The views and opinions expressed in this article are those of the author and do not necessarily reflect the official opinions, policies, or positions of StreetShares or any of its affiliates.
Cryptocurrency. It’s buzzworthy and always trending. Your college roommate’s cousin’s friend’s barista invested in cryptocurrency and now he’s a millionaire. It’s everywhere and it seems that everyone has an opinion on it. Is it the future of banking and finance or just another passing trend?
Regardless, it’s hard to have an opinion on cryptocurrency if you don’t understand it. Cryptocurrency and the innovative technology behind it seem complicated, but this short guide will introduce you to cryptocurrency in plain and simple English.
What is Cryptocurrency?
In the simplest terms, cryptocurrency is a type of digital asset, but more specifically, it’s digital currency. For example, think about how there are hundreds of types of fiat currencies (government-backed, legal tender) such as the Dollar, Pound, Euro, or Yen. There are also hundreds of different types of cryptocurrencies as well. You’ve probably heard of some of the popular ones such as Bitcoin, Ethereum, Coinye, or Ripple.
Cryptocurrencies use distributed ledger technology (DLT) to create a peer to peer transaction system instead of using a third party like a bank or government, like with traditional currency. Most cryptocurrencies use a DLT that is built with blockchain technology. Which brings us to…
Also see: Take the Road Less Traveled: 8 Awesome Reasons to Start Alternative Investing Today
What is Blockchain Technology?
A lot of people talk about blockchain technology and cryptocurrency as if they’re interchangeable. Although they’re not interchangeable terms, they are related. A blockchain is a technology or platform that allows cryptocurrency as we know it to exist.
You can think of a blockchain as a giant Excel sheet. This database stores data in cells, or “blocks”. Each block holds information and data, and after it is verified, it is linked by a cryptographic code to the next block, forming a chain. These chains of transactions are permanently recorded in a public database that is distributed over an entire network of computers, not in just one central location.
Although blockchain technology was developed in order to support cryptocurrency, specifically Bitcoin, the technology also has plenty of other uses aside from hosting digital currency such as data back-up, supply-chain monitoring, and even copyright protection.
What Can You Do with Cryptocurrency?
You can use cryptocurrency as payment for goods and services, just as long as the seller will accept it. You can use them to buy goods or services from private individuals, shops, and restaurants, but many major retailers are beginning to accept some forms of cryptocurrency as well. You’ve probably heard of Bitcoin, one of the oldest and most popular forms of cryptocurrency. Retailers like Overstock, Expedia, and even Microsoft already accept Bitcoin.
Cryptocurrencies are also gaining popularity as many people are using them as investments. Although the stories of overnight millionaires are enough to get anyone’s attention, it’s worth noting that cryptocurrencies are still high-risk investments. The cryptocurrency market is young and exciting but that also means their market value fluctuates like crazy.
Aside from buying, trading, and selling cryptocurrencies, you can also “mine” them. Mining is an essential part to of the cryptocurrency network and blockchain technology. Simply put, miners are basically providing a bookkeeping service for the different types of cryptocurrency transactions. Since there is no central bank or third party, miners work to gather transactions into a finished block. When a miner finishes a block of a specific cryptocurrency, they are rewarded with a small amount of that currency.
Read more by Christine Maxwell: Impact Investing: How to Make Your Dollar Do More
Where Can I Store My Cryptocurrency?
Although you can’t hold cryptocurrency in your hand, you still need a place to store it. A cryptocurrency wallet can exist in many forms via software, hardware, or cloud technology. Whatever type of wallet you choose to use, it still serves the purpose to store public and private keys that will eventually interact with blockchain technology. Cryptocurrency wallets allow users to store, transmit, and check the balances of their cryptocurrencies.
Basic Elements of Cryptocurrency
Cryptocurrencies come in different forms, but most of them share many of the same elements. We’ll round out this intro to cryptocurrency with a list of common cryptocurrency characteristics.
Cryptocurrency doesn’t rely on banks, private institutions, or even the government. People all around the world can use cryptocurrency to buy goods or send or receive money without having to worry about exchange rates, borders, or limits.
Cryptocurrencies are not a physical currency you can hold in your hand. Everything that happens with cryptocurrencies is electronic.
All transactions are recorded in the public ledger aka the blockchain. However, there aren’t any rules about who can use or not use cryptocurrency. To make cryptocurrency transactions you don’t need to provide identification, a social security number, or be a citizen of a specific country.
No take backs! Once you send or receive cryptocurrency and the network confirms the transaction, it’s permanent.
Peer to Peer
There is no third party in cryptocurrency. The entire
network is peer to peer. Users send and receive their cryptocurrency without using a third party like a bank, all thanks to blockchain technology.
Cryptocurrencies don’t exist on a single or centralized system. Instead, they are hosted by a public network of computers making them decentralized. Think of the difference between sending a file that needs to be edited via email versus editing that same document on a cloud like Google Drive, so that everyone can have access to the same version of the document.
The “crypto” in cryptocurrency means hidden. The hidden information within a blockchain is encrypted. Although the public can see all the encrypted data, only the owner can decrypt their cryptocurrencies, keeping them safe.
Want more great financial content like this, delivered straight to your inbox? Subscribe to the StreetShares blog!
This communication is provided for informational purposes only. It is not intended to be an advertisement, a solicitation, or constitute professional advice, including legal, financial, or tax advice, nor is StreetShares providing advice on any particular situation.