concept underpins cryptocurrencies and keeps them relatively more stable than fiat currencies.
However, the biggest benefit of cryptocurrencies is the fact that these coins aim to serve the underbanked population of the world. Currently, about 4.66 billion people have access to the internet. Yet about 6% or 14 million American adults are unbanked. That number becomes even more embarrassing when you look at the global landscape. Cryptocurrencies can fix this problem by giving this unbanked population access to a form of currency to trade online. As long they have a cellphone, they can hold digital currency.
While cryptocurrencies have a host of benefits, they also come with some risks. One of the biggest and most glaring risks is the level of volatility that comes with these types of digital currencies. Because they aren’t governed by a centralized bank or government, their prices can fluctuate on the flimsiest of reasons, such as Elon Musk sending out a tweet.
This volatility has been witnessed over the years but no more so than in 2017 when the price of Bitcoin increased by over 1,000%, only to come crashing down, wiping out fortunes.
How Can You Earn Cryptocurrencies?
If you are going to trade in cryptocurrencies, you will need to learn how you can earn some. While the key source of these digital currencies is mining, not everyone has the skill set or resources to go Bitcoin mining.
As such, there are some other ways through which you can earn your virtual coins. These include:
- Buy: The fastest and simplest way to earn cryptocurrencies is to buy them. There are myriad crypto exchanges that take your fiat currency dollars and exchange them for cryptocurrencies of your choice.
- Earn by joining airdrops: Many projects use airdrops to create a buzz around their idea and form a community of enthusiasts. To get people interested, they give away tokens, sometimes in the form of emerging cryptocurrencies, to the community’s first members. In some cases, you will be required to do some work in exchange for this digital currency, but you earn crypto coins either way.
- Perform microtasks: Just like airdrops, performing microtasks calls for a bit of input on your end in exchange for the cryptocurrency on offer. More and more platforms accept cryptocurrencies as a form of payment now, and freelancers who are enthusiasts often choose this payment method.
- Cryptocurrency trading: Whenever you buy cryptocurrencies through a crypto exchange, you have the option of holding them, trading them for cash, or trading them for other cryptocurrencies. You will need to have a cryptocurrency wallet and use a reputable exchange for this, but if you have unique risk tolerance and use the smartest investment strategies, trading cryptocurrency can be a lucrative game.
You could also start accepting payments in the form of digital currencies if you own a business or slowly start trading your assets for the most stable digital coins available.
While this cryptocurrency for dummies guide is an oversimplification of the entire digital currency landscape, it gives you a good picture of what blockchain technology is and why a good percentage of the world is currently suffering from Bitcoin mania.