Money is confusing. Technology is even more confusing. Add those two together, and you get a perfect storm of misunderstanding called cryptocurrency.
You heard that right folks, today we’re delving into and demystifying everything surrounding cryptocurrency.
I can’t lie, I didn’t really understand what cryptocurrency was until I started doing research for this post. I’d heard of Bitcoin and knew it was some type of money, but beyond that I was clueless! What I discovered was absolutely fascinating, and helped me understand why cryptocurrency is so popular: it’s decentralized, extremely secure, and an infinite financial resource.
Before we get started, a warning: If you’re looking for a beginners guide to Bitcoin mining or a cryptocurrency investment guide, this is not it! I don’t know about you, but a 24-year old freelance writer is the last person I’d go to for financial advice. Instead, talk to a financial professional if you’re interested in investing in Bitcoin, Dogecoin, or any of the other myriad cryptocurrencies on the market.
Now that that’s out of the way, let’s get into Troomi’s beginner’s guide to cryptocurrencies.
What is cryptocurrency?
Cryptocurrency is like typical money but digital. In a nutshell, it is a form of digital currency that isn’t tied to any real-world asset, like when physical money was tied to the price of gold. This means that cryptocurrencies don’t rely on a bank or government for development and circulation. Instead, they are decentralized, meaning that authority is distributed among all users and entirely online.
While cryptocurrency isn’t tied to any real-world value, it does have a fixed way of creating new money based on predetermined rules, and a value that fluctuates depending on external circumstances. For example, only 21 million Bitcoin can ever be mined (more on mining later). In fact, crypto uses binary 1s and 0s that set each piece of crypto apart, kinda like the serial numbers you find on dollar bills. Don’t get any ideas though, you can’t just enter a bunch of 1s and 0s into your computer and earn Bitcoin!
To illustrate how wild cryptocurrency fluctuation is, when Bitcoin was started, one coin was worth $0.08. Now one coin is worth a whopping $60,000!
Cryptocurrency is used for all sorts of things: to transfer money between family and friends, for investment purposes, and even to pay bills. Many tech start-ups even use cryptocurrency to finance their businesses. Makes sense that a tech start-up would use such a high tech currency, right?
How does cryptocurrency work?
Cryptocurrency transactions are completed using cryptography and blockchains.
Cryptography is a method of disguising and revealing information online, ensuring that payment info and transactions are safe and secure. Because of this, both parties in a crypto transaction remain anonymous. You can spend, lend, or borrow money completely anonymously and securely. The transaction doesn’t include your identity, credit score, or bank information.
This security system keeps cryptocurrencies extremely secure. To hack into a crypto network, you’d need to hack into at least 51% of the system, which is practically impossible.
Cryptography is also where we get the “crypto” in cryptocurrency!
If cryptography is the security system, blockchains are the technology that power the machine.
To explain how a blockchain works, picture just that—a chain made up of little blocks. Each block in the chain holds individual transaction info. Once a transaction is completed, it is posted on a distributed ledger that verifies the viability of the transaction. This blockchain system allows you to send cryptocurrency to anyone around the world securely and without a large transaction fee. This fee is typically smaller than a check or wire transfer.
Anyone can see these transactions (minus private information), which keeps the system honest. Don’t forget this little chain, it’ll be back later.
So we know that cryptocurrency is extremely secure. Do you know what else is secure? You guessed it, Troomi! Our kid-friendly smartphones are some of the most secure devices on the market. They’re extremely easy to use, and protect your kiddos from all sorts of cyber security risks. If you’re reaching that point where your child is ready for their first phone, click here to learn more!
What is cryptocurrency mining?
When I first read about cryptocurrency mining, I pictured little digital people in mining gear descending on ropes into the depths of your computer and emerging with chunks of Bitcoin. This, of course, is not how it works.
Mining is the process of gaining more cryptocurrency by verifying transactions on a blockchain. Told you not to forget about our little digital chain! As miners verify new transactions on a blockchain, they are rewarded with a fee. This method of securing a blockchain is known as “proof of work” or POW.
Mining is quite a bit more complex than just reading over data and verifying that a certain purchase happened. To mine you need to have the ability to solve complex mathematical problems, an overwhelming amount of computer power (which may not be very good for the environment), and specialized (and expensive) computer hardware. After all, there is usually more than one miner working on each block chain segment, and only the first miner to complete the verification gets the reward.
What are the most innovative cryptocurrencies?
There are a few types of cryptocurrency, and each is innovative in its own way.
- Fiat crypto has no intrinsic value, and the worth is agreed upon by the public. Bitcoin, Litecoin, and Monero are examples of fiat currency.
- Stablecoins are cryptocurrencies that peg their value to an external reference in order to minimise the volatility of worth shifts. An example of this is Tether, which is tied to the US dollar.
- Utility tokens are used to power functions on a blockchain network. They are not necessarily currency and work more like a coupon you redeem for services on the blockchain. Due to their predetermined use they have some value. Examples are Ether, XRP, and EOS.
Now you know the basics of cryptocurrency: congratulations!
And don’t forget to keep an eye on the Troomi blog for more tech tips and tricks in the future!