Cryptocurrency, or Crypto for short, is all the talk these days. Seriously, you see so many people going crazy over the prices of crypto, how to trade crypto, asking friends if they buy bitcoin, and telling you how crypto is the next big thing. Is that true? Well, maybe! Cryptocurrency, in its most basic explanation, is a digital currency, as in it’s not banknotes or coins. Since cryptocurrency is digital, you access it through your phone or any device. So many stores and chains now actually accept crypto as a means of payment, and more and more employers, especially those using freelancers, are now paying their employees in crypto.
While all of this might sound crazy, it’s pretty much locked in that cryptocurrency will continue to grow. If you go to some countries like El Salvador, crypto is an accepted means of payment and transactions for the ENTIRE country. You can walk into any supermarket or Starbucks in El Salvador, whip out your phone, and instantly pay for your order with a click on your cryptocurrency app. Convenient? Yes. Problematic? Maaaybe.
What Exactly Is Cryptocurrency?
Okay, so we got that it’s a new kind of money and you can use it to pay for coffee, but what exactly is it and how did it come to be? Before we actually explain cryptocurrency itself, we need to go back…Way back, and explain normal money first.
Money, as we know it now, can be referred to as centralized currency or “fiat currency”. This means that the currency itself is issued by a government authority, like a bank. For example, the US dollar is issued and supervised by the US treasury. The dollar became a currency in the first place because it was accepted by the people as a means of payment, it became widespread in the U.S and in other countries, and it was given value that was maintained for years and centuries to come. So, in the simplest explanation, we added value to the dollar.
Because the dollar is governed by authorities and banks, that makes it centralized, just like any other official currency or legal tender. While you might think “Okay, that’s how it has always been, what’s the problem?” There is no problem perse, but there are some predicaments. You see, when you have centralized currency, especially these days where people mostly use debit cards, credit cards, and mobile wallets, all of these transactions need to be monitored and recorded. When you go and buy a cup of coffee and $1 is taken from your card and into the coffeeshop’s account, the transaction has to be approved. This dollar goes through the bank’s system and is then recorded.
Who does all of this? Well, banks! This is why banks exist. They help facilitate these transactions but they’re also responsible for making sure they go through with no problems. However, problems do sometimes occur and at the end of the day, these banks have to make money so your transactions help them make a profit, too.
Another problem with traditional money lies in its value. Nowadays, the value of a currency is affected by so many factors like the economy, wars, resources, and so many more. For example, in extreme economic crises in third-world countries, world leaders will sometimes decide to float their currency altogether. Floating means that the value of the currency is susceptible to extreme changes due to supply, demand, and the forex market. So, with that currency, you may be able to buy a cup of coffee for X today, but for X2 tomorrow. Countries with floating currencies include Afghanistan, Kenya, Madagascar, Ukraine, and more.
So, with these issues in mind, comes cryptocurrency. Since normal centralized currencies’ transactions are kept in bank records and authorities, cryptocurrency keeps its transactions in something far different. It’s called…The Blockchain!
What Is The Blockchain?
The Blockchain is like a public digital record for cryptocurrency transactions. While banks have their own records and systems that are private, the blockchain is public and lists all transactions openly through digital connections between the devices while using crypto. For example, if X is a client at bank Y and sends money to Z in bank S, both banks will have to connect, validate, and keep this transaction in their records. However, with blockchain technology, X can send the money directly to Z without any middlemen, and that transaction will be recorded in that public digital record where ALL transactions are kept. Obviously, in that case, the blockchain belongs to no specific authority. To keep these transactions and records secure, all cryptocurrency and blockchain technology uses cryptography, hence the name.
When Did Cryptocurrency Start?
Although some attempts at producing electronic currency like the now-bankrupt DigiCash company were in place since the 90’s, it wasn’t until Bitcoin that crypto really took off. If you’ve heard about cryptocurrency, then you have most likely heard about Bitcoin. Bitcoin was started back in 2009, by either an individual or a group named “Satoshi Nakamoto” (Nobody really knows). It was sort of like open-source, free-for-all software that later on became very popular. This was when the first blockchain also went live. Bitcoin trading was extremely cheap at first, and the more it got popular, the more its trading price skyrocketed all the way to $1. Equating a digital currency with the U.S dollar is a herculean feat, but Bitcoin did it.
To put things in perspective, if you had bought Bitcoin when it was at almost zero price back in 2009, you would have had MILLIONS today. An example of this is the Floridian Laszo Hanyecz. In 2010, Laszlo just wanted to buy a couple of pizzas. Laszo posted on the internet that he would pay 10,000 Bitcoin to anyone that would buy him pizza and one man did. Both pizzas were most likely less than $50. However, if Laszo hadn’t used those 10,000 Bitcoin and instead kept them to trade when Bitcoin was at its highest, he would have made hundreds of millions of dollars. So next time you think that paying more than $20 for a pizza is too much, just remember this.
Over the years, Bitcoin has been going up and down and up and down in price and value, making some people ridiculous amounts of money, while others missed out on their chance. Nowadays, there are thousands of digital currencies around like Ethereum, Ripple, Litecoin, Binance, Dogecoin, and more. These currencies are growing at exponential rates, but at the same time, they also crash and burn hard when they do.
What Is Cryptocurrency Trading?
Like anything you trade, crypto can be bought and sold, but there is a catch. When someone owns crypto, this crypto is stored in a digital crypto wallet (ex: Trezor, Electrum, Coinbase). Think of it like your mobile wallet that stores crypto instead of dollars, euros, or any other fiat currency. There are two main methods of trading: Buying cryptocurrency with fiat currency (Like buying crypto for x amount of dollars) or exchanging crypto for crypto. Lastly, people sell their cryptocurrency for “real” money.
There are cryptocurrency trade platforms that operate similar enough to the stock market, where you will see all the trading details and cryptocurrencies and choose whether to buy or sell, sort of like stocks. This uses CFDs, or Contracts for Difference.
What Are The Disadvantages of Cryptocurrency?
Since crypto isn’t a government-issued currency with tons of authorities backing it, you can expect that it doesn’t have all the wrinkles ironed out. This is because it’s:
1-Not Widely Accepted
Even though SOME stores and chains now accept crypto, such as Microsoft, Home Depot, Whole Foods, and Starbucks, most places don’t. Over time, it’s expected that more and more companies and even entire countries will accept crypto but that’s still up in the air. In fact, crypto is not considered legal tender in almost all countries. Only El Salvador and the Central African Republic use crypto as legal tender. Will this change? Perhaps, but it will most likely in be in countries that are struggling economically. In countries such as Nigeria, Turkey, and Vietnam, crypto is very popular.
While crypto may become a legal tender in some countries, you can’t expect the top countries such as the U.S to adopt it as a legal tender anytime soon. Dollars and euros are simply too powerful to be replaced by crypto, even if the U.S and European countries legalize its transactions and trade.
2-Illegal In Some Countries
Some countries have outright banned the use and trading of cryptocurrency altogether. To no one’s surprise, China is at the top of the list of these countries. China has some very strict rules and bans on the use of cryptocurrency. However, some believe that China is planning on having its own digital currency, which could eventually rival crypto and Bitcoin.
Other countries that have banned crypto include Egypt for religious reasons, India for protective reasons, Indonesia, Colombia, and more. On the other hand, some countries have strange butting heads ideologies with crypto, such as Russia, Iran, and Iraq.
If you ask anyone who traded crypto, they will tell you that it’s very, very risky. The value and prices of crypto go up and down every day so the investment can be catastrophic. As the market keeps changing, people can win or lose in the millions. While fiat currency’s value is affected by a ton of variables, crypto’s volatile value changes according to supply and demand. So, the more crypto there is and the fewer people want it, the lower in price it will go and vice versa. The media and word of mouth can also affect how crypto is doing.
4-Not Very Secure
As we have mentioned, the blockchain and its transactions are public. For fiat currency, banks have security measures upon security measures to make everything very private and secure. On the other hand, blockchains and crypto are more at risk. Regulation is another important variable since crypto is largely unregulated, so anyone can do whatever they want and it’s very easy to just launch a cryptocurrency.
An example of this is the meme-inspired “dogecoin”, which was literally made just as a joke and now has actual potential to be a big hit. Some countries, however, like France and Germany, are making regulations for crypto. Still, there is no international regulation that applies to all countries.
Perhaps the biggest drawback of crypto is the fact that once you make a transaction, that’s it, you can’t get it back. Of course, the second party can always send back the coins you sent, but there is no authority that can get you back the money, like a bank, for example. So, if someone accidentally sent a bunch of coins to someone else, they better hope that the recipient has a good heart and conscience.
6-Highly Fluctuating Investment
Because of all of these cons, crypto is considered a “high-risk, high-reward” investment. People tend to focus on the second part, but the first part is far more important. There are other investment options out there that are way safer and won’t keep you stressing out over numbers going up and down drastically every day.
Crypto Takeaway For Moms
To summarize, crypto is a digital currency on devices in e-wallets that are decentralized and ungoverned by official bodies or banks. Its transactions are stored in a public record called the blockchain, and these transactions are done directly without a middleman organizing or monitoring them. While its rewards can be massive, it’s a high-risk investment that has a lot of cons and general public worry against.
Overall, there is no denying that cryptocurrency is taking the world by storm and that it will not be going anywhere anytime soon. With the economic condition of the world changing so often and the attitudes towards money, currency, and transactions shifting, crypto has a massive shot at making it big. Will crypto become the next legal tender of several countries or will it crash and burn and go the way of eCash in the 90’s? Only time can tell.