By now you have most probably heard of cryptocurrency. A family member, Doctor or friend has probably told you how they’re making loads of money with virtual currencies like bitcoin or one of the lesser-known, 1300-plus investable cryptocurrencies. How much do you really know about them, though?
The answer is most probably, not enough. This article aims to walk you through the basics of cryptocurrencies and explains things in plain English.
What Are Cryptocurrencies?
A cryptocurrency is essentially an electronic peer-to-peer currency. They don’t physically exist, but that doesn’t mean they aren’t worth anything. This is visible in their rapidly rising trading prices.
There are more than 1300 cryptocurrencies currently in circulation. It’s worth noting that the barrier to entry for cryptocurrencies is relatively small, meaning if you have the time, money and people who understand computer code, you have an opportunity to develop your own cryptocurrency.
Why Were They Invented?
Technically, versions of peer-to-peer currencies have been around for some time, but none were truly successful until 2008, when bitcoin was conceived. The basis of its’ creation was to fix a number of perceived flaws with the way normal money is transmitted from one party to another. These flaws included how long it can take to settle cross-border payments, as well as how financial institutions have been reaping the rewards of fees by acting as third-party middlemen during transactions.
What About Blockchain?
Blockchain is the digital ledger where all transactions involving virtual currency are stored. If you buy, sell or use bitcoin, it is recorded in an encrypted fashion in the blockchain ledger.
Blockchain technology is essentially the infrastructure that underlies the actual currency.
Blockchain offers a number of potential advantages, and it was designed to cure three major problems with the current money transmittance system.
Firstly, it is decentralised, which means there isn’t a datacenter where all transaction data is stored. Instead, data from a digital ledger is stored on hard drives and servers all around the world. This ensures that no one person or company has central authority over the virtual currency, and it acts as a safeguard against cyber-attacks. Transactions on blockchain networks also provide the opportunity for faster transaction times when compared to traditional methods.
How Do Virtual Coins Fit into This?
Digital currencies are what investors are buying. In almost all instances, buying a cryptocurrency won’t give an investor any ownership to underlying blockchain technology. This is one of the biggest differences between crypto and stocks. If you buy a stock by a publicly traded company, you own a fractional percentage of that business. With cryptocurrencies that is almost never the case.
The coins are required to pay for transactions fees on a blockchain. Some coins act as intermediaries to allow transactions to settle faster. Ripple, a blockchain company that focused on partnering with big banks, allows cross-border payments to be routed through their blockchain system to allow for faster transaction times. The server could take a payment in Japanese Yen, convert the payment into their cryptocurrency, XRP, and then convert those coins into British pounds at a much faster speed than could be done with traditional banking systems, and most probably at a lower cost, too.
Cryptocurrencies have the power to change our lives forever. They allow you take control of your money and your information. Some people will ignore them and hope they disappear, but more than a decade since bitcoin’s inception, it looks like joining the party is the better option right now.