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What is cryptocurrency and why would I need it?

by | Feb 2, 2018

What is Cryptocurrency?

Cryptocurrency is a digital asset and means of exchange of value that works via a technology called the blockchain.  (For more information about blockchain technology, check out our article What is Blockchain?)  Bitcoin is the first and most popular cryptocurrency, and its development opened the door to the creation of more than one thousand other coins and tokens, many of which use their own unique platforms and apply blockchain technology in novel ways.

One of the fundamental traits of cryptocurrencies is the use of cryptography, or complex mathematical codes and algorithms, to encrypt and make every transaction secure on the blockchain. That’s why they are called CRYPTOcurrencies! The blockchain network is made up of an enormous network of users and miners, who solve these complex encryption formulas to validate transactions and add blocks of data to the blockchain.

To put that all together: a cryptocurrency is an encrypted means of transaction that is publically tracked and validated on the blockchain network.

What Makes This Technology Special?

The power of cryptocurrency and blockchain technology is that it allows for transparent, unchangeable transactions that are validated on a distributed network. These qualities have a couple of important implications. The immutable nature of the blockchain means that assets cannot be withdrawn after sending to another individual or double-spent, and the distributed method of validation means users do not need to rely on 3rd party institutions, such as a bank, to track the account ledger.

Four Reasons for the Success of Cryptocurrencies

1. Digital money

When you hear cryptocurrency, your mind probably flies straight to Bitcoin, or some digital coin used to send value from one individual to another, just like Venmo, Apple Pay, or The Cash App. The important distinction between crypto and one of those services is that they are facilitated by a 3rd party; by using them you are placing your faith in their honesty and responsible handling of your money. Blockchain technology, meanwhile, allows you to send money straight to someone else – no middleman required. Even retailers are starting to accept crypto as payment, helping them to bypass banks and work directly with their customers.

2. Investment

The code that underlies some cryptocurrencies like Bitcoin places a cap on the total number of coins that can ever be created. For example, there will only ever be 21 million Bitcoins. That limit is built into the code and there’s no way to bypass it. These coins will slowly be released to miners and nodes up until they run out, sometime around the year 2140. As with any asset, as demand increases on a finite supply of a good, the value increases. Some see this as an opportunity to invest just as you would with a stock or property, hoping that the value continues to rise. But as with any other investment, you always run the risk that the value drops and you lose the money you put in.

3. Utility and access tokens

Aside from digital currencies, utilities can also be tokenized onto the blockchain, creating an ecosystem and marketplace that allows you to access that service or network by purchasing and trading the relevant tokens. You can read more about the differences between crypto as currency or asset in our article What is the difference between coins and tokens?

Take, for example, cloud storage. In a blockchain-based system, you would buy tokens if you needed space to store files online or sell tokens to rent out storage to others. Or we can think about Ethereum. This network is fueled by Ether, which acts as a form of payment made by the users of the platform to execute smart contracts and other operations the network allows.

This application of blockchain technology in particular is poised to significantly change a whole series of industries, particularly financial institutions, by eliminating the need for intermediaries. To be able to access and use these innovative platforms, users will need to own the corresponding cryptocurrencies, and this is part of what gives them their value.

4. Decentralization

The decentralized nature of the blockchain gives users complete control of their assets and frees them from reliance on large institutions (eg. Governments and banks.) Because the currency is cryptographically secured, its value does not rely on the soundness of a government or financial institution, but rather on the community of users. The value of this characteristic becomes apparent when considering countries that have experienced crippling hyperinflation due to unstable or corrupt regimes.

A trustless and censorship-free network underlying the means of transactions and stores of value, there is no single entity in full control which could manipulate the supply, movement of, or access to money. Also, it enables even those without access to a bank, currently 30-40% of the world’s population, to be included in the economy.

As the world transitions into a more globalized and digital economy, crypto makes transactions between family members, friends, and merchants overseas cheaper, faster, and easier. With no third parties or remittances in the middle, one can send cryptocurrencies directly to any other wallet in the world, without waiting 3-5 business days or putting up with exorbitant fees.

Should You Buy Cryptocurrency?

Ultimately, the decision whether to buy crypto or not is your own, but the reasons listed above are some of the most common. With more than 1000 cryptocurrencies in existence, the market is still highly speculative, because many of the innovations are still in an infant and experimental phase. However, some currencies like Bitcoin are already being used in daily life, so the reason you might decide to buy one coin versus another will vary as well.

With increased demand, fueled at least in part by speculation, and limited supply, the total crypto market is expected to expand in the future. Bitcoin has risen in value from $900 at the start of January 2017 to over $10,000 at the beginning of 2018. The total market capitalization of all cryptocurrencies has followed a similar suit in just a year, going from $17 billion to over $700 billion. However, individual currencies will rise and fall, so do not forget that owning crypto is a risk just like any other investment, and is particularly volatile given the market’s early stage of development.

There are many factors to consider if you’re thinking about buying cryptocurrencies, along with the ones we have already discussed. Broader retail usage, media coverage, acceptance by the public will all impact the value of crypto, and the speculative nature of many blockchain projects will all impact the value of a given coin. So make sure you do your due diligence if you are thinking about jumping on board!

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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