Cryptocurrencies are a rapidly developing sector with thousands of competing projects (coins) and millions of people buying and selling them daily. Most of those coins you’ve probably never heard of but that’s okay since we’re going to be focusing on the most well known as our example Bitcoin.
What’s most interesting about cryptocurrencies aside from them being an appealing option for investment is that cryptocurrencies are also an emerging technology that will be seeing adoption on a global scale. This article is intended to give those with little to no knowledge of cryptocurrency a solid understanding of what a cryptocurrency is. If you’re someone who heard about crypto on T.V. or from a friend then this article is for you.
At its core a cryptocurrency is quite simply digital money. That digital money can be used to buy goods and kept as a digital asset that grows and declines in value based on the market. What makes a cryptocurrency and specifically Bitcoin different from the numbers floating in your bank account is how they’re created and issued.
A Bitcoin is created through a process called “mining” which doesn’t involve any mining in the actual sense of the word. Mining as used here is the process that a computer on the Bitcoin network goes through in order to log transactions that have occurred. To log those transactions a computer must solve a cryptographic puzzle. When a computer wins and solves that puzzle its owner is rewarded with Bitcoins. It’s important to note that each Bitcoin is unique and has its own ID that can be traced back to its creation. Thanks to cryptography every single Bitcoin can be verified as authentic and is impossible to counterfeit.
Now, because of the mining process, a Bitcoin is not issued by any country or centralized bank, and since Bitcoins are created by computers they don’t derive their backing or value from any one source like the U.S. Dollar does. Cryptocurrencies have obtained their value based on speculation and their current and future utility. Because of that utility, people are willing to trade a fiat currency like the U.S. Dollar for one Bitcoin or even a fraction of one. In other words, they’re worth $XXX because people are willing to buy them at that given price just like any other traded good.
Also before jumping further past this point, it’s possible to own 0.5 Bitcoin or a full Bitcoin or even 0.00005 Bitcoin just like having 1 penny entitles the holder to 0.01 U.S. Dollar. Bitcoin can be broken down into smaller units.
Another aspect that makes Bitcoin different from the Dollar is that Bitcoin is deflationary. The rate at which Bitcoins are mined is designed to take place at a constant rate of every 10 minutes.
At the time of this writing each block yields 12.5 Bitcoins. Because of this release model there is a point in time where there won’t be any more Bitcoin created and the rate cannot be increased or decreased. Don’t worry though that time is a long way off. There will be 21 million Bitcoins at the time of the final mining block and that is scheduled to occur around 2140. That may seem like a lot of time but the vast majority will be in circulation by the year 2033 as seen below.
In theory, the value of a Bitcoin should therefore increase over time as the currency becomes more and more scarce. This model varies vastly from currencies used today like the U.S. Dollar where the value or buying power has gone down significantly over the past several decades due to increases in the money supply.
That all sounds well and good but what am I actually “buying”? Well for a coin such as Bitcoin you would be buying another currency that can be used to buy goods and services or keep as a speculative investment. What most people in the media look at today is Bitcoin as a speculative investment or store of value (like gold) as opposed to a currency to buy things with like the Dollar. That view does not give the full picture though as more businesses are beginning to accept cryptocurrencies like Bitcoin as payment.
As a final point I’d like to compare cryptocurrencies to a stock. When an individual buys a stock they are buying ownership of that company and presumably expecting the stock’s value to increase. When someone buys a Bitcoin they may be doing so for several reasons including to use to buy other goods and also as an investment. The buying of a Bitcoin however does not entitle the user to any ownership besides the currency itself. Owning a Dollar doesn’t give the holder any ownership of the U.S. Government (not that anyone would even want that headache).
What a Bitcoin or any other cryptocurrency grants a user is access. Access to use that currency and its network to transfer the currency or any of the other options that the network has available. For many coins out there today in order to use their network or services it is required that you hold their cryptocurrency in order to use it. In a sense, owning those tokens to hold as an investment is betting on the success of that network much like investing in Coca-Cola is a bet on the success of the Coke line of products.
Cryptocurrencies are a form of digital money that are very different than the money sitting in your wallet and bank account at this moment. Those differences arise from creation, issuance, supply, and a slew of other topics that cannot be adequately digested in one article. Now that you have a solid base to start with other topics to pursue in regards to cryptocurrency include blockchain, which I refer to as the “network” in this article, how to buy and sell cryptocurrencies, how to store them, and what their advantages are compared to the money we use today.
I’ll be releasing a weekly article concerning these education topics along with my regular coin reviews. For updates on articles I’m releasing please follow me on here or on Twitter @thant1194 or on InvestFeed @thant11. Thank you for reading today’s article! I have to return some video tapes.
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