If you’ve been following the news at all in the past few years, you’ve likely heard of the terms Bitcoin or cryptocurrency. It’s a hot topic, but it’s difficult to understand for the average American not working in finance. The increasing value and volatility of cryptocurrency can make this a hard section of finance to grapple with—but have no fear. If you’re curious and want to learn more, this guide is here to help.
What is cryptocurrency?
As defined by Merriam Webster, a cryptocurrency (or “crypto”) is “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” It is essentially digital money created from code that is impossible to counterfeit or double-spend.
Cryptocurrency is different than traditional cash. An easy comparison can be made between cryptocurrency and arcade tokens or tickets at a carnival. When someone purchases tokens and tickets, they’ll use cash to buy them, but what comes back in return is no good as a currency outside of that arcade or carnival. Even saving four tokens to use the next time you visit won’t guarantee the value of those tokens stays the same. It’s possible the arcade will require five tokens to play next time.
Cryptocurrency can be purchased as a share (similar to a stock) with the buyer’s cash. The share of cryptocurrency is not usable at a local grocery store or retailer, but it is of worth within the realm of cryptocurrency and can change in value at any time.
Origins of cryptocurrency
During the 2008 housing market crash, when there was a panic to retrieve assets out of banks, it is speculated that a coder or coders invented cryptocurrency under the pseudonym “Satoshi Nakamoto.” The question the inventor(s) satisfied: why do we need banks to pay each other? Nakamoto created an economy of peer-monitored internet protocol, and the encrypted string of data they created, or “hash,” signifies one unit of currency. Thus, Bitcoin, the first cryptocurrency, was born in 2009.
If you simplify cryptocurrency down to its purpose, it’s the first economy built on digitizing human trust. The nature of those “hashes” of data removes human error from the process of payment and trade, so the threat of misappropriation of funds or scams is lessened.
Where cryptocurrency is purchased
Online cryptocurrency exchanges like Binance and Coinbase are platforms where people seeking shares can purchase and store their cryptocurrencies. Think of them as digital wallets: they are a safe place to store your shares, trade, and conduct crypto-commerce transactions.
Value of cryptocurrency
As of December 2020, there are over 7,800 cryptocurrencies in existence, according to CoinMarketCap. In total, these cryptocurrencies are currently worth over 960 billion USD, however, this value can vary drastically considering its unpredictability.
Why cryptocurrency is popular
People who invest in cryptocurrency view it as the future of standard currency, predicting traditional money will die out or crash. Banks can inflate money, so removing them from the equation puts people more at ease and in control of their assets.
Before making any investment decision, it’s wise to discuss your concerns and questions over with a trusted financial advisor. An expert can help point you in the right direction and ensure that any investments you make are best for your unique financial goals.
Now that you have a grasp on cryptocurrency, share the wealth of knowledge with other curious family members and friends!