Just like the internet in the 1990s, Cryptocurrency is slowly transitioning from a fun fad to something that actually looks like it has long-term potential. There are new coins cropping up almost every day, athletes are requesting to be paid in Bitcoin instead of dollars, and some countries have even recognized Bitcoin as legal tender.
Despite all of this excitement, the basic concepts of cryptocurrency can still be difficult to wrap your head around. If you haven’t gotten around to learning everything that you need to know about cryptocurrency yet, don’t worry. We went ahead and highlighted the most important facts about digital coins for you.
What is blockchain?
Before learning about cryptocurrency, it’s important to get an understanding of the underlying technology that powers it. This technology is known as the blockchain. At its simplest, blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.
You can think of it almost like a digital bank statement that is generated automatically and cannot be tampered with. This bank statement records all transactions that you or anyone else makes using cryptocurrency. This way, there is a legitimate, undeniable record of every single transaction that is made using cryptocurrency as well as how much of it you own.
Since blockchain technology is so secure, it allows people to own bitcoin and other cryptocurrencies without the fear that this digital money will just disappear, or fall prey to hackers. Additionally, unlike normal currencies that are controlled by central banks, there is no one single person in charge of the blockchain. Instead, it’s run by people who use it.
Here is how the step-by-step process of how the blockchain process works:
- A new transaction is entered.
- The transaction is transmitted to a network of peer-to-peer computers.
- These computers solve a series of equations to determine the validity of the transaction.
- Once the transaction is determined as legitimate, the information is stored in “blocks”.
- These blocks are then chained together to form a history of all transactions.
How are new coins created?
During the California Gold Rush of the 1800s, prospectors would mine the ground in search of precious metals. Bitcoin mining is the modern-day equivalent to this except instead of pickaxes, bitcoin miners use computers.
“Mining” is the process through which new cryptocurrencies are created and the mining process requires high-powered computers that solve complex equations. Through the process of solving these equations, new coins are created and the integrity of the blockchain ledger is maintained.
For their efforts, Bitcoin miners are reward with cryptocurrency (of course). This payoff makes the process very similar to mining for physical gold. Bitcoin miners are very important in making sure that all bitcoin transactions are legitimate and that users are not double-spending their coins, or spending the same coin twice.
Why is cryptocurrency different from dollars?
A very common question that people ask is: how is cryptocurrency any different from sending money online through PayPal, Venmo, Cash App, or a similar tool? This is a great question and there are a few reasons why cryptocurrency is a preferable option.
- It’s decentralized – The United States dollar is very tightly controlled by the central bank, known as the Federal Reserve. The Fed is constantly pulling levers to manipulate things such as interests rates and the total money supply. The Fed’s actions have created to a monetary system that is unstable and in constant need of fixing (the 2008 Financial Crisis, The Pandemic Panic of 2020, etc.). With bitcoin, there is no single party in charge. Instead, it’s value is determined by a natural free market.
- It’s instant – Online money transfers are the quickest method for sending money but can still take several business days to transfer. If the transfer is international then it may take over a week. On the other hand, cryptocurrency can be sent anywhere in the world instantly.
- Its supply is limited – Currencies like the U.S. dollar can be created anytime the government wants to print more. While printing more money may sound like a good thing, it actually causes that currency to lose its value (a process called inflation). Over time, currencies will slowly but surely lose their value which robs consumers of their spending power. For example, a carton of eggs used to cost 84 cents in 1980. In 2020, that same exact carton of eggs costs about $2. This won’t happen with Bitcoin because the total number of coins that can be mined is capped. Since there is a fixed supply of coins, bitcoin will never lose its value through inflation.
Different types of coins
There are potentially hundreds of coins in the world today and new ones are being created almost every day. However, there are a few coins that have become much more popular than others. In terms of market cap, here are the biggest cryptocurrencies (as of July 2021):
- Binance coin
Since almost anyone who wants to can create a new digital coin, there are likely to be plenty more popping up over the coming years. Many central banks are also considering creating digitized versions of their national currency (a digitized dollar, for example). The future of cryptocurrency is incredibly exciting and there’s a good chance that the industry looks unrecognizable 5, 10, and 20 years down the road. One thing is for certain though…this is an industry that you want to keep your eyes on!
We hope that you have found this article valuable when it comes to understanding everything that you need to know about cryptocurrency and digital coins. If you are interested in reading more, please subscribe below to get alerted of new articles as we write them!