What is There to Know About Cryptocurrency?

Here you are. Reading about cryptocurrency.

Who would’ve thought?

Maybe this isn’t your first time inquiring about crypto. This stuff can be annoyingly difficult to understand and follow. I’ll try my best to break down some of the basics about cryptocurrency, its purposes, and its functions. Also on why it keeps going up in value and so on.

Where to start…

In today’s world, there are different types of currencies. You have government-printed money otherwise known as fiat currency. There are commodity currencies and there are cryptocurrencies. All the above fluctuate according to market prices in an interdependent system more complex than you can even begin to imagine.

I’ll begin by explaining fiat currencies. This includes the Canadian Dollar, US Dollar, European Euro, Japanese Yen, and all other currencies produced by governments around the world. The thing about fiat currencies is they aren’t backed by any physical commodity (gold or silver). In theory, they retain value because we all agree that it is valuable. We are demanded to pay taxes in our country’s currency which in turn gives it credibility. Fiat currencies are extremely flexible, they give governments the power to meet the demand for their respective currency in a circulating global market where exchanges are constant.

That’s a lot of fancy economics for saying that fiat currencies are centralized assets controlled and largely influenced by governments through monetary policy.

So what are commodities? These are typically very stable physical investments that usually retain their value over time. Government currencies used to be backed by commodities (commodity currency) like gold and silver. Demands for currency got so high that the standard was ditched for flexibility.

So where does crypto fit in all of this?

In theory, cryptocurrency, or more specifically Bitcoin, is believed to have been invented by an extremely smart group of individuals that tried to solve the problems of a centralized economy. Cryptocurrency is decentralized to give power to its users, in this free exchange environment where all transactions are public and visible.

For every exchange, a small fee called a gas fee is paid for every transaction to miners responsible for verifying purchases on the blockchain. I probably confused you with all those terms so let me break down the definition of each.

What is a crypto miner?

A miner is someone who owns lots of computers. Supercomputers even. They create new coins of a cryptocurrency by solving complicated algorithms on the blockchain. They can also help verify and run transactions through the network so that money, services, cryptos are exchanged. Miners require a lot of energy to run, so when you hear about cryptocurrencies requiring a lot of power to function, this is where that energy is used.

What is blockchain technology?

This is what’s revolutionary about cryptocurrencies. They operate through the solving of puzzles on the blockchain all embedded in code. These “blocks” are very complex and coded algorithms solved by miners and become much harder to solve over time.

For example, a bitcoin becomes harder and harder to mine over time, making it more valuable because the demand is higher, but the supply is limited. Approximately every 4 years, bitcoin becomes twice as difficult to mine.

This makes it highly resistant to inflation because it rises in value quite dramatically over time. This is also why it went from being valued at nothing at the time of creation to approximately $50,000 CAD today and why it will only keep going up in value in the long run.

There are estimations for dates when the last bitcoin will be mined (at 21 million bitcoin) and many wild predictions as to what will happen to the crypto market then.

As far as I know, only time will tell.

What else makes cryptocurrencies attractive?

Remember when I said crypto transactions are public? This would mean that in principle you would be able to track exactly where your tax dollars are spent. Corruption would be public and not behind closed doors.

Despite what you might hear about crypto scams, owning cryptocurrency is more or less safe if you take the time to learn to navigate the space. Something important to know is that there are two types of wallets when it comes to storing your crypto.

There are cold wallets and hot wallets.

Cold wallets are essentially uncrackable (except hardware wallets) and are basically spots where your assets are stored when you are offline. To access this wallet all you usually need is your seed phrase. This seed phrase is stored on paper or on video somewhere accessible but private. The other type of cold wallet is a hardware wallet where your crypto is stored on something like a ledger where you would need a pin to access it.

When you hear about supposed crypto millionaires forgetting their “crypto passwords” from years ago, they have lost access to their seed phrase and therefore can’t access their funds.

Up next is the hot wallet where your crypto is stored on some third-party platform that is actively storing your wallet information for investment purposes or simply just for ease of access. Basically, you are relying on their security systems to keep your funds protected. Since their reputation depends on their security, they’re usually pretty reliable.

So what now?

Well, now you know the basics. It’s time to do your own homework and keep an eye out. If you find there is something missing in my explanations feel free to reach out on my instagram. Look out for my next story on NFTs and why they are the future for artists and businesses.