The internet was buzzing about cryptocurrency last year as Bitcoin’s value boomed. Right before it dropped again. But it’s by no means dead, far from it. In fact, the event placed cryptocurrency squarely on the map and brought it to the attention of a much wider audience.
However, many people in that audience aren’t financial experts, and there are a lot of questions out there about what exactly a Bitcoin is, what it’s used for and how to get one. While there is a lot of information available, most of it is quite specialised and unless you’re thinking about getting serious with cryptocurrency, or "crypto", it’s probably not the right place to start.
If you’re just trying to figure out what digital currency is, you’ve come to the right place.
1. Cryptocurrency is digital money
When you get right down to the core, cryptocurrency is just a type of money. And in the same way that you spend “normal” money, you can also spend cryptocurrency, though in a more limited way for the moment. More on that in point 2.
The different types of crypto, like Bitcoin, Ethereum, Litecoin and so on, may have fancy and futuristic-sounding names, but they are nothing other than “normal” money’s versions of, for example, the pound or the euro or the dollar. And like these currencies, the various cryptocurrencies also have different monetary values.
But unlike “normal” money that has a physical presence in the world in the form of banknotes and coins, Bitcoin and alternatives, termed "altcoins", only exists in the digital world, hence why it’s digital money.
So even though the most well-known cryptocurrency is called Bitcoin, there aren’t any actual physical coins attached to it (no matter what some images may show you).
2. You can use cryptocurrency to buy, sell, trade and invest
Now we know that cryptocurrency is simply another type of money, it’s not difficult to figure out what you can do with it: everything you can do with other types of money!
To many, it may seem like Bitcoin, Ethereum and other digital monies are used mainly for trading and investing, something that’s used to turn a little bit of money into (hopefully) a lot of money. But people are using it for simple purchases as well, whether it’s buying or selling something online or even just paying for a coffee.
The latter is not very common as many businesses don’t accept digital currencies yet, but if more people start switching to Bitcoin or Ethereum or any of the other altcoins out there, businesses will follow suit.
3. Cryptocurrencies are borderless
Real-world money is tied to specific locations and you can only use the currency of a particular location to buy things there. Simply put, if you try to use Euros to pay for a coffee in the UK, you’ll have to deal with a disgruntled barista.
You’ll have no such issues with the likes of Bitcoin. Because it’s digital money, its only tie is to the digital world, regardless of country or area borders. This means that you would be able to use Bitcoin wherever you went or buy goods online from all over the world, as long as the business or person accepts it. The big benefit here is that you won’t have to worry about exchange rates.
And in a 2018 survey, 30% of Europeans said they could see themselves buying goods online with a digital currency.
4. Banks can’t influence cryptocurrency
We’re so used to all money going through banks, but in this case, they are left out of the equation. Besides exchange rates disappearing, there are a few other interesting aspects to a currency system without a bank.
The biggest one is perhaps there aren’t any institutions that control or manage the money supply, nor that can use inflation (a general rise in prices for goods and services) to reduce the value of digital money over a period of time.
Of course, there is a flipside: transactions can be made anonymously because cryptocurrency accounts and transactions aren’t necessarily linked to real-world identities. While a crypto account will need to be linked to an address, this address can’t be traced.
This makes it easy for criminals to cover their tracks and more difficult for banks and governments to find the perpetrators. However, this may change as the technology continues to develop.
5. Blockchain records cryptocurrency transactions
Blockchain is a public ledger that stores every transaction that ever happened with cryptocurrency. Because it’s public, everyone can see what others have done.
It’s a decentralised entity, which means that it doesn’t exist in one single location. Rather, it exists on all computers that use it and everyone who makes a transaction adds to it. Once a transaction is made, the ledger is automatically updated everywhere else, too. And once you send the money, you can’t cancel it. It becomes an unalterable record in the ledger.
This makes cryptocurrency a very efficient and secure payment method. It’s efficient because you’re not using a middle-man (a bank) to carry out the transfer. You are dealing directly with the other person or business. This is called "peer-to-peer".
It is also secure because nobody can alter transactions once made. And because every single transaction is listed, nobody can lie about how much digital money they have, nor can they spend money twice.
6. You can buy cryptocurrency at an online exchange
Even though cryptocurrency is a hot topic, there are still quite a lot of people who don’t know how or where to buy it. At the start of 2018, it was one of the most-asked, Bitcoin-related questions on Google.
It makes sense, too. If you ask people where they get “normal” money from, they’ll say their job, government benefits, parents,… There is a very clear source and you usually get it by performing some sort of duty. But how do you get Bitcoins or other types of digital money? The answer is: you have to buy it.
The most popular way is to sign up with an online exchange, which is a market place of sorts where you can buy digital currency. Beware, however, as not all online exchanges are reputable, so make sure you do your research on which one to use. Also keep in mind that certain exchanges will only have certain currencies, so if you have a specific cryptocurrency in mind, your first step will be to check if an online exchange can offer you that one.
Other than an online exchange, you can use Bitcoin ATMs to deposit money to buy Bitcoins. You’ll need to set yourself up with a Bitcoin wallet first. The wallet is a string of numbers and letters that will be linked to your amount of digital money, much like a bank account number. In the same way that you can use a regular ATM to deposit and withdraw your money, you can use Bitcoin ATMs to deposit and withdraw money. With the money that you deposit, you can buy Bitcoins.
7. You don’t have to buy one bitcoin, you can buy fractions
Depending on the current value of the digital currency you want to buy, you may or may not be able to afford one full coin. And as Bitcoin and its brethren are very volatile, that value can change quickly and significantly.
Luckily, you can buy fractions of a coin as well so the market is more accessible to a wide audience. Basically, anyone can afford cryptocurrency. If you can only buy for £5, you simply get the Bitcoin equivalent of that sum.
8. Cryptocurrency is created through mining
We all know that money comes from banks. Central Banks can print more if necessary and put it out into the world. But as mentioned previously, they don’t play a role in cryptocurrencies, so how is something like Bitcoin created and how do people create more of it?
The answer lies in what they call mining. Everyone can be a miner, theoretically, but it’s no easy feat. It’s a complex process that uses a variety of computer algorithms that run on a qualifying computer. The whole process is very complicated, but the main goal for a miner is to solve a cryptologic puzzle that will allow them to build a block that can be added to the blockchain.
Put simply: people can use their computers for some crazy calculations that will end up creating something like a page in a physical ledger. The miner who accomplishes this is granted a certain amount of newly created Bitcoins. This is the only way to create new cryptocurrency.
But don’t worry, this doesn’t mean that everyone can create an infinite supply of Bitcoin. First, the process is difficult and not something that everyone can pull off. Second, there’s a limit to how much cryptocurrency someone can own. For Bitcoin, a person can own a maximum of 21 million Bitcoins. The limit is different for other digital currencies. Some currencies, like Ethereum, currently don’t have a limit.
9. Cryptocurrency is the future (some believe)
As we are becoming a more and more global, the need for a global currency increases. Nobody wants to constantly deal with exchange rates (except people who make a lot of money trading currencies) and nobody wants to pay the bank fees that come with it.
Cryptocurrencies provide a solution as they can be used everywhere and by everyone, regardless of where they are in the world. Moreover, people are moving away from cash payments, relying more on their cards and phones not just for large purchases, but small purchases, too.
However, cryptocurrency still has a way to go before it becomes the new way of paying. Currently, the value of Bitcoin and other altcoins is very volatile and people are worried about a repeat of the crash after the dotcom bubble.
Many would argue that we are in a crypto bubble right now, or at least that a bubble is coming, meaning that cryptocurrencies are being bought and sold at a much higher value than their intrinsic or actual value.
That’s why people should be cautious when investing in digital currencies, but it’s also important to be aware that certain cryptocurrencies could come out the other end stronger.