At first, it just seemed like a fad, but cryptocurrency has stuck around. Many have stayed away from it for a variety of reasons. But, as the days go by, this virtual currency is legitimizing fast and those concerns are melting away. If crypto makes no sense to you and you don’t understand the hype behind it, this article was meant for you. It’s a simplified explanation of all things to do with blockchain; here is Cryptocurrency, A Guide for Stoners
How money is created
Back in the day, a currency used to be based on gold and silver. By the end of 1932, the gold standard was abandoned as a global monetary system. It was replaced by two forms of currency, legal tender, and fiat money.
Legal tender can be defined as any form of payment that is recognized by a government and can be used to pay a financial debt. Coins or banknotes that are accepted as currency are examples of legal tender.
Fiat money is not backed by anything physical, it’s backed by faith in the issuing government. It holds value because of public faith in that country’s currency. A government can create fiat money through a legal decree; they don’t have to mint any coins or banknotes. From there, it gets turned into legal tender by making it the standard for debt repayment.
Key Take Away – Almost all types of currency used today are created by a government or financial institution. Its value is based on the public’s trust in the stability of the issuing government’s economy. This is the exact reason why a British Pound will be worth more than a developing nation’s currency.
What is cryptocurrency?
Cryptocurrency is a digital currency, created and encrypted by computer code. It’s decentralized, meaning that it’s free from oversight from any government or financial institution. There are many different types of cryptocurrencies out there and all have a finite supply. Each one is only valuable because the people who buy it say that it is. A cryptocurrency is only worthless if there is no demand for it; the higher the demand, the higher the value of the coin.
What is the blockchain?
With cryptocurrency, every single transaction that happens, no matter how big or small, is recorded on a public ledger. Everyone has the same copy of this ledger in a peer-to-peer network and this is known as the blockchain. To hack it, you would have to change everyone’s copy, or else the algorithm would not work. Because of the technical oversight, blockchain technology is extremely secure.
What is crypto mining?
Crypto mining is done by specialized computers and it’s responsible for two things, creating cryptocurrency and verifying transactions. Each transaction has to be verified multiple times before it gets added to the blockchain ledger.
Mining – Creating Crypto
Creating cryptocurrency is called mining because just like other valuable resources, there is a finite amount of each cryptocurrency. For example, only twenty-one million bitcoins exist. Mining new coins happen when the computer either verifies a transaction or solves a puzzle. Because of the energy that both processes take, the miner is rewarded with cryptocurrency.
Benefit – Global Currency
Cryptocurrency isn’t produced by one government and you can access it on the internet. It can be exchanged for many different types of currency. Because of this, I could travel to Japan, find a Bitcoin ATM and exchange my crypto for that country’s tender. I would only pay a withdrawal transaction fee and skip some of the currency exchange fees.
Benefit – Investment Potential
Cryptocurrency is considered to be one of the riskier investments because it’s not backed by any centralized agency. However, this very factor also makes it valuable. Because most cryptocurrencies have a limited supply of coins available, it’s impossible for any financial institution or government to create more, diluting their value. As the demand for a coin increases, so does its value. Plus, with blockchain technology, the human element is removed and replaced with a computer program; ultimately reducing the margin for error.
Downside – Potential Environmental Impact
The biggest downside to cryptocurrency is the potential impact it has on the environment. Mining cryptocurrency takes a lot of energy and some coins take a lot more than others. Because of this, many countries have outlawed mining cryptocurrency. Keep in mind, we are talking about running computers. Thus, sustainable energy methods can be used when it comes to mining crypto.