A brief intro to cryptocurrency
24 Feb 2021
Have you heard terms like “cryptocurrency” and “Bitcoin” floating around more and more of late? You’re not alone. If you’re wondering what they are and what they mean, read on for a basic introduction.
However, before reading, bear in mind the following: cryptocurrency is an emerging area of finance based on incredibly complex computer technology.
Understanding the systems on which it’s based, and how it works at a technical level, is well beyond the scope of an introductory article. To truly grasp it, you’d probably need to be an expert in cryptography. So, we won’t be talking much about the technical side of cryptocurrency.
We’re not even going to talk about the investment side of cryptocurrency, even though that is, far and away, the area where most cryptocurrency enthusiasts are focusing their time.
For this article, we’re simply going to explain cryptocurrency as a concept, and even as a philosophy. That’s the best place to begin.
What is cryptocurrency?
At its most basic level, a cryptocurrency is a new type of digital money.
Now, your first response to that might be: hey, I can transfer my regular old Aussie dollars digitally. Is that not the same thing?
Well, not quite.
What sets cryptocurrency apart from regular money is the technology on which it is based.
Your “regular old Aussie dollars” are reserved in banks. To access that money, you need an ATM or an online banking account so that you can get more of it or transfer it to others. In most cases, a bunch of “middlemen” like banks and brokers take a cut in the process.
With cryptocurrency, the idea is to get rid of those middlemen altogether.
The original and most famous example of a cryptocurrency is Bitcoin. However, there are, at time of writing, literally thousands of other cryptocurrencies out there, all competing for investors’ dollars and a small slice of the ever-growing pie.
Most of these, including Bitcoin, rely on a decentralised technology called blockchain. Because it’s decentralised, by definition it means no single entity is in charge of the currency. Instead, every computer in the network works to confirm the transactions. There are no middlemen.
So, that’s a brief introduction to the concept. However, as mentioned previously, cryptocurrency is pretty complex. Understanding it requires a lot of time and research, and because it’s a developing area, even the so-called “experts” are learning as they go.
Luckily, we’re not looking to master the topic here. We’re just looking to give you a starting point. And to do that, it’s helpful to take a further step back and ask an even simpler question: what is money?
What is money?
To understand cryptocurrency, it pays (no pun intended) to think about the definition of money itself.
Before money was invented, people traded and bartered items. This was a simple process that rarely had need for middlemen. However, as societies grew and transactions became more complex, the barter process became increasingly inefficient. There had to be a more efficient way.
Money was the main method of making transactions easier and faster. As a result, it caught on like wildfire in developed societies around the world.
However, because money can be easily duplicated, someone always had to regulate and control it. This was generally the responsibility of governments and banks.
Today, money transactions are more efficient than ever thanks to technology like credit cards and the internet. However, at the end of the day, credit cards and online banks are simply continuations of the same type of currency.
Cryptocurrency, for many, is seen as a viable alternative. It’s a way to maintain that efficiency while removing the middlemen from the process. For its most ideological supporters, it’s even seen as a way to address poverty and increase equality around the world.
How is cryptocurrency created?
Cryptocurrencies like Bitcoin are created through a digital process called mining. This is, of course, a metaphor based on the real-life process of mining ore – except “mining crypto” involves using powerful computers to solve complex mathematical equations. Importantly, this process has proven to be effective in minimising duplication.
In total, there are 21 million Bitcoins that can be mined, and about 18.5 million have been mined already. Many have described it as a 21st century version of a gold rush. It means that, if you own a Bitcoin, you either mined it yourself, or you got it from someone who, at some point, mined it.
What are the criticisms of cryptocurrency?
Naturally, cryptocurrencies like Bitcoin are not without their critics. For every supporter, there’s also a sceptic.
Some of the most common cryptocurrency criticisms relate to its volatility, its wastefulness (it requires a huge amount of electronic resources), its potential to be hacked, and the possibility for it to be used for illicit activity.
For others, they believe that it’s simply never going to “catch on” enough to be relevant.
Whatever its merits and flaws, one thing is certain: cryptocurrency doesn’t seem to be leaving the headlines any time soon. It’s worth paying attention to.
If you want to delve deeper into Bitcoin in particular, it’s worth checking out the original white paper written by Satoshi Nakamoto (the pseudonym used by Bitcoin’s inventor, or possibly inventors). Published in 2008, it outlines, in detail, his vision for the cryptocurrency and how it could be implemented.
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