What Is Cryptocurrency? - dummies (2024)

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However, what sets cryptocurrencies apart is the technology behind them. You may say, “Who cares about the technology behind my money? I only care about how much of it there is in my wallet!” The issue is that the world’s current money systems have a bunch of problems. Here are some examples:

• Payment systems such as credit cards and wire transfers are outdated.
• In most cases, a bunch of middlemen like banks and brokers take a cut in the process, making transactions expensive and slow.
• Financial inequality is growing around the globe.
• Around 3 billion unbanked or underbanked people can’t access financial services. That’s approximately half the population on the planet!

The basics of cryptocurrencies

The definition of money

• Enough people must have it.
• Merchants must accept it as a form of payment.
• Society must trust that it’s valuable and that it will remain valuable in the future.

Another key change in money has been its ease of transaction. The hassle of carrying a ton of gold bars from one country to another was one of the main reasons cash was invented. Then, when people got even lazier, credit cards were invented. But credit cards carry the money that your government controls.

As the world becomes more interconnected and more concerned about authorities who may or may not have people’s best interests in mind, the idea is that cryptocurrencies may offer a valuable alternative.

Here’s a fun fact: Your normal, government-backed currency, such as the U.S. dollar, must go by its fancy name, fiat currency, now that cryptocurrencies are around. Fiat is described as a legal tender like coins and banknotes that have value only because the government says so.

Some cryptocurrency history

In November 2022, well-known crypto exchanges FTX and FTX.US filed for bankruptcy and their founder, Sam Bankman-Fried, was arrested in December 2022 for fraud.

Yet, even after these events, many financial analysts expected cryptocurrency to recover and endure.

Crypto's beginnings

Bitcoin was the first established cryptocurrency, but many attempts at creating digital currencies occurred years before Bitcoin was formally introduced.

Bitcoin remained the only cryptocurrency until 2011. Then Bitcoin enthusiasts started noticing flaws in it, so they decided to create alternative coins, also known as altcoins, to improve Bitcoin’s design for things like speed, security, anonymity, and more.

Among the first altcoins was Litecoin, which aimed to become the silver to Bitcoin’s gold. As of 2022, the number of cryptocurrencies had soared to more than 19,000, although many of these were not expected to survive.

Key cryptocurrency benefits

• Reducing corruption: With great power comes great responsibility. But when you give a ton of power to only one person or entity, the chances of their abusing that power increase. The 19th-century British politician Lord Acton said it best: “Power tends to corrupt, and absolute power corrupts absolutely.”Cryptocurrencies aim to resolve the issue of absolute power by distributing power among many people or, better yet, among all the members of the network. That’s the key idea behind blockchain technology anyway.
• Eliminating extreme money printing: Governments have central banks, and central banks have the ability to simply print money when they’re faced with a serious economic problem. This process is also called quantitative easing. By printing more money, a government may be able to bail out debt or devalue its currency.However, this approach is like putting a bandage on a broken leg. Not only does it rarely solve the problem, but the negative side effects also can sometimes surpass the original issue.For example, when a country like Iran or Venezuela prints too much money, the value of its currency drops so much that inflation skyrockets and people can’t even afford to buy everyday goods and services. Their cash becomes barely as valuable as rolls of toilet paper.Most cryptocurrencies have a limited, set amount of coins available. When all those coins are in circulation, a central entity or the company behind the blockchain has no easy way to simply create more coins or add on to its supply.

• Giving people charge of their own money: With traditional cash, you’re basically giving away all your control to central banks and the government. If you trust your government, that’s great, but keep in mind that at any point, your government is able to simply freeze your bank account and deny your access to your funds.For example, in the United States, if you don’t have a legal will and own a business, the government has the right to all your assets if you pass away. Some governments can even simply abolish bank notes the way India did in 2016. With cryptocurrencies, you and only you can access your funds.
• Cutting out the middleman: With traditional money, every time you make a transfer, a middleman like your bank or a digital payment service takes a cut. With cryptocurrencies, all the network members in the blockchain are that middleman; their compensation is formulated differently from that of fiat money middlemen’s and therefore is minimal in comparison.
• Serving the unbanked: A vast portion of the world’s citizens has no access or limited access to payment systems like banks. Cryptocurrencies aim to resolve this issue by spreading digital commerce around the globe so that anyone with a mobile phone can start making payments. And yes, more people have access to mobile phones than to banks. In fact, more people have mobile phones than have toilets, but at this point the blockchain technology may not be able to resolve the latter issue.

Common crypto and blockchain myths

Simplified version of how a blockchain works.

Let me get some of the most common misunderstandings out of the way:

• Cryptocurrencies are good only for criminals. Some cryptocurrencies boast anonymity as one of their key features. That means your identity isn’t revealed when you’re making transactions. Other cryptocurrencies are based on a decentralized blockchain, meaning a central government isn’t the sole power behind them.These features do make such cryptocurrencies attractive for criminals; however, law-abiding citizens in corrupt countries can also benefit from them. For example, if you don’t trust your local bank or country because of corruption and political instability, the best way to store your money may be through the blockchain and cryptocurrency assets.
• You can make anonymous transactions using all cryptocurrencies. For some reason, many people equate Bitcoin with anonymity. But Bitcoin, along with many other cryptocurrencies, doesn’t incorporate anonymity at all. All transactions made using such cryptocurrencies are made on public blockchain.Some cryptocurrencies, such as Monero, do prioritize privacy, meaning no outsider can find the source, amount, or destination of transactions. However, most other cryptocurrencies, including Bitcoin, don’t operate that way.
• The only application of blockchain is Bitcoin. This idea couldn’t be further from the truth. Bitcoin and other cryptocurrencies are a tiny byproduct of the blockchain revolution. Many believe Satoshi created Bitcoin simply to provide an example of how the blockchain technology can work.
• All blockchain activity is private. Many people falsely believe that the blockchain technology isn’t open to the public and is accessible only to its network of common users.Although some companies create their own private blockchains to be used only among employees and business partners, the majority of the blockchains behind famous cryptocurrencies such as Bitcoin are accessible by the public. Literally anyone with a computer can access the transactions in real time. For example, you can view the real-time Bitcoin transactions.

Risks of cryptocurrency

Volatility got especially out of hand in 2017, when the price of most major cryptocurrencies, including Bitcoin, skyrocketed above 1,000 percent and then came crashing down. However, as the cryptocurrency hype has calmed down, the price fluctuations have become more predictable and followed similar patterns of stocks and other financial assets.

Regulations are another major topic in the industry. The funny thing is that both lack of regulation and exposure to regulations can turn into risk events for cryptocurrency investors.

Gear up to make transactions

Cryptocurrency wallets

You can’t get involved in the cryptocurrency market without a crypto wallet. Get the most secure type of wallet, such as hardware or paper wallets, instead of using the convenient online ones.

Cryptocurrency exchanges

Storing your cryptocurrencies on an exchange is considered high risk because many such exchanges have been exposed to hacking attacks and scams in the past. When you’re done with your transactions, your best bet is to move your new digital assets to your personal, secure wallet.

A third type of crypto exchange is called hybrid, and it merges the benefits of the other two types to create a better, more secure experience for users.

Cryptocurrency communities

Getting to know the crypto community can be the next step as you’re finding your way in the market. The web has plenty of chat rooms and support groups to give you a sense of the market and what people are talking about. Here are some ways to get involved:

• Crypto-specific Telegram groups. Many cryptocurrencies have their very own channels on the Telegram app. To join them, you first need to download the Telegram messenger app on your smartphone or computer; it’s available for iOS and Android.
• Crypto chat rooms on Reddit or BitcoinTalk: BitcoinTalk and Reddit have some of the oldest crypto chat rooms around. You can view some topics without signing up, but if you want to get involved, you need to log in. (Of course, Reddit isn’t exclusive to cryptos, but you can search for a variety of cryptocurrency topics.)
• TradingView chat room: One of the best trading platforms out there, TradingView also has a social service where traders and investors of all sorts come together and share their thoughts, questions, and ideas.
• Invest Diva’s Premium Investing Group: If you’re looking for a less crowded and more investment/trading-focused place to get support, you can join our investment group (and chat directly with me as a perk too).

On the flip side, many scammers also target these kinds of platforms to advertise and lure members into trouble. Keep your wits about you.