Cryptocurrency 101— For Beginners by a Beginner — Part 2
As we defined it earlier, cryptocurrencies are virtual currencies. Unlike fiat, they do not exist physically — meaning that you will not be able to see or touch a cryptocurrency, but will be able to make transactions with them.
Cryptocurrencies vs Blockchain
What are cryptos? What are blockchains? How are they related? How are they different?
Let’s explain.
Cryptocurrencies are virtual currencies or virtual money.
Blockchain is the technology that enables cryptocurrencies to be run. Remember when we talked about Blockchain here?
Recap — A blockchain is a block of data containing records of transactions.
Just like there are different kinds of paper currency, there are different kinds of cryptocurrencies, and the most popular one is, you can guess is ….. Bitcoin.
Bitcoin runs on the bitcoin blockchain, we also have Ether, the second most popular cryptocurrency which runs on the Ethereum blockchain, as of December 2021, there were over 8000 cryptocurrencies in existence with even more to come.
Why do we need cryptocurrency?
As with the other mediums of exchange before it, the paper currency has its major flaws — it is centralized i.e, the current financial system is heavily controlled by the government and the banking system. And because these few people have so much power, they can make decisions such as freezing accounts, printing more money, setting interest rates. These are such great responsibilities, such that one bad decision can trigger a global financial crisis. In fact, it was the events of the global financial crisis of 2008, that led to the development of Bitcoin by a cool dude called Satoshi Nakamoto.
Cryptocurrencies are unique because they are decentralized. No one person or institution has control over how they are created or distributed. It is peer to peer, meaning that Person A can easily send it to Person B, without passing through a bank, and at a lesser cost of transactions.
How are Cryptocurrencies Made?
Remember in the last article, we talked about Mining — that it is the process of validating the records or transactions on the blockchain ledgers. This process is carried out by people using supercomputers to solve complex mathematical jazz. When the mining process is complete, and a block of data is checked, validated, hashed and successfully added to the blockchain, the miner or the person with the computer who successfully hashed the block is rewarded with about 6.25 Bitcoins. This is how new Bitcoin units are mined or created, after which a new block is created. Each new block begins with an entry of the Bitcoins paid to a miner.
Safety and Cryptocurrencies
They are called cryptocurrencies because they are secured by a process called cryptography. Do you recall the meaning of a Hash from our previous post on Blockchain?
ICYMI, a hash is a unique identifier that is given to a block after the records in the block have been verified.
Across the blockchain, each block has its own hash or unique identifier, as well as the hash of the block before it. This means that if somebody tries to alter the record of a transaction after it has been mined, that alteration will change the current hash of the block itself and that of the following blocks, making them all invalid.
In a situation whereby a person tries to steal some Bitcoin from the blockchain, that person will have the task of re-mining the block that holds the record of the transactions. For it to be a successful, untraceable heist, not only will the person do that for one block, but also for the millions of other blocks that are linked to each other. That person will also have to do this across the other ledgers hosted on millions of computers across the globe. This speaks to the security offered by a system of encryption and decentralization such as the blockchain.
The concept of cryptocurrency has many appeals
- It is decentralized
- It removes the need for banks, all you need is access to the internet
- Transactions are almost instant because why wait for 3–5 business days to receive a payment?
- They are not influenced by transaction and interest rates
Cryptocurrencies are not all glitters and gold. They also have their own flaws, the most notable of them being that they are very volatile. One moment, the value of a cryptocurrency may be grazing the surface of the moon, and in another moment, it is dipping deep into the depths of sadness (pardon my terrible poetry), but there are some crypto coins that can address the problem of volatility. They are called stable coins e.g the USDT, USDC. Also, cryptocurrencies are yet to be globally accepted as a medium of transaction with some countries actually banning the trade of cryptos.
There are also some concerns about energy consumption and the use of cryptos for criminal activities.
Investing in Cryptocurrencies
The reason you probably know about cryptocurrencies is that you know people who are either celebrating the increase in value of cryptos or mourning the loss of money with the dip. This is because people currently invest in cryptocurrencies by buying and holding them in anticipation of an increase in value. When that happens, they sell off some units for a profit. This is not financial advice by any means, but if you are interested in investing in cryptos, be sure to do your research and to learn about the intrinsic properties of the cryptocurrency to invest in.
If you are interested in more resources, here are some that I find incredibly useful
