What is Cryptocurrency? A Primer
Cryptocurrency: is it the next great boon to investing, the future of finance, or the inevitable downfall of capitalism? Only time will tell. But it’s clear that millions of people are shifting their focus to crypto.
Terms like NFT, Ethereum, and Dogecoin are popping up in the news and social media feeds. Credit card companies are integrating with cryptocurrencies like Bitcoin. And you just might be hearing all the benefits from your friends and neighbors in the same way Boomers talked about Avon or Herbalife. And yet, cryptocurrency may ultimately shift the way we do business and invest.
What is cryptocurrency exactly?
Cryptocurrency can best be described as a digital form of money. The “crypto” in the name comes from the cryptography, or coding, that’s part of the process. This includes standard computer coding as well as complex mathematical algorithms or “codes.”
Cryptocurrencies are open source but still manage to remain secure. That’s where those codes come in. These complex algorithms are run by miners that add transactions to the ledger of all crypto transactions, or blockchain. The blockchain is public. Wait, what?
How can something be open source and private at the same time?
Your cryptocurrency is stored in a crypto wallet. These wallets rely on 2 codes. There’s your public key and your private key. Think of it kind of like your account number and your routing number for your bank account. Imagine if your routing number was public, so anyone can see it and potentially send you money. But transactions can only take place, i.e. you take money out of your wallet, with your private key. The “coding” protects this code at all costs.
A major tip for managing your crypto wallet is keeping this private key safe. Your public key is derived from your private key through complex mathematical algorithms that govern the blockchain and the currency. These algorithms keep the currency secure but they do make managing cryptocurrency complex.
Cryptocurrency relies on “miners” to help validate transactions. They use powerful computers to essentially “crack the code” to successfully and efficiently update the blockchain. That’s a gross understatement. But there is a lot of nuance to crypto-mining that we’ll get into in later articles. Miners who successfully add transactions to the blockchain are rewarded with crypto coins. Outside of buying or investing in crypto coins, this is how cryptocurrency is added to the economy. So essentially, you can buy/invest in a portion of or buy an entire crypto coin. Or you can mine for an extensive period of time in the hopes of being rewarded with coins.
What’s desirable about cryptocurrency is that it’s decentralized. This means that the blockchain exists all over the world on the computers of the various miners and users. Anyone with access to the blockchain might potentially see the public key to your wallet. But the cryptography is so in-depth that they cannot easily guess or find your private key.
The original appeal for cryptocurrency is that it is completely anonymous. It was used as the currency of the dark web. This is partly because a decentralized currency managed exclusively by numbers is completely anonymous.
Another appeal of cryptocurrency is that it’s self-governed. After all, while banks are managing our money, if they’re also working with, and sometimes managing, your credit cards then there are conflicts of interest. If a bank knows your debt and income they may limit your ability to make more money.
By decentralizing information and financial power, cryptocurrency provides investors with greater anonymity with regards to their finances, they’re less limited by bank hours, holidays, and fees. With the large influx of new investors, cryptocurrency investments are growing at a greater rate than standard investments or savings.
A good way to think of cryptocurrency is how money used to be held to the gold standard. Dollars used to correspond to gold that existed in the US treasury. Similarly, cryptocurrency is a scarce resource. There’s a finite number of crypto coins that will ever be available. The corresponding cash value is quickly escalating as more people invest. It’s a bit like the gold rush in that many are focusing on mining to help increase their wealth.
Cryptocurrency is not going anywhere. Its popularity is only growing. But only time will tell if we are moving towards a more global, decentralized economy or if governments will intervene, the systems will fail, or there are just too many hurdles for adaption.
But hopefully, thanks to this article you’re one step closer to finding your place in the crypto economy.
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