What is Cryptocurrency?

Beginner Mar 11, 2021 · 4 min read

What is crypto
Key Takeaways:
— A cryptocurrency is a digital currency that is based on cryptography. Cryptography makes the cryptocurrency virtually impossible to manipulate or fake.
— Cryptocurrencies are based on a little something called blockchain technology. It is transparent, decentralized, tamper-proof and governed by people instead of institutions. 
— The difference between traditional money and crypto is that cryptocurrencies are designed to sort out some of the problems that the money system as we know it faces, from centralization to inequalities, corruption and of course inflation. 
— The essence of this technology is to give power back to the end user and provide people with financial freedom.

If you’re hearing about crypto all the time, but you’re still not totally sure what the term means – this is the article for you.

Cryptocurrency. It’s an exciting world filled with complex terms and jargon to baffle even the most tech-savvy individual. If you’ve just stepped foot into the curious world of crypto, odds are you don’t really know what on earth anyone is talking about. That’s okay, we’ve got you covered with some easy need-to-knows.

In this article, we’ll unpack some of the most important building blocks which make up the electronic economic ecosystem and help you understand what is cryptocurrency.

Building block #1: the definition of a cryptocurrency

In simple terms, a cryptocurrency is a digital currency that is based on cryptography. Crypto-what now? Cryptography is basically a computer-based method of protecting important information by using special code. Don’t worry, understanding the complex nature of the technology here isn’t super important, but the underlying implication is:

Cryptography makes the cryptocurrency virtually impossible to manipulate or fake. This means no counterfeit and no double-spending.

Building block #2: cryptocurrency as money

In short, cryptocurrencies are a new form of money. They are finance-focused and it’s why “currency” is in the title. You can store your crypto (in the same way you can save traditional money), transfer it (in the same way you can send traditional money digitally), and spend it at retailers who accept it (yep, you guessed it: in the same you can with traditional money). 

So why not just use traditional money? Why bother with crypto? Well, with cryptocurrencies there’s a special little twist (and yes, it lives in the technology) that sets them apart from the traditional currencies. 

The difference between traditional money and crypto is that cryptocurrencies are designed to sort out some of the problems that the money system as we know it faces. Wait, what problems are these now? Glad you asked! Some of the issues which need resolving include:

  • Generally speaking, banks and brokers take a chunk of payment for storing your money or for transactions you make. So when trying to save, banking can be an expensive way to store your money. Ironic isn’t it?
  • The third party involvement of a central entity (such as a bank) also means that you don’t have real ownership of your funds. But surely it’s your money, right? Well, when it’s controlled by a third party, you don’t actually have complete control of your cash.
  • Like bartering with chickens is an outdated payment system, wire transfers and credit cards are reaching their expiration date. With wire transfers, it’s difficult to send money across the globe without facing massive fees, and credit cards rely on a system of debt and interest – two things which no one likes the sound of.
  • There is a massive problem of financial inequality across the world and unfortunately, it’s only growing.
  • There are literally billions of people who are unbanked (meaning they can’t access financial services and rely on cash alone).

Building block #3: the benefits of a cryptocurrency

Okay, so now you know the basics. If you still need a little convincing that digital currencies offer a better solution for payments than traditional money, here are a couple of benefits that are unique to cryptocurrencies.

You are financially independent with crypto

This is an important one: With traditional cash, central banks pretty much control your money. It’s a bitter truth, we know. This means your funds can be frozen at any time and you can lose access to your money at the click of a button. Some countries, like India and Zimbabwe, have simply changed the way they do money and abandoned their currency or bank notes when they needed to.

Crypto diminishes money printing

If a government is faced with an economic problem and a (hold your breath) cash shortage, they can just keep printing money to bail the country out of debt. The problem with this is that it only helps temporarily. It’s kind of like putting lipstick on a pig. Trying to cover money problems with more money can make things look better, but, well, the situation is still a bit of a pig at the end of the day. 

However, on the other side of the coin, cryptocurrencies usually have a limited supply and when all coins are in circulation, there’s no way of creating more. This means the cryptocurrency won’t lose value because of an overly stuffed (cue the pig analogy) market.

With cryptocurrency, this just isn’t a problem you need to worry about. You have complete financial freedom (aren’t those words just so sweet?). The only person who can access your cryptocurrency funds is you and the only time you need to worry about it is if you lose access to your private keys, but we can help you out here.

Crypto offers payments for the unbanked

As mentioned above, there are far too many people across the world who have no access to banking systems. Cryptocurrencies offering a tidy solution to this problem: Anyone with a mobile phone can make crypto-payments. Since more people have smartphones than bank access, cryptocurrency opens up a brand new payments system to those desperately in need of it.

Building block #4: the difference between traditional currency and crypto

With traditional money, your funds are government-based and rely on banks for safeguarding. You need a connection to the bank for digital transfers or an ATM to get your money out and if there’s a problem, then you can bet your bottom dollar you’ll have a headache trying to sort it out. Essentially, the banks are the men in the middle between you and your money.

Cryptocurrencies cut out the middleman – instead of relying on a centralised bank, they rely on clever technology. Specifically, blockchain technology.

Building block #5: how cryptocurrency works

Without going to deep dive into the technology behind cryptocurrency, here’s a crash course in how cryptocurrencies work:

Cryptocurrencies are based on a little something called blockchain technology. A blockchain is essentially just a special kind of database which stores important information in little groups called “blocks”. These blocks link to each other in sequence to form a chain. (A chain of blocks = a blockchain. Crypto-devs tend to go for the simplest terms even though the tech is complicated.)

What’s important here is that each block acts as a page of a ledger or record. When someone transacts cryptocurrency, they get access to the entire ledger. It’s like a shared library where everyone has the same copy of the record book.

Hang on, but if everyone has a copy, then surely everyone gets access to my money?

Great question! But fortunately not. Since the blocks are encrypted to make a unique unsolvable puzzle, your money is safe! Everyone might have access to the ledger, but only you have access to your private keys – your own unique way to get to your cryptocurrency.

If your key remains private, which is extremely important, no one else has the opportunity to manipulate any of your transactions. Think of it like your banking pin, except far, far more secure.

And that my friends, is the magic of cryptocurrencies, giving power back to the people and providing you and I with financial freedom.

Knowledge is power – so keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Alt Coins or Different Coins on the Block

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