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Cryptocurrencies are the evolution of money in a secure and digital form just as email has become for pen and paper.
Heard of Crypto before?
If you haven’t been living under a rock you will have heard of the advent of cryptocurrencies.
Some might have invested in them directly, others will have heard of them through a friend or on news headlines for their volatile nature and intermittent supersonic growth followed by colossal market crashes. Many skeptics have often labeled it magic money for the speed at which they appear and disappear!
Most probably you will have come across Bitcoin, the largest by market value, or you might have come across other cryptocurrencies such as Ethereum, Litecoin, Binance Coin, Dogecoin and many others.
Sounds familiar right?
Let’s dive in.
Cryptocurrency definition
Investopedia defines a cryptocurrency as “a digital or virtual currency secured by cryptography and based on a network that is distributed across a large number of computers”.
Wait, don’t we have digital money already?
In the modern days, the Internet has digitalised our relationship with money and currencies in many ways. Piggy banks, and the time of stacks of coins and paper money have largely (though hot entirely) been replaced by a digital representation of the same underlying money type, fiat money. We are now becoming increasingly accustomed to use internet banking, digital payments (eg. Paypal, Apple Pay and so on), and mobile apps to run our financial affairs.
However, we should keep in mind that this “digital money” is simply a digital representation of the actual instrument (eg. FIAT currency) it is linked to. There is no “innovation” in the money layer per se which continues to be entirely linked to the trustworthiness of the central authority that confers its value to it, be it Central Bank, Government or other.
Should a government and central go bankrupt and into default (has happened time and time before, hence likely to happen again!) then all the money in that given economy will become worthless irrespective as to whether you’ll be left holding a stack of paper bills or any given amount in “digital” form.
So what is Crypto then?
Cryptocurrencies or “crypto” – as they are most commonly called – are decentralised money used over the internet. The key terms to keep in mind here are crypto and decentralised so we’ll briefly describe those components:
- The first part, “crypto”, refers to a secure (or encrypted, hence the word) way of transferring value leveraging encryption technology that has already been widely used for other purposes including telegrams sent during wartime.
- The latter, “decentralized”, alludes to the design of such forms of money to be issued outside of the realms of central governments and the traditional banking system.
Put simply, cryptocurrencies allow for value to be stored or even transferred from one person to another (peer to peer) without the need for financial intermediaries.
This is enabled through blockchain technology that is cryptographically secured and transferred. No need to get into technical details for now. We cover blockchains, cryptography and security features of cryptocurrencies in separate articles.
Peer-to-peer transfers of value
Just like the internet has made it possible for us to exchange information from one person to another anywhere in the world at a click of a button, the same is now possible with cryptocurrencies.
We are now able to securely transfer economic value around the world without the need for layers of financial institutions in between. No need for central authorities, no need for Governments to confer value or legal tender status to such currencies. With less “friction” between the sender and receiver, the result is a faster, cheaper and superior user experience that allows peer-to-peer transfers of value at a click of a finger.
Hallelujah! No more delays, no more rejections, no more excessive fees. This is a giant step forward for individuals and businesses who can now benefit from transferring money from one corner of the world to the other with no more intermediaries, and more value retained for themselves and the ultimate beneficiaries. Just think of how many millions of migrant workers can benefit from this technological advance without seeing the value of their hard earned money handed into the hands of financial remittance businesses!
Cryptos operate on decentralised “open” ledgers called blockchains
Again, without getting bogged down into too much technical detail one of the main differences between traditional currencies (eg. USD, GBP, EUR and so on) and a cryptocurrency is that whereas the accounting, record keeping and hence control of balances occurs within the proprietary systems and ledgers of banking institutions, in the cryptocurrency space all balances and transactions are recorded on a distributed, public ledger called a blockchain.
What this means is that internal ledgers and proprietary systems of financial institutions, for as pristine, professional and audit proof as may be portrayed to be to the outside world, are subject to internal errors and manipulation. Sadly, it is no secret and painfully regular to read news headlines highlighting how financial incentives for private gains and shareholder benefit often drive manipulation of data and fraudulent activity.
Open source, public blockchains – and in particular – the Bitcoin blockchain have been designed to put an end to such activity and allow the entire world, or anyone caring to look within it as to how each and every transaction has been recorded and accounted for with the consensus of all nodes of it network. We’ll get into more about the specifics of the Bitcoin blockchain and consensus mechanisms in a separate article.
Secure and pseudonymous
While still in their infancy, cryptocurrencies are becoming increasingly popular as a way of storing and transferring value. Moreover, by offering a secure and pseudonymous (i.e. not using names or account details, simply blockchain addresses) way to make payments they are increasingly becoming more widely accepted by businesses and merchants as are gradually being accepted and legitimised by governments around the world.
So now that you have a basic understanding of what cryptocurrencies are, why not explore one of the following articles breaking down:
- the key factors and characteristics underpinning cryptos (click here)
- Some of the main types of cryptos around (click here)
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