Last week, we learned about blockchain – a new technology that essentially removes the need for trust in transactions.
This week, we’re learning about the most famous (and perhaps most useful) application of blockchain: Cryptocurrency.
We’ll discuss the most popular form of Cryptocurrency, Bitcoin, along with why cryptocurrency has earned so much hype over the past few years. Let’s dive in!
First, what is Cryptocurrency?
Cryptocurrency is a new type of currency that only exists online. Yes… that means Bitcoins aren’t actual coins at all!
While it’s true that a lot of our money now exists purely online (think of bank transfers), the traditional “fiat currencies”, such as the U.S. dollar, are run by a central government.
Instead of being issued by a central government, cryptocurrencies are issued by a network of anonymous computers that, together, manage the total amount of currency available. This is called a P2P (“Peer To Peer”) network because all participants communicate directly with each other… instead of through a central overseer, like a bank. They also oversee the transactions securely, without the need for human oversight.
They do this using blockchain technology, which we briefly explained last week.
What types of cryptocurrencies are there?
There are many types of cryptocurrencies. In fact, anyone can create a cryptocurrency!
Of course, people have to be interested in it for it to gain any real value. And that’s the difficult part… while the basic idea behind cryptocurrency is quite sound, the way people use it can get complicated.
As of September 2020, there were 6,955 cryptocurrencies. Together, they combined for a total market cap of $324.716 billion. The most popular cryptocurrency is Bitcoin, which has enjoyed a lot of attention since being created in 2009.
Other popular cryptocurrencies include Ethereum, Litecoin, Tron, Chainlink, Binance Coin and more.
What makes cryptocurrency different from traditional (“fiat”) currencies?
In short, we all “agree” that fiat currencies are valuable. They don’t actually represent anything of value, and they aren’t backed by a commodity (like gold).
This has worked out pretty well for us so far… but it does come with its fair share of risks. As we’ve seen, some currencies can suddenly lose their value if people lose faith in the government that issues them.
Take, for example, the Venezuelan bolívar – it lost 99% of its value in 2019! In many cases, U.S. dollars have become responsible for more than 70% of transactions in the country, because people simply can’t trust that the bolívar will keep its value.
This is where cryptocurrency comes in. Instead of relying on a central government, cryptocurrencies uses blockchain to create a decentralized currency. This means it’s protected from sudden drops in value… at least, in theory, when it’s stabilized. Right now cryptocurrencies are still quite volatile, because the only way we know to evaluate them is by comparing them to… you guessed it, fiat currency!
How do you earn cryptocurrency?
Cryptocurrencies are essentially “rewards” for those who participate in creating the blockchain network that oversees them.
As we know, computers manage cryptocurrencies. That requires a lot of power… and if only one computer were running the show, it wouldn’t be nearly as secure.
That’s why cryptocurrencies are given out to the computers that help create the secure blockchain network. The act of contributing computer power to a cryptocurrency network is called “mining” (similar to mining for gold).
Computers that are “mining” are essentially performing complicated mathematical tasks that require a lot of computer power. These tasks verify every action that occurs on the cryptocurrency network, such as a transfer of coins from one user to another.
Because this requires a lot of computer power, the computers that participate are offered a small amount of cryptocurrency as a reward. It’s usually randomly assigned based on how “hard” your computer is working.
That’s how cryptocurrency is created. Right now, cryptocurrency’s value is based on how much people are willing to pay for it using fiat currency. This means most cryptocurrencies are quite unstable right now, since they haven’t had time to mature. There is still a lot of speculation as to how valuable a cryptocurrency like Bitcoin may be in the long run. That’s why it changes price so often.
How do you access cryptocurrency?
Cryptocurrencies are stored in digital “wallets”, which are represented by a unique identifying number, or “address”. These are quite secure, as they contain no identifying information… in fact, they can even be lost for good! If you lose the unique identifying number that “proves” you own a particular cryptocurrency, then there’s simply no way to recover it.
Thankfully, there are now many apps and companies that help users manage their “crypto wallets”, which lowers the risk of this happening. Of course, there have also been bad actors who have tried to take advantage of users. As such, you should only get involved in cryptocurrency if you know what you’re doing… or just want to invest a little bit because you’re curious.
Why is cryptocurrency so popular?
It’s our belief that cryptocurrency is the future of currency. By removing the need for trust, we are all protected from any major events that may compromise the financial network.
However, it’s still very much in its infancy. Heck – we still don’t even know the identity of the person who created the first cryptocurrency, Bitcoin!
All we know is that it was invented by a man who goes by “Satoshi Nakamoto” online. He posted a manifesto and built the first network completely anonymously.
It makes sense, though, doesn’t it? The idea is that nobody should be in charge of the network. It’s both all of us and none of us at the same time!
Conclusion: Cryptocurrency may be the future of money, so now is the time to learn all about it!
This was the simplest explanation we could come up with, but it only covers the absolute basics. If you’re interested in learning more about this exciting new form of money, we highly recommend checking out some YouTube videos on the subject. It’s rather complicated, but it could turn out to be the future of all money… so we think it’s worth looking into!
Speaking of which… if you’re interested in learning more about cryptocurrency, you CAN “test the waters” without taking any risks. For example, you can try XY COIN – a new app that lets you collect cryptocurrency for free. All you have to do is keep it turned on and you’ll automatically earn COIN, which you can trade for all sorts of prizes… including popular cryptocurrencies like Bitcoin and Ethereum! Click here to learn more about XY COIN.
Now, how about you? Do you have any cryptocurrency like Bitcoin or Ethereum? Do you think the prices will rise significantly in the future, or is this just a passing fad? Let us know in the comments below!