Bitcoin’s creation in 2009 introduced the world to an alternative to normal money that does not need banks and is not controlled by the government. This is called decentralized finance and nobody, in 2009, could have known how big it would become. Now, many people are left needing cryptocurrency explained.
Since then, interest in cryptocurrency has exploded. But cryptocurrency has its own language with terms like blockchain, NFT, DAOs, Defi, and Proof of Work, and it can be very hard to understand.
The Dypto-Crypto team is here to help by making cryptocurrency easier to understand; for beginners who want to start from scratch and for those who want to learn the more complicated stuff.
So, without further ado, here is what every crypto beginner should know:
Cryptocurrency Explained: What is Cryptocurrency?
At its most basic form, cryptocurrency (or crypto for short) is a virtual currency that is decentralized and secured by cryptography. This makes it nearly impossible to double-spend, counterfeit, or steal.
In fact, one of the most defining features of cryptocurrency is decentralization, as mentioned above. This simply means that it is not issued by any government authority or central agency. As such, crypto is theoretically immune to government interference and outside manipulation.
How Does Cryptocurrency Work?
Let’s explain how cryptocurrency works:
Most cryptocurrencies, like Bitcoin or Ethereum, are based on blockchain networks that are enforced by a massive network of computers. These computers can be owned by anyone, anywhere in the world as long as they have an internet connection. The more computers that join the network, the more decentralized and resistant to manipulation it becomes.
So why would anyone want to add their computer to the network? These computers are rewarded for helping maintain the cryptocurrency network and ensuring all transactions are recorded correctly. People can actually get paid by allowing their computers to validate blockchain transactions.
This sounds complicated, so let’s break it down using an example:
Let’s say that you work as a cashier at a local grocery store. When you’re hired, you agree to follow that store’s rules and trade your time for your local currency. This could be dollars, pounds, rupees, etc.
As a cashier, you record each item a customer purchases and make sure they pay the correct price and do not steal any merchandise.
At the end of the week, your pay is based on how many hours you worked. Simple, right?
A cryptocurrency blockchain works in a similar way.
If you want to be rewarded for the work of making sure transactions are entered correctly and safely, you use your computer to check transactions on the blockchain that correspond with the currency you want. For example, if you wanted Ethereum, you would check on the Ethereum blockchain.
Then, for every transaction you validate, you get a small percentage of that cryptocurrency. How much you get depends on the value of that currency.
What Are the Pros and Cons of Cryptocurrency?
In having cryptocurrency explained to you, it helps to know about are the pros and cons.
Like anything, cryptocurrency is not perfect. It is still very new, and it has flaws. Here are the biggest pros and cons of cryptocurrency you should be aware of:
Pros of Cryptocurrency:
- Decentralization: Crypto is not issued or controlled by a central agency, so there is no influence from monetary policy or interference from government control.
- Transparency: Unlike typical currencies, transaction data for cryptocurrency is recorded on a blockchain, which is an open ledger. This data is available at any given time to any member of the public.
- Anonymity: Although the data is completely open for viewing at all times, the transactions remain completely anonymous. This protects your personal privacy and security. Typical debit and credit cards, however, can easily be scanned and hacked.
- Potential for Investment Growth: Unlike typical currencies, crypto doubles as an investment. When Bitcoin had a massive surge in growth in 2017, hundreds of people turned into millionaires overnight.
While this experience is not typical, crypto can represent an opportunity for significant gains.
Cons of Cryptocurrency:
- Potential for Investment Loss: Like any investment, what goes up must come down. Cryptocurrency can easily pad your pocket, but there’s also an element of risk. For example, Bitcoin experienced a 50% price drop in two months from April to June 2021. (CBS News).
- Production Cost: A major con that most people don’t consider with crypto is the cost it takes to produce. Most cryptocurrencies require vast sums of electricity, water, or nuclear power to mine. Read more about this in the Harvard Business Review.
- Regulatory Restrictions: Because cryptocurrency is relatively new, there are certain things you still can’t purchase with it. While Paypal has recently implemented the ability to make purchases with certain cryptocurrencies and withdrawal your crypto, there’s still a long way to go before you can use it the same way as fiat currency.
Is Cryptocurrency a Good Investment?
Asking whether cryptocurrency is a good investment is the same as asking if the stock market is a good investment- that is, it can be, but only if you do your research and make informed decisions.
If you want to invest in cryptocurrency, first spend some time determining the risk factors associated with that particular currency and the benefits it stands to represent.
Lastly, don’t fall victim to hype- if you invest in a cryptocurrency, make sure it’s because you’ve taken the time to make a well-informed decision.
Still Have Questions? Dypto is Here to Help
While we hope this article has explained cryptocurrency in a uniquely simple and understandable way, we can’t answer every crypto question in one blog post. Furthermore, there may be points we haven’t quite explained simply enough.
If you still have questions about what cryptocurrency is, be sure to visit Chapter One of our Crypto Basics module. And if you have questions or suggestions for other topics you’d like covered, be sure to leave them in the comments below!