Cryptocurrency 101

Cryptocurrencies have been hailed as the money of the future by some and denounced as a fad by others.

 

The notoriously volatile cryptocurrency market has made some investors into almost-instant millionaires and cost others enormous sums. Every day, users find new ways to use cryptocurrencies to disrupt existing markets and further their social and economic goals.

However, to many Americans cryptocurrencies largely remain a mystery. Exactly what they are, how they work and how to get started using them is often poorly explained. This perceived lack of access keeps many potential investors from harnessing the power and potential of cryptocurrencies. It also slows the adoption rates of this technology, holding the market back from its full capacity.

Fortunately, cryptocurrency does not have to be a difficult or intimidating subject. Once potential investors learn a few key facts about what cryptocurrencies are and how they work, they can be prepared to invest with confidence.

How does cryptocurrency work?

Cryptocurrencies are digital assets with inherent value. Like cash or precious metals, cryptocurrencies can be exchanged for goods and services or invested. In some cases, they can also be exchanged for fiat currencies. A fiat currency is a form of money issued by an authorized governmental body, such as dollars or euros. Like fiat currency, there are different types of cryptocurrencies such as Bitcoin and Litecoin.

Where fiat currencies have traditionally been tied to or backed by physical assets such as precious metals, cryptocurrencies generally are not. Anyone can create a cryptocurrency. Cryptocurrencies take their value from the reality that all users who buy into them value them, which automatically gives them worth. This can also result in value fluctuations of the cryptocurrency.

Although there are differences in their underlying designs, all cryptocurrencies are uniformly based on blockchain technology. Blockchain technology is a combination of cryptography (the science of encoding and decoding information), networking and accounting.

The easiest way to understand how blockchain and cryptocurrency technology work is to imagine a giant network. This network is not controlled by any central authority. It exists independently and new users may add themselves to the network at any time. On this network is a record of every digital dollar or “block” ever created, along with a record of what account the block belongs in.

When users enter the cryptocurrency market, they get at least two “keys.” The first is a public key, which is essentially equivalent to a bank account number. The network uses that number to track the money a user has accumulated. It also uses the public key as a reference for where to send money or pull money from during digital currency transactions. Users’ private keys function like passwords or personal identification numbers, allowing them to access their money from a cryptocurrency platform. To engage with their funds, users can download a variety of apps that function as digital wallets. Some cryptocurrencies can even be connected to debit cards for ease of use. Why are cryptocurrencies attractive?

Cryptocurrency users cite a wide variety of reasons for being drawn to the digital currency marketplace. Many of those reasons are directly related to a few of the following key foundational characteristics of cryptocurrencies:

 

  • Cryptocurrencies are decentralized: Cryptocurrencies are not issued by governmental authorities. This makes them uniquely immune to interference from governmental regulation or manipulation compared to their fiat counterparts.
  • Cryptocurrencies offer unmatched privacy: The network on which cryptocurrencies function keeps a record of every transaction conducted using digital currencies. However, unlike bank accounts, public keys contain no personally identifying information. This permits users to buy, sell, trade and otherwise operate in complete privacy if desired.
  • Cryptocurrencies are largely unregulated: The decentralized, non-fiat and anonymous nature of cryptocurrencies makes them extremely difficult to regulate. Unlike standard currencies, cryptocurrencies typically are not subject to taxes. Cryptocurrencies can also be transferred in any amount a little or no cost. Fiat currencies, by contrast, must be transferred using banks and other formal lending institutions, and are often subject to substantial fees, delays and governmental oversight.
  • Cryptocurrencies are versatile: Blockchain technology is revolutionizing how companies do business. The full potential of the technology is only just beginning to be explored. New applications for blockchains, and therefore cryptocurrencies, are being developed every day. Users are continuously finding new ways to apply cryptocurrency tokens that would be difficult or impossible using standard currencies.

What can cryptocurrency be used for?

Cryptocurrencies are most commonly used as a substitute or alternative to standard fiat currencies. Users can exchange cryptocurrency tokens for products or services or invest them in growth opportunities. The versatility of blockchain technology also means that cryptocurrencies can be used for a variety of other purposes. Chief among these are data storage, processing and retrieval.

For example, complex systems have been developed using cryptocurrency tokens that allow computer owners to “rent” processing power and storage space on their home systems to academic institutions and researchers in exchange for small payments. This arrangement prevents researchers from needing to invest in costly computer systems or being forced to wait long periods of time for their data to be processed by slower, smaller systems. It also allows individual computer owners to make an income on assets that would otherwise go unused.

What kinds of businesses accept cryptocurrency?

As the number of cryptocurrency users increases, more and more businesses are choosing to accept digital currencies directly. Entire online marketplaces have been established to connect businesses interested in paying for services in digital currency with self-employed professionals who prefer to be paid that way. Other online marketplaces have been set up to facilitate the buying and selling of products in cryptocurrency. Users can take advantage of interactive online maps to find out which businesses are accepting digital currencies directly in their geographical area. As of 2017, users were already spending nearly $200 million in Bitcoin alone on products and services.

As an alternative to businesses accepting cryptocurrencies directly, some companies are focusing their efforts on expanding the ways users can seamlessly convert their cryptocurrencies to other currencies mainstream sellers are already set up to accept. Cryptocurrency banks, debit cards and ATMs already exist and the availability of their services is increasing. Online apps create smooth exchange transactions for consumers shopping online with cryptocurrencies, including on purchases from some of the biggest and most well-known online retailers. As the cryptocurrency market continues to expand, so will consumers’ options for using digital currencies to easily pay for everyday expenses.

 

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