When I first heard of cryptocurrency, I thought it was similar to PayPal or Venmo … a simple, digital exchange of money. You can imagine my surprise when I learned that cryptocurrency wasn’t only a digital exchange, but an exchange of a completely new currency.
I could hardly wrap my mind around it. I was this emoji personified: 🤯.
How could a brand new (albeit invisible) currency work? What could you buy? Did people actually accept it? What stopped people from not believing in it?
I had lots of questions … and I still do. Cryptocurrency is a complex, ever-changing topic that affects consumers, investors, and business owners alike. Below, we tackle some of those questions and highlight the most important aspects of cryptocurrency. By the end, you should have enough of an understanding to chime into those dinner party conversations with a fact or two.
What is cryptocurrency?
Cryptocurrency is digitally-encrypted money (hence, crypto | currency). Cryptocurrency is a decentralized, unfixed currency system that’s stored on and validated by the blockchain — versus being regulated by governments or financial institutions.
Bitcoin was the first cryptocurrency. Since its conception in 2009, which occurred in response to the banking crisis and housing market crash, hundreds of other cryptocurrencies have been created … and have failed.
Your Cryptocurrency Dictionary
Before we dive into the world of cryptocurrency, let’s review a few key terms frequently used in this guide and when discussing the concept.
Altcoins is slang for “alternative coins.” Altcoins refer to every other cryptocurrency besides Bitcoin.
All cryptocurrency transactions are recorded on the blockchain, a public record used to verify digital currency transactions and prevent scams. Transactions are recorded on blocks, and a new block is added to the chain roughly every 10 minutes. We explain blockchain further in the video below.
Cryptography refers to the act of writing in or deciphering a code. Cryptography (where we get the “crypto” in cryptocurrency) is a type of mathematics that creates secure transactions and online environments, i.e. “encrypted” accounts or currency.
Fiat currency is paper money like the US dollar or Euro.
Cryptocurrency mining is a proof-of-work (PoW) system where miners solve math problems to validate every cryptocurrency transaction. These minters get cryptocurrency in exchange for their time and resources. These complicated mathematical calculations also increase the security, transparency, and value of cryptocurrency. Mining is only one way — the hardest way — to obtain cryptocurrency. The reward for solving these math problems varies per currency but is more profitable than any other method (besides an outright purchase).
Nodes are computers that are part of the global cryptocurrency blockchain network. They serve to verify transactions recorded on the blockchain. Even if one node attempted to validate an incorrect transaction, the transaction wouldn’t go through as they require multiple validations (and that node would be disconnected) … making cryptocurrency a virtually incorruptible network.
A private key is a secure “password” that gives cryptocurrency owners access to their wallets. Each wallet has its own private key, and without it, users couldn’t access their coins.
A public address is similar to an email or physical house address. (It looks like this: 1GV5Vye4LCfpkM9V5oFSQsZk8kq2vBxvCK.) To send cryptocurrency, you simply need the recipient’s public address. It’s the only public-facing piece of data on the blockchain, and each transaction uses a unique address.
Benefits and Drawbacks of Cryptocurrency by Feature
Both support and speculation exist in the world of cryptocurrency. Some hate it, some love it, and most are confused by it. It’s a brand new concept that sparks a whole barrage of questions and concerns.
Below, we explain the core features of cryptocurrency and the positive and negative perspective of each.
Benefit: Cryptocurrency transactions are secure and private, creating valuable anonymity despite their very public (yet non-identifying) validation method on the blockchain.
Drawback: Security, privacy, and anonymity make it easy to use cryptocurrency for less-than-legal purposes.
Benefit: Cryptocurrency has low transaction costs and in-between fees you might find at banks or payment gateways.
Drawback: Cryptocurrency isn’t accepted by everyone, which could cancel out its affordability altogether.
Benefit: The volatility of cryptocurrency can yield a high-reward (high-risk) investment.
Drawback: Due to its volatility, cryptocurrency turns many people off from investing … which could lower its value over time.
Benefit: Cryptocurrency isn’t regulated or valued by a financial institution or central government, which eliminates the middleman, a penchant for corruption, and creates a truly global currency. It’s monitored by a peer-to-peer internet protocol.
Drawback: Many people relate cryptocurrency to the Silk Road … such a decentralized, deregulated asset could be used for both legal and illegal purposes. There’s also no way to recover lost coin.
Benefit: Cryptocurrency doesn’t deal in physical coin or paper money, leaving little room for loss, theft, or misuse.
Drawback: Cryptocurrency is purely digital, and you can’t recover lost coin or repeal validated transactions. The “invisibility” of cryptocurrency can also make it hard to trust.
Benefit: Cryptocurrency isn’t inflationary — there’s a set amount that can ever be mined and circulated.
Drawback: Cryptocurrency will likely never become a central currency because of its non-inflationary, inflexible elements.
Benefit: Cryptocurrency is released through mining, which anyone can do with the proper resources — a computer and internet.
Drawback: Cryptocurrency mining consumes a ton of energy and resources.. (In fact, miners are on track to use more energy than Argentina.)
How is Cryptocurrency Created?
Cryptocurrency is released into the economy through the process of mining, as we defined above. But how do these digital coins become a legitimate currency in the first place?
Cryptocurrency creation depends on three main things:
- A community of people who believe in the purpose of the coin and network … and who will eventually mine and evangelize it
- A code to create and encrypt the software and blockchain network on which the currency will operate (which is relatively easy as most cryptocurrencies are based on the open source code of Bitcoin available on Github)
- The confidence of merchants to value and do business with the currency, further building trust among consumers, investors, and the general public
There’s obviously a lot more that goes into creating a cryptocurrency, but these are the main three elements that lead to its legitimacy and acceptance. Third parties like WalletBuilders also offer to create cryptocurrency for you.
Creating Your Own Cryptocurrency
Nowadays, a lot of businesses are creating their own cryptocurrencies — through a crowdfunding process known as an initial coin offering (ICO). ICOs are when startups raise money by creating their own digital token that can be spent on current or future products or services.
Companies who participate in ICOs exchange their token for established cryptocurrencies like Bitcoin. Some ICO investors keep their tokens for future use or trade them on cryptocurrency exchanges as they would stock.