While understanding the basics of crypto is something that goes over the heads of many of us, the good news is that it’s not as complex as you might think.
In a nutshell, cryptocurrencies – also known as virtual currencies or digital currencies – are a form of electronic money. Often shortened to crypto, this new world form of currency is traded in the form of a unit, such as a bitcoin or ether, and is more or less a digital token. These tokens are created from code using an encrypted string of data blocks, known as a blockchain.
Confused? You’re not alone. In an increasingly digital age, it shouldn’t come as much of a surprise that someone finally thought of a way to digitise money beyond an online bank account, debit or credit card, but that doesn’t mean that we’re at a point where it’s used on an everyday basis – yet. In order to break the concept of crypto down in even simpler terms, understanding the origins of cryptocurrencies and how they work is paramount.
While Bitcoin is a form of cryptocurrency, it actually came before the broader term was even invented. Dubbed an “a peer-to-peer electronic cash system”, Bitcoin was the first form of crypto style digital currency, and came roaring to life in January 2009. The concept was originally set out in a whitepaper by the pseudonymous Satoshi Nakamoto, whose real identity still remains a mystery even today.
As a decentralised digital currency without a central bank or single administrator, transactions are verified by network nodes through cryptography, and recorded in a publicly distributed ledger known as a blockchain. As all of the computers running the blockchain have the same list of blocks and transactions, and in turn can transparently see these new blocks being filled with new bitcoin transactions – it’s not possible for anyone to ever cheat the system.
In simple terms, a blockchain collects information and data in groups, also known as blocks. As new data comes in, it is entered into a fresh block. Once the block is filled with data, it is chained onto the previous block, which makes the data chained together in chronological order.
While many different types of information can be stored on a blockchain, the most common use so far has been as a ledger for transactions. It’s for this reason that the very phrase is most commonly linked to cryptocurrencies such as Bitcoin and Ethereum. Blockchain is used in a decentralised manner, so that no single person or group has control, and instead – all users collectively retain control. Decentralised blockchains are immutable, or that the data and information entered is irreversible. Arguably, this is a major part of the appeal linked to all types of crypto.
As the first form of crypto, it’s safe to say that Bitcoin has had a very volatile trading history. The cryptocurrency’s first price increase occurred in 2010, when the value of a single Bitcoin jumped from around $0.0008 to $0.08. It has undergone several rallies and crashes since then, which often includes daily double-digit inclines and declines. In spite of all this, there are periods when the cryptocurrency’s price changes have outpaced even their usually volatile swings, resulting in massive price bubbles. Arguably, it’s these potentially huge payoffs that have seen a spike in crypto interest around the world.
Cryptocurrencies hold no physical form, are not issued or backed by any banks or governments, nor are individual cryptocurrencies valuable as a commodity. Despite it not being legal tender, Bitcoin in particular has managed to take the world by storm, and in turn triggered the launch of hundreds of other cryptocurrencies, collectively referred to as altcoins.
To buy cryptocurrency, you need to buy and sell via an exchange. This means you need to create an exchange account and store the cryptocurrency in your digital ‘wallet’. If you simply want to trade cryptocurrency you just need a brokerage account, rather than accessing the underlying exchange directly.
Supporters see cryptocurrencies such as Bitcoin as the future, and are racing to buy them now, presumably before they become more valuable. At its latest peak, Bitcoin was changing hands at $41,528 on Jan 8, 2021. However, just three short days later, it was back at $30,525.39. Today, there are now over 13,000 known cryptocurrencies trading publicly, so it’s safe to say that what was once dubbed a ‘fad’ isn’t disappearing anytime soon.
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