What Everybody Ought to Know About Crypto

Cryptocurrency is a new technology that has taken the finance world by a storm. Well, technically it’s not new since it’s been around for 11 years now - after Bitcoin, the first-ever cryptocurrency, went live in early 2019. However, the very concept of cryptocurrency is still new and baffling to many.

A recent study found that only one in 10 people understand how cryptocurrencies work, while just 29% have some knowledge about cryptocurrencies. For those who have an idea about them, many echo American Senator Thomas Carper's sentiment that “Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.”

For the (relatively) short time that cryptocurrencies have been around, they’ve defied naysayers and demonstrated wild success; for instance, being investors’ foremost asset choice last year.

What is Cryptocurrency?

The concept underlying cryptocurrencies needn’t be so complicated. Admittedly, the technical aspects can throw you off at first. However, the average user need only grasp what’s the big idea or vision behind the technology, and how it’s supposed to achieve that.

Cryptocurrency is an internet-based currency that employs cryptography and blockchain technology to conduct and secure funds and transactions. Blockchain technology is an invention of Satoshi Nakamoto, the enigmatic creator of Bitcoin. Blockchain is a distributed, peer-to-peer, decentralized, and immutable ledger that employs cryptography to link together records. Cryptocurrencies leverage the decentralized nature of cryptocurrencies to achieve uncensorable transactions, as well as the immutability to achieve irreversible transactions.

Particularly, the decentralization of cryptocurrencies is a pretty huge deal. Decentralization means that the operations of cryptocurrencies are autonomous, self-controlling, and under no authority of any government, state, or regulatory body. This removes cryptocurrencies from the power, control, and interference of such bodies. It means, basically, and as Nakamoto intended, that cryptocurrencies hand over the power back to the people.

The peer-to-peer nature of cryptocurrencies allows individuals to send and receive funds directly from each other without the presence or need for a central authority or third-party intermediaries. The peer-to-peer nature of transactions also means transactions are cheaper and quicker.

The name ‘cryptocurrency’ is inspired by cryptography, the complex algorithms that secure the currencies.

The Rise of Digital and Virtual Currencies

There’s always a foundation for any idea, and cryptocurrencies are no different. Though some of the concepts that went into the creation of Bitcoin were entirely novel, Satoshi Nakamoto still stood on the shoulders of digital currency pioneers. Let’s go back and trace the very first beginnings of digital currencies.

  • 1983: American cryptographer David Chaum creates a “blinding” algorithm that laid the foundation for unalterable, secure, and electronic currency transfer. It’s an anonymous and cryptographically-secured electronic money called eCash
  • 1995: Chaum attempts to commercialize eCash - through a company called Digicash, without success. The company later goes belly-up, forcing Chaum to sell it off, together with eCash patents.
  • 1998: Computer engineer and cryptographer Wei Dai published a paper describing 'b-money' an anonymous, distributed, and digital currency. In the paper, he proposed what were the basic ideas of today's cryptocurrencies: “a scheme for a group of untraceable digital pseudonyms to pay each other with money and to enforce contracts amongst themselves without outside help,” among other characteristics
  • 1998: Computer engineer Nick Szabo describes 'bit gold’, a decentralized electronic cash system that would require users to dedicate computer power to the solving of cryptographic problems, with results being cryptographically published.

Other attempts at a digital currency include Florida-based e-gold – which was a method of investing in gold electronically. However, the currency employed rather lacks security protocols, which made it a magnet for criminal activities, causing it to finally bow under regulatory pressure. Others include Russia's web money and more which sprung up in many parts of the world over the years.

Then in 2008, a person or persons calling themselves Satoshi Nakamoto published a paper titled: Bitcoin: A Peer-to-Peer Electronic Cash System. The paper laid out the ideas for a decentralized, autonomous, and peer-to-peer electronic cash system known as Bitcoin. The following year in January, Bitcoin was launched, with Satoshi mining the original block containing the first bitcoin.

Before Bitcoin, the problem of double-spending (the risk that a holder will make a copy of a digital token and use it to purchase goods while retaining the original copy) was the biggest issue that prevented digital currencies from really taking off. Bitcoin solves this problem by utilizing a distributed ledger called a blockchain. The blockchain broadcasts all transactions publicly on the blockchain after confirmation by all the nodes on the network. This way, transactions are transparent, rendering double-spending impossible.

The success of Bitcoins has inspired thousands of other cryptocurrencies. While some have gone to achieve mega-success, others are neither a hit nor a failure, while still others have fallen by the wayside.

As of May 13, 2020, the aggregate value of cryptocurrencies is $245.8 billion, with Bitcoin taking the largest pie with 67.3%. There are 5,464 cryptocurrencies in existence, according to CoinMarketCap.

Properties of Cryptocurrencies

Cryptocurrencies distinguish themselves from Fiat currencies by several characteristics, which we’ll look at below:

  • Decentralization

Unlike fiat currencies, cryptocurrencies' supply and value are not controlled by governments, centralized banks, or other regulatory bodies. Instead, the value of a cryptocurrency is determined by the value ascribed to it by its users, while the supply is determined by highly complex algorithms ingrained into its code.

  • Finite Supply

The vast majority of cryptocurrencies are characterized by a finite supply. For example, Bitcoin has a finite, capped supply of 21 million. After these coins have been released into circulation, no other bitcoins will ever exist. This controlled supply helps prevent inflation by ensuring that too many coins do not flood the market, and that supply never exceeds demand.

The idea is that cryptocurrencies should be like gold, in that it’s a precious metal that’s rare and whose supply will run out at some point. This is unlike Fiat currency, whose supply is in the control of central banks which can produce unlimited supplies of it if need be.

  • Anonymous/Pseudonymous

Thanks to a decentralized system, when transacting in cryptocurrency, users do not need to provide proof of identity. Cryptocurrencies rely on a system of public and private keys, also known as addresses, to receive, send, and authenticate transactions. However, they’re also pseudonymous in the sense that transactions are linked to the public addresses, and can potentially be linked back to you.

  • Trustless

The decentralized nature of cryptocurrencies means that individuals don’t need to trust each other for transactions to take place. This creates a 'trustless' system of transactions

The blockchain uses a mechanism called consensus to validate transactions. When a user initiates a transaction, it’s broadcasted on the blockchain network, where all nodes (a global network of computers) receive and verify it. If a transaction is valid, it will be confirmed and added onto the blockchain. If a transaction is invalid, nodes will flag it and discard it.

  • Immutable

Immutable means unchangeable, unalterable, irreversible. Once a transaction is completed, no one can change it. Not the transacting parties, not the creator of the blockchain network, no one.

  • Highly secure

The ‘crypto’ in cryptocurrency is for 'cryptography', which is the encoding of messages so that unauthorized third parties cannot decipher them. In cryptocurrency, cryptography involves the use of highly complex encryption algorithms to secure transactions, control the release of new coins, and verify transactions.

The distributed nature of blockchains also means that all nodes in the network must reach a consensus about any transaction - which makes it impossible for anyone to commit transaction fraud. This distribution also means even if some nodes were hacked, the rest would continue monitoring and running and securing the network.

The Uses of Cryptocurrencies

Ignoring the hype, what are cryptocurrencies really useful for? Are they just a fancy technology with no real-life application? As it turns out, cryptocurrencies pack a massive real-life potential.

  • Protecting Citizens from Financial Retribution

When citizens in autocratic countries commit real or perceived crimes against the state, such governments can easily freeze or seize their financial assets or reverse transactions at will.

Unlike Fiat currency, which is state or government-controlled, cryptocurrencies are entirely immune from authoritarian whims. Not only are transactions not bearing any personal information, but also funds and transaction records are distributed across thousands of nodes across the world, rendering it impossible for any government to impart any influence on an individual's finances.

  • Eliminating Barriers to International Transactions

The traditional way of sending money across borders is expensive and takes long – sometimes even days. This is thanks to the multitude of intermediaries involved in every transaction. Also, banks and other traditional systems do not work on weekends.

On the other hand, cryptocurrencies do not recognize borders, meaning the eventual charges on a transaction are not determined by geographical location. As well, transactions are either entirely free or with very little fees.

  • Private Transactions

Thanks to anonymous/pseudonymous transactions, cryptocurrency affords users much-needed privacy. Indeed, some cryptocurrencies such as ZCash, Monero, DASH, Verge, Komodo, and Grin are designed to specifically facilitate a high level of privacy for transactions.

In this way, individuals can move or receive whatever amount of money they want and when they want without volume caps, being interrogated about where their money came from and who they’re sending it to. Cryptocurrency transactions also eliminate the byzantine processes involved in the traditional system when sending large amounts of money, a factor that causes delays and leaves individuals stranded.

  • Affordable and Fast Money Transfers

Cryptocurrencies provide the option to send money cheaply and quickly. Since transactions happen over the internet, anyone can send money anytime from anywhere incredibly fast and with nominal fees. Speed is a quality that anyone appreciates in a financial system, and cryptocurrency delivers.

Typically, blockchain-powered transactions take place within seconds or minutes, which is hardly what can be said of banks and traditional systems.

What can You Do with Cryptocurrencies?

  • 1. Buy Goods

In the early days, it was almost impossible to find a merchant that accepted cryptocurrency. However, as cryptocurrencies have become more popular, more and more retailers, both online and offline, now accept cryptocurrency. Cryptocurrency can be used to pay for groceries, hotels, jewelry, clothing, and even college.

  • 2. Invest

Stories abound of people who have become millionaires through cryptocurrency. Particularly, early investors of Bitcoin lucked out big-time during the 2017 boom. The one thing to remember about cryptocurrencies is that they are highly volatile; characterized by wild price swings that can wipe out thousands of dollars within minutes. Trading in cryptocurrencies is done via platforms known as exchanges - which provide an environment for buyers and sellers to exchange the currency. Some popular crypto exchanges include Kraken, Coinbase, BitFinex, BitStamp, Huobi, Binance, and so on.

  • 3. Accept as Payment

Cryptocurrencies are increasingly becoming an accepted means of payment. Today, thousands of retailers accept crypto payments including heavyweights such as Microsoft, Wikipedia, AT&T, travel industry giant Expedia, Burger King, Virgin Atlantic, and so on. Some services exist with the sole purpose of enabling businesses to accept cryptocurrency. Popular options include CoinPayments, CoinGate, Bitpay, AlfaCoins, Coinsbank, Coinbase Commerce, and so on.

What is the Future of Cryptocurrency?

Depending on who you ask, cryptocurrency is either a fad or a bulwark that is the future of money. Others believe that Bitcoin, the world’s first cryptocurrency, is the gold of the digital age. Some believe that cryptocurrency will always play second to the traditional finance system; existing in the fringes.

Skeptics will be quick to dismiss cryptocurrency as an industry whose days are numbered, while cryptocurrency diehards are happy with the industry remaining a niche. But one clear thing is that the industry is full of surprises.

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