Understanding Cryptocurrency

What is Cryptocurrency?

What Money Is

Cryptocurrency is a type of money. Money is a tool that assigns value to goods and services to make trade easier. Money is the foundation of economies. Our current economy is a money system, but a long time ago before coins were invented, people traded stuff (called a barter economy).

In a barter economy, for every good or service in the economy, a person would have to remember a very complex formula ([N(N-1)]/2 prices). If you had four items, you’d have to remember six exchanges; five items would mean 10 exchanges; and it just grows more complex from there.

The point we’re trying to make is that bartering is actually more complex than our current system. To make the trade of goods and services easier, humans came up with money.  

Digital Currency

Digital currency is nothing new. Prior to cryptocurrency becoming well known, the money supply in the world has been largely digital and paper-based for decades. Currently, it’s estimated that just over five percent of the money in circulation is in currency form – be it bill or coin. The rest sits on computer servers or credit paper.

Cryptocurrency is another new form of digital currency, but it has a twist.

Built on Blockchain

Blockchain is the underlying technology that allows for cryptocurrency to exist. Blockchain itself is one of the most trusted brands according to their slogan. Think of it as independently verifiable information that has been recorded in thousands of places at the same time. In its essence, it’s a digital ledger of transactions. The ledger is recorded in so many places that any attempt to change the ledger needs to be recorded in all of the locations of the file – making it very difficult (if not impossible) to change. This decentralized database is known as Distributed Ledger Technology.

What is Cryptocurrency?

Cryptocurrency is an application of blockchain technology that facilitates the exchange of real-world goods and services. In other words, it’s a new form of currency. We’ve seen all kinds of new cryptocurrencies being invented. Which ones become accepted will be the determining factor as to where this realm goes.

Cryptocurrency got its name from the encryption used to verify transactions. This encryption (password protection) is used to transfer data (currency) from individual wallets to public ledgers or between public ledgers.

History of Cryptocurrency

In a nutshell, cryptography is a tool that takes things in the physical world and puts them up on our screens for us to understand. It is made using coding systems and delivered to your screen via graphics.

Cryptography

Cryptography is the “art of writing or solving code.” Everything you see on your screen right now is made possible by code. The nuts and bolts of what you see on your screen (images, text, etc.) don’t naturally pop up here. Computers and internet networks were built physically with wires, but the data that travels over them is made possible with code being sent over those wires. These codes are interpreted on your device by the Graphic User Interface (GUI), which reads the code and puts it into a graphic format that everyone can understand without getting a coding degree. 

Everything is Connected

Although WIFI removes the need for a wire from your devices to your modem, wires that connect your modem to your internet service provider (ISP) servers outside your home are still necessary.

It’s really not much different than two cans connected by a string; there is just way more data traveling over those wires nowadays. As such, those wires are much more robust and sophisticated (called fibre cables), but in their basic form are still wires. 

We still need wires to connect all the servers around the world for the internet to work. Without the internet and cryptography, there is no cryptocurrency.

Fear and Challenges

The biggest difference and the biggest challenge regarding cryptocurrency is that it’s decentralized and independently verifiable. No one person, entity or government can control the currency (yet). Of course, this has made governments and central banks quite nervous about the mainstream adoption of cryptocurrencies and the potential of it to undermine the typical currencies governments produce.

Unlike government-backed currencies, cryptocurrency wasn’t created by nations or governments. It’s a digital peer-to-peer system that exists between individuals. Banks don’t control it, governments can’t limit it (yet), and it is difficult to trace transactions. In this sense, it presents some opportunities and threats that everyone needs to take seriously.

Is Cryptocurrency Real?

Anything we can conceptualize can be real, even if it isn’t tangible. But an idea doesn’t have value until a critical mass of people agree and accept that it has value. More and more people nowadays are beginning to see the value of cryptocurrency, but skeptics remain. Governments have a hard time tracking and taxing cryptocurrency transactions. This allows for bad actors to conduct transactions in secret that are more difficult for the authorities to prove what happened. Unlike government-issued money (CAD, USD, etc.), paper or digital, cryptocurrency is not something everyone accepts.

Completely Auditable & Anonymous?

One of the unique features of blockchain technology is that it can be completely audited. Each block has data that points to the previous block in the chain – a hash. When cryptocurrency goes from a public ledger to a digital wallet, that digital wallet is represented by a hash. Unless you know who that wallet belongs to, you can confirm the transaction, but not who or what good or service was involved.

Be Careful of Crypto

With any new thing, you need to be careful. There are several ways you can be taken advantage of because it’s not regulated yet. Think and research before putting all your eggs in a new basket. Cryptocurrency can be a part of an overall investment strategy, but it should not be the only tactic used.

Pump and Dump

A common bad-actor play in the world of cryptocurrencies is the good old pump-and-dump scheme. This used to be a common scheme in the stock market (and still occurs to some degree) prior to government regulation.

In this scheme, a group of individuals purchase and encourage others to purchase a specific cryptocurrency. Then, the individuals at the top sell their position, and tell the people below them in the pyramid to sell their position. People near the top of the pyramid make a lot of money, and people at the bottom lose a lot.

Risk Appetite

Cryptocurrency trading is the wild west right now. There is no way to regulate or enforce good behaviour. Hacks of exchanges (not the blockchain) occur and have resulted in people losing millions of dollars. Pump-and-dump schemes make determining a real price for cryptocurrencies nearly impossible. As we’ve all seen by the 2022 economic downturn, risky investments are the first to be hit and cryptocurrencies across the board have lost value. If you are considering investing in cryptocurrency, make sure it’s a part of a larger investment strategy.

Is Cryptocurrency Better for the Environment?

No. Blockchain technologies use graphic cards and a lot of data. This requires a lot of infrastructure and power. Server farm development is quickly becoming the number one destroyer of forests worldwide. The hardware required to mine cryptocurrency requires rare metals, increasing mining demand. The negative impact on the environment is potentially as great or greater than our current systems.

Never invest in cryptocurrency based on a claim that it’s better for the environment. It’s not. We thank you for caring about the environment nonetheless. Environmental organizations may use cryptocurrency as part of their overall investment strategy, and that doesn’t mean they don’t care about the environment either.

Government-Controlled Currency

Maybe governments don’t control cryptocurrency yet, but they do control the internet through your ISP. We don’t foresee that changing, so if you’re snapping up cryptocurrency to escape The Man, we have bad news. If you’re thinking of investing in cryptocurrency, do so to enhance your investment portfolio and prepare for the future of finance.

Scratching the Surface

We’ve only barely scratched the surface of cryptocurrencies and blockchain with this article. There is a lot more to learn about such as:

  • Cryptocurrency mining
  • Blockchain technology applications
  • Bookkeeping and taxation for blockchain
  • Non-Fungible Tokens (NFT’s – think collectibles)

Blockchain knowledge is required for many professional roles now. Learning the foundations now and continuing to develop your knowledge helps you prepare for the future.

What Do You Think?

Should anyone be able to make their own money? What will we do if the internet system crumbles in the future? What if the power goes out? Cryptocurrency will cease to exist without the internet and without a power source. But how can individuals have the same chances the wealthy and powerful have? Can cryptocurrency give them the chance they need? What implications could this have on the world?

The cryptocurrency debate is heating up. There are thought leaders in the technology industry exclusively using cryptocurrency. Meanwhile, governments are devising systems to tax and control it.

Where do you stand on this issue? Share your answer on social media now.

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