Category: Introductory

Cryptocurrencies Explained, in Plain English

Cryptocurrency
Blockchain
Cryptocurrency Explained
Cryptocurrency Types

Summary

Everything you need to know about what cryptocurrencies are, how they work, and how they're valued.

Product description

Everything you need to know about what cryptocurrencies are, how they work, and how they're valued.

Sean Williams(TMFUltraLong)Jan 2, 2018 at 8:34AM

By now you've probably heard about the cryptocurrency craze. Either a family member, friend, neighbor, doctor, Uber driver, sales associate, server, barista, or passer-by on the street, has probably told you how he or she is getting rich quick with virtual currencies like bitcoin, Ethereum, Ripple, or one of the lesser-known 1,300-plus investable cryptocurrencies.

But how much do you really know about them? Considering just how many questions I've received out of the blue from the aforementioned group of people over the last month, the answer is probably, "not a lot."

Today, we'll change that. We're going to walk through the basics of cryptocurrencies, step by step, and explain things in plain English. No crazy technical jargon here. Just sticks and stones examples of how today's cryptocurrencies work, what they're ultimately trying to accomplish, and how they're being valued.

Let's get started.

What are cryptocurrencies?

Simply put, cryptocurrencies are electronic peer-to-peer currencies. They don't physically exist. You can't pick up a bitcoin and hold it in your hand, or pull one out of your wallet. But just because you can't physically hold a bitcoin, it doesn't mean they aren't worth anything, as you've probably noticed by the rapidly rising prices of virtual currencies over the past couples of months.

How many cryptocurrencies are there?

The number is always changing, but according to CoinMarketCap.com as of Dec. 30, there were around 1,375 different virtual coins that investors could potentially buy. It's worth noting that the barrier to entry is particularly low among cryptocurrencies. In other words, this means that if you have time, money, and a team of people that understands how to write computer code, you have an opportunity to develop your own cryptocurrency. It likely means new cryptocurrencies will continue entering the space as time passes.

Why were cryptocurrencies invented?

Technically, the idea of an electronic peer-to-peer currency was being tinkered with decades ago, but it wasn't truly successful until 2008, when bitcoin was conceived. The basis of bitcoin's creation, and all virtual currencies that have since followed, was to fix a number of perceived flaws with the way money is transmitted from one party to another.

What flaws? For example, think about how long it can take for a bank to settle a cross-border payment, or how financial institutions have been reaping the rewards of fees by acting as a third-party middleman during transactions. Cryptocurrencies work around the traditional financial system through the use of blockchain technology.

IMAGE SOURCE: GETTY IMAGES.

OK, what the heck is blockchain?

Blockchain is the digital ledger where all transactions involving a virtual currency are stored. If you buy bitcoin, sell bitcoin, use your bitcoin to buy a Subway sandwich, and so on, it'll be recorded, in an encrypted fashion, in this digital ledger. The same goes for other cryptocurrencies.

Think of blockchain technology as the infrastructure that underlies virtual coins. It's the foundation of your home, while the tethered virtual coin represents all the products built on top of that foundation.

Why is blockchain a potentially better choice than the current system of transferring money?

Blockchain offers a number of potential advantages, but is designed to cure three major problems with the current money transmittance system.

First, blockchain technology is decentralized. In simple terms, this just means there isn't a data center where all transaction data is stored. Instead, data from this digital ledger is stored on hard drives and servers all over the globe. The reason this is done is twofold: 1.) it ensures that no one person or company will have central authority over a virtual currency, and 2.) it acts as a safeguard against cyberattacks, such that criminals aren't able to gain control of a cryptocurrency and exploit its holders.

Secondly, as noted, there's no middleman with blockchain technology. Since no third-party bank is needed to oversee these transactions, the thought is that transaction fees might be lower than they currently are.

Finally, transactions on blockchain networks may have the opportunity to settle considerably faster than traditional networks. Let's remember that banks have pretty rigid working hours, and they're closed at least one or two days a week. And, as noted, cross-border transactions can be held for days while funds are verified. With blockchain, this verification of transactions is always ongoing, which means the opportunity to settle transactions much more quickly, or perhaps even instantly.

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