Cryptocurrency has become a common word both spoken and published over the last ten years, and in recent years has become ever more prevalent. With a number of different currencies released, the growing popularity of NFTs, new purchase and trading options, and prominent public figures discussing and creating cryptocurrencies themselves, many people find themselves left with more questions than answers.
Here we are going to break down a few of the most frequently asked questions in cryptocurrency and provide you with answers that you don’t have to be in the finance or tech industry to understand.
What is Cryptocurrency?
If we want to find answers to any of our cryptocurrency questions, we must first understand what cryptocurrency is in the first place.
In its simplest definition, cryptocurrency is a digital currency that is secured by cryptography. For some these may sound like foreign words, but with a closer look, you will find them quite familiar. If we take a hint from an etymologist, we can break down the word into crypt (latin, hidden) and graphy (latin, a writing), meaning all cryptography means is “hidden writing.” If you have ever played with a cypher or codes as a kid, or even if you enjoy a game of Sudoku from time to time, you have engaged with cryptography.
So, cryptocurrency—at its core—is a currency that is protected and exchanged via cryptography. Think of it like a unique key crafted for each coin and purchase, your own personal algorithm that distinguishes your coin from someone else’s.
How Does Blockchain Work?
If you’ve heard the word ‘cryptocurrency,’ you’ve probably heard the term ‘blockchain’ thrown about. Being a key part of how cryptocurrency functions, understanding blockchain is an important part of making the dive into the world of crypto. But don’t worry, blockchain too is not as complicated an idea as it sounds.
“One key difference between a typical database and a blockchain is how the data is structured. A blockchain collects information together in groups, known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are closed and linked to the previously filled block, forming a chain of data known as the blockchain. All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.”
-Adam Hayes, Blockchain Explained. Investopedia
“Another way of understanding blockchain is like a data waterfall. Think of a cascading waterfall that stops in pools along the way. As more water flows through, more pools are created. But all the water must pass through all of the other pools to get to the last pool. As that pool fills up, another pool is created, but all the other pools will still be passed through first.” – Brett Sohns, Founder of LifeGoal Investments
This ensures a definitive record of all data and prevents any forgery, duplication, or theft.
What is a Decentralized Currency?
Part of the appeal of cryptocurrency is that it is a decentralized currency. This means that it cannot be controlled or minted by governments. Let’s step into some basic economics on how cryptocurrency functions in our global system.
“Essentially, when someone decides to mint a cryptocurrency, they create a specific number of coins of which value is determined by the demand, and the amount of coin left. Let’s take Bitcoin as our example. There is a cap of 21 Million Bitcoin, 18.74 million of which are in circulation. When those 21 Million Bitcoin have been mined, there will be nothing left to mine. This makes the value of cryptocurrency reliant on a system that is closer to trade than it is something like the US dollar. While one Bitcoin is always worth one Bitcoin, its relationship to centralized currency is far more based upon trade value, number minted, and number in circulation.” – Alex Wang, CEO of Ember Fund
While a decentralized currency may be both exciting, and frightening, it has a number of interesting benefits and uses.
There are so many currencies to choose from now, which one should I invest in?
There are now a number of cryptocurrencies in existence, and in theory, there could be an infinite number. The exciting part of a high number of cryptocurrencies comes from the diversification of value, wealth, and globalization. However, the reasons for, and differences between these currencies can be confusing.
“Many cryptocurrencies, different functionalities The underlying blockchain technology is one reason we see so many cryptocurrencies. It provides developers an opportunity to create different cryptocurrencies for different functionalities. We have those cryptocurrencies that function as currencies. They are essentially a store of value and can be used much like traditional fiat. Bitcoin and many others fall into this category.” -Fernando Gonzales Aguire, Why are there so many cryptocurrencies? Bobsguide.
“The best things to focus on when looking for which cryptocurrency to invest in are who is behind it, its history, what it is traded in (ie, does it have utility function, is it connected to certain commodities), and how many have been minted.” – Russell Lieberman, Founder, and CEO of Altan Insights
What are NFTs?
NFTs have become a topic of discussion lately, and while many know that they are in the genre of cryptocurrency, per se, exactly what they are may have missed you. So, let’s take a quick dive into NFTs.
NFT stands for Non-Fungible Token. This means it is a digital asset that cannot be replicated. The reason it cannot be replicated: Blockchain technology.
While NFTs are not exactly like Bitcoin or Ethereum, they use the same technology of cryptography to possess an individual key or signature.
The easiest way to think of NFTs is like fine art. I can go to the Louvre and see the Mona Lisa, take a photo of it, and print it out at home, but my photo is not the Mona Lisa; the only real Mona Lisa is the one in Paris.
“NFTs allow people to create artwork, music, or even digital property and use blockchain technology to ensure that there are only one, or a small number of the digital assets. This allows it to be purchased and traded in a unique function, or even linked to physical assets if the creator decides.” – Loic Claveau, CMO of TakeUs!
Down the Rabbit Hole
Yes, cryptocurrency has a lot of depth, functionalities, and pieces that can seem quite confusing at first. Hopefully, you now have a better idea of what cryptocurrency is, how it functions, and how you can participate in its growing global market.
The last thing to know about cryptocurrency is to do your research, and don’t be afraid to go down the rabbit hole of what crypto is. You may find some articles with overly complex lingo, but you may also find people who demonstrate the exciting accessibility of a cryptocurrency.
One thing is for sure, crypto is not disappearing anytime soon.