With cryptocurrency hype trending upwards with no signs of slowing, a lot more interest is being generated by the sheer amount of wealth being funneled in and out of it.
There is a ridiculous amount of money being generated each and every day but yet most people wouldn’t be able to tell me what is cryptocurrency.
To most, I suppose it feels overwhelmingly technical and difficult to understand, and therefore interest dies out.
So what exactly is cryptocurrency? How does it work? What does it do better than normal currency? Let’s get right into the topic and start answering some of the difficult questions as simply as we can.
What is Cryptocurrency?
Cryptocurrency is a medium of exchange that is purely digital in nature, encrypted, and decentralized.
More simply put, it is a new system of exchanging value for goods that in contrast to the U.S. dollar or Euro, is not managed by any one government or corporate authority such as a central bank.
The idea of decentralization means this digital currency system’s verification and security falls broadly across the cryptocurrency’s users.
“Bitcoin: A peer-to-peer electronic cash system,” was the first paper (known as a white paper) published on the subject by Bitcoin’s anonymous creator, Satoshi Nakamoto, back in 2008, which covered topics such as decentralization and blockchain.
Satoshi described his work as a currency system based on proof rather than trust. This cryptographic proof he mentions is known as a blockchain.
What is a Blockchain?
Blockchain is the real meat behind why cryptocurrency works and why it's gaining popularity. In the simplest terms, a blockchain is a sort of database.
So let’s get into a lot more detail and see what exactly a database is. A database is a collection of information, stored digitally, on a computer system.
Typically information is stored in rows in columns using table formats to make processing data more efficient. Most importantly information in a database can be accessed and modified from multiple locations simultaneously.
Typical databases are running on massive supercomputers and owned by large companies that have total control over said database.
Databases are similar to currencies such as the U.S. dollar or Euro because they have a central location where data can be controlled by one entity, usually a reserve or central bank.
Blockchain is a type of database that collects and structures its information in “groups” called “blocks” that hold sets of data.
“Blocks” have a certain storage limit, and when that limit is hit the block gets chained to the previously filled block, forming what is known as a “blockchain”.
Any new information coming in now fills an entirely new block that, when filled, also gets chained to a previous block.
Structuring data this way also means that there is a set timeline of events that can be traced back. If each action is chained to the previous block preceding it, then we are left with an immutable timeline of events.
This leads me to the other point where blockchain greatly differs from a database. A database is run by a large set of computers working together in a database.
All these computers are stored in one central location, usually a basement of some large company headquarters or a server farm.
Blockchain on the other hand also requires hundreds or thousands of computers to run the database, but those computers or groups of computers that hold blockchain on them are scattered across the globe geographically and are operated by separate individuals.
These groups of computers that create the blockchain network are called “nodes.” These nodes all have their own copy and a full record of all the data stored on the blockchain since its inception.
Blockchain is not unique to cryptocurrency but for crypto’s sake, Bitcoin as the easiest example, all the data would consist of all the transactions ever made.
This is where it gets interesting. Let’s say there is a discrepancy between one node and the other thousands of nodes in the network.
It can use the other thousands of nodes and the information on them to correct itself and in this way can prevent any one computer from altering information on the network.
With the information on the blockchain being stored in thousands of computers scattered all around the planet with thousands of unique users constantly cross-checking information, the information stored on this blockchain becomes impossible to tamper with, creating a very safe, and secure basis for creating a currency.
There is far more explaining to do but coming back to our topic at hand after that lengthy explanation, cryptocurrencies are a natural development off of the idea of blockchain.
Blockchains aren’t only used in a currency format and can hold other information as well.
That being said, cryptocurrency is the word on the street lately and the most popular utilization of a blockchain so far.
So far, more than 6000 different currencies are being traded publicly. That’s an awful lot more currency than there are fiat currencies in the world, how do you make sense of that? How can we begin to separate what we are looking for?
Let’s begin by measuring our currencies by a very popular metric - market capitalization. For the uninitiated, the “market cap” of a company or a cryptocurrency in this case is the total number of outstanding shares multiplied by the current market price of said shares.
For reference, The total market cap of the gold market is around $11 trillion dollars, Tesla Inc. at around $650 billion dollars, etc. We’re going to use this metric to spot some of the most popularly traded cryptocurrencies on the market:
Bitcoin - $1.1 Trillion
The king of all that is crypto. Bitcoin stands above all other coins on the market. It has become the new “gold” of the internet and much like gold in the past, has secured itself as the new storage of wealth.
This is mostly because of its status as the first and thus oldest cryptocurrency, which means it has longevity working in its favor, amongst other factors.
Think of Bitcoin as the top dog of cryptocurrencies. Does it do everything the best? No, not really, but it is the current standard to measure against.
Ethereum - $240 Billion
Ethereum is the closest competitor to Bitcoin, in market capitalization as well as viability and usability. Ethereum has its own open-source software platform and allows for companies to create tokens using the ERC-20 token as a basis.
This means many companies can utilize Ethereum to create a unique token system for their specific needs. Currently, over 200,000 ERC-20 compatible tokens exist.
Polkadot - $41 Billion
Polkadot is a new generation blockchain designed in direct competition with Ethereum. Using a nominated proof of stake mechanism allows for two types of network actors, validators and nominators, to secure a network.
More simply put, Polkadot is attempting a different blockchain system that will allow for a larger amount of transactions to occur simultaneously.
Cardano - $38 Billion
Cardano is a smart contract blockchain much like Polkadot and Ethereum looking to compete with Bitcoin.
They have developed a proof of stake blockchain protocol that is 4 million times more energy-efficient than Bitcoin.
Their claim would mean they found a way to do what Bitcoin does using the energy of a household in comparison to bitcoin using the energy of an entire small country.
Ripple - $29 Billion
In contrast to Bitcoin, Ripple (more commonly known as XRP), was directly designed as a way to perform fast and cheap cryptocurrency transactions.
It gained a lot of traction in early 2017 during the previous crypto boom but has recently found itself in some hot water with the SEC (Securities and Exchange Commission).
Some very interesting information and knowledge that will shake up the cryptocurrency markets is sure to come out of the trial between Ripple and the SEC.
Now that we know some of the more popular Cryptocurrencies being traded on the market right now, let’s take a look at some reasons why they might be so popular and if they seem like a reasonable investment.
- Firstly, many people speculate that cryptocurrencies will become the currency of the future and are banking on the value going up drastically over time as we are currently in the very early stages of cryptocurrency adoption. People buying and holding means they believed the price is currently undervalued and implies the general consensus is that cryptos will be worth a lot more in the future.
- Secondly, the removal of a central authority with the governance of the currency is gone. Decentralized currencies are very appealing to some due to central agencies keeping their hands out of inflation rates and trying to control the value of said currency.
- Thirdly, volatility generates profit. Cryptocurrencies are currently the most volatile tradeable asset right now. Some of the smaller market cap coins have been known to move hundreds of percentages a day. That’s some serious profit to be made, albeit with valid concerns.
Investing in Crypto
There are plenty more reasons that I can list as to why cryptocurrency is becoming more and more popular, but the question on everyone’s mind is whether cryptocurrency is a good or worthwhile investment.
There are plenty of people that will tell you to, "go for it!" while others will say, "you're too late!" Others claim doomsday is around the corner and the market will crash any day. The truth is, it's still very early to tell.
I have always seen cryptocurrency as having potential because they do solve a problem and they do it quite well.
However, to recommend as an investment is risky business. As I mentioned, crypto is extremely volatile and subject to drastic changes in price. As with the potential for great gains, there is potential for great loss.
I will always say that if one is not prepared to lose the money they invest, it is not money they can afford to fool around with in the first place.
I have a firm belief in crypto solving the issues surrounding our economic systems and I believe there will always be a place for it, but ultimately I can not recommend it as a safe way to invest money.
Always do your research and invest to the best of your ability, learn from mistakes and don’t take failure too harshly. At the end of the day, investing is tough and shouldn't be looked at as a game.