5 beginners’ layman facts about crypto from a cryptocurrency expert.
Still a newbie about what cryptocurrency, blockchain, or Bitcoin is? Fret not! I decided to learn the beginner's level of what cryptocurrency is all about and is it the next potential opportunity?
Before explaining the facts, I do think that it is important to understand what cryptocurrency is. Cryptocurrency is derived from the words ‘cryptography’ and ‘currency’. In other words, it is commonly known as a form of digital currency that has an encrypted string of data or hash (some kind of code that’s being stored on the blockchain) encoded to signify one unit of currency. It’s digital money created from code.
Fact #1: The backbone of a cryptocurrency is the blockchain
If you’re wondering what exactly is a blockchain, it’s a method that verifies and records any transactions that are performed over the internet by a peer-to-peer internet protocol on a decentralized system through cryptography. These are implemented by miners (refers to owners of the hardware) by using sophisticated hardware that solves an extremely complex computational math problem.
Unlike a country’s fiat currency like the US Dollar or the Singapore Dollar whereby the supply of the country’s currency available is entirely governed by the country’s government and the federal reserve to “print” the fiat currency that is being backed up by the government, cryptocurrency, on the other hand, is controlled entirely by the blockchain. In other words, there is no one governing entity that controls the blockchain except the miners. Hence, the protocols of a cryptocurrency can only be changed if every miner in the blockchain unanimously agrees to it.
Besides, the blockchain of a cryptocurrency has a public database. Meaning, everything is visible. Different crypto has different protocols for maintaining the public database. Once a transaction is added, it cannot be edited forever. It cannot be changed unless the change is made to the rest of the other blocks.
Tip: To see how the latest blocks of transactions are created, you can have a look at Blockchain.com/explorer.
2. Fact #2: It runs on a decentralized platform.
Since cryptocurrency is being built and controlled on a blockchain, authority is no longer given to only a single entity but to many different entities instead. Hence, the term decentralized.
In fact, the entire reason for the birth of cryptocurrency all started from Bitcoin (a type of cryptocurrency), the father of all cryptocurrency was created in response to the Lehman Brothers incident that sparked the 2008 global financial crisis. Long story short, many banks that were on the brink of bankruptcy were bailed out by the government by ordering the Federal Reserve to print more money (as much as they like, take the 2020 Covid crisis for example) in circulation which led to the devaluation of the dollar.
However, because Bitcoin was created to have only a fixed maximum number of Bitcoins that can be in circulation and the rate at which new Bitcoins can be produced, it was then that Bitcoin was designed to be free from manipulation and from government control. The maximum number of Bitcoin produced and the rate of production cannot go beyond the set limit because of the coding used in it’s design and the transparent nature of it on the blockchain makes it easy for verification purposes.
Fact #3: Bitcoin and blockchain are synonymous but not the same thing.
Most people get confused when they identify cryptocurrency like Bitcoin. Although it’s part true, since Bitcoin is categorized as a cryptocurrency, however, there are many other types of cryptocurrency such as Ethereum and Litecoin. Another misconception is that the majority of people identify blockchain like Bitcoin. However, they are not the same thing. A blockchain is a platform that runs on a decentralized system that can be used for different situations. As in the case of cryptocurrency, blockchain is embedded to ensure that there is no single control to the supply of digital currency being circulated or middleman involved when a transfer of funds is being made. On the other hand, blockchain could also be used as smart contracts in insurance, supply chain management, or property ownership transfer whereby it enhances the efficiency of the process and eliminates the role of the middleman.
Fact#4: Alternative coins are an advancement to the previous coin.
Altcoins (alternative coins) is a term that is used to describe all cryptocurrencies other than Bitcoin. The reason it’s being identified as an alternative is that they are alternatives to Bitcoin and traditional fiat money. So why are there many other alternative coins being created when Bitcoin is able to solve the very problems that existed during 08'? It’s because with every cryptocurrency being created, there are cons to it. For instance, Bitcoin’s used cases are limited to being considered only as a store of value and a payment method. Hence, alternative coins are usually built to ‘improve’ on the previous coin.
For example, Ethereum was created to allow developers to create their own use application which eventually led to the boom of Decentralised Finance (Defi). Defi is a term used to describe the financial applications that are built on blockchain technology which enables digital transactions between multiple parties. In layman’s terms, cryptocurrencies are used through a Defi platform where middlemen such as banks and brokers are eliminated.
Hence with a higher use case for Ethereum, it has led to the rapid growth of Ethereum. Because developers were able to create their own application with the usage of Ethereum as a mode of payment to power up their application which led to the biggest drivers of the NFT (Non-fungible token) movement. Hence, Ethereum is second to Bitcoin because of its utility use.
Fact #5: People buy crypto for various reasons
For the majority of reasons, it could be for speculation purposes. As some see it as hype to quickly get in and hope to make a quick buck on it. Others see it as a store of value like commodities such as gold and silver where the features of Bitcoin are pretty similar to gold and hence being labeled as digital gold. Or, for other reasons especially for alternative coins, believing in the growth of the developer’s project. Different developer of each cryptocurrency intends to solve a certain problem that provides a different usage for different projects. Hence, if a project seems logical to an individual looking to invest in cryptocurrency, they are likely to invest in the cryptocurrency being used for the application of the project.
Conclusion
While there seems to be logic behind the emergence of cryptocurrency or Bitcoin, its ability to be a practical used application is still questionable for me as Bitcoin has limitations to its scalability and with a decentralized system, imagine having to receive payment from a friend that takes an hour because you need all miners to verify your transfer before a transaction is completed versus an instant transfer that is made solely by the central bank that makes it instant! However, I do think that it does make sense for Bitcoin to be used as a store of value given that the law of demand and supply still exists as many institutions are slowly buying into Bitcoin. All in all, I do have a small percentage of my portfolio (5%) placed in Bitcoin but would not want to bet all on it as I still do view it as a form of speculation. Hope this gives you a better insight into what Cryptocurrency is all about!
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