With all the talk of Bitcoin over the last few years in the news, on blogs and on social media, more and more people are asking questions about what it is and how it works. The simple answer is that it’s what is known as a cryptocurrency, and it runs on a system known as a blockchain.
But what is a cryptocurrency? How do they work? How are they related to blockchains? Why does everyone seem to think that these things will change the world?
We know it can all be very confusing, especially when people start throwing technical jargon around all over the place. With the worldwide adoption of cryptocurrencies being compared by Forbes to that of the internet around 1994, it’s becoming more important than ever for everyone to understand what this revolutionary new technology is, how it works, and how it may very well change all of our lives.
So today, you can leave your jargon-dictionaries at home, as we break down for you what these wonderful cryptocurrency things are all about in language that should be easy for anyone to understand.
What is cryptocurrency?
A cryptocurrency is any currency that uses cryptography (the clever mathsy stuff we mentioned earlier). Ok sure, that’s not really much of an explanation, is it?
So first, let’s take a quick look at what regular, every day, government-backed currency (known as fiat currency) is all about.
If you look at the banknotes in your wallet right now, what do you see? Money? Well, sure, obviously, but what else? Look carefully, and you’ll notice it’s actually just a piece of plastic with some ink and stuff on it. Is that thin piece of plastic really worth the number written on it? Of course not. Yet you could still use a bunch of them to buy a new ute, so how does that work?
Well, it works because we all agree that it works. The notes you get from your bank don’t have any value by themselves, but rather they represent value. It’s basically not much different from giving someone an IOU.
You can give that IOU from your bank to someone else in exchange for something that has actual value, or you could go to the bank themselves and cash it in for some nice shiny gold (well, at least in principle).
Cryptocurrencies are much the same in that respect. They don’t have value by themselves, but they do represent value because the people using it mutually agree that it does. The only difference is that they do it digitally and use maths to keep them secure, rather than thin bits of plastic with holograms on them.
This is why the cryptocurrencies like Bitcoin, Litecoin and Ethereum have attracted so much attention from investors, and why even the big banks themselves are starting to dip their toes in the crypto-waters with things like Ripple (XRP). You should definitely check out this article over here if you want to know about these cryptocurrencies in more detail.
Cryptocurrencies are also unique, in that they don’t specifically need some central organisation or group to issue and oversee them like regular everyday fiat currencies do. How do they do that? Using blockchains, of course!
How are cryptocurrencies related to blockchains?
Cryptocurrencies and blockchains are like twins. They are separate things that can technically work without each other, but they were born together and you don’t often find one without the other.
Cryptocurrencies represent value, and blockchains are a means of recording the transfer of value from one person to another. To put it another way, cryptocurrencies are a specific application of blockchain technology (but they are far from the only one). If you’re interested in finding out more about how blockchain works, you should check out this article on it over here.
Pairing a cryptocurrency with a blockchain means that the cryptocurrency can operate without the need for any central group or organisation like a bank or a government getting involved. Instead, it’s a form of money that is not only used by everyday people, but it is also controlled democratically by those same everyday people. Yes, that even includes you!
As if that wasn’t enough, this lack of centralised control (which is called decentralisation) means that there’s no single point of failure for someone with malicious intent (like a hacker) to attack, which makes it inherently much more secure compared to say a bank’s servers.
All of this is to say that cryptocurrency is—objectively speaking—a straight upgrade over traditional fiat currency in pretty much every way. Even when problems are found, cryptocurrency is capable of finding and implementing solutions to those problems much faster than fiat currencies have traditionally been able to do, and they do so in ways that are for the benefit everyone. What’s not to like about that?
So there you have it.
We hope this has helped to demystify the exciting world of cryptocurrencies, and given you some insight into why over 66 million households worldwide have already hopped on the crypto-train.
If you’re interested in joining them, but don’t know where to start, MyVested is a simple to use app that takes the guesswork out of cryptocurrency. If you’d like to know more, just head over to https://www.myvested.com and have a look around.