It’s easy to get caught up in all the buzz around cryptocurrency. What is cryptocurrency and why do we require it? You’ve likely figured out by now that cryptocurrency is a combination of two words: cryptography and currency. Let’s briefly explore these two topics.
Cryptography
The process of cryptography involves converting plain text into jumbled texts that can only be accessed with a specific key. It’s a very complicated puzzle that is only solved by a select few. Senders and recipients of Bitcoins and other cryptocurrency typically have a pair of public and private keys.
It means that anyone who has a wallet for cryptocurrency can share their public address with others so they can send them cryptocurrency. The private key is only available to them. This allows them access to their wallet and check the balance.
Keep in mind that your privacy is the most important thing to do to keep your funds safe. Crypto is a digital technology, so you’re not technically sending any money. You’re only updating an accounting system or ledger to show, for example, that you have one Bitcoin less and your recipient has one more.
The Blockchain is a system of accounting that is similar to the internet banking we do today.
Currency
Most people do not understand what money or currency is. It may sound obvious, but it’s true. Most of us would reach into our pockets, take out a piece of paper with a fancy print and say “that’s simple, this is money”. Truthfully, anything can be a form of money. US Dollars, Euros or Yen can all be used. Shells, chocolate and gold can also be used. It can be used for money as long as it is agreed that it has value.
Money has three main properties:
Store of Value
Money must hold its value in order to be useful. If I earn $100, I must be able hold it for days or months and buy items worth $100 later. Paper money is more durable than other items like milk, bread or eggs, which are prone to expiration.
Unit of Account
Money is the unit of account. You need to be able quickly and easily to debit or credit people when they make transactions. Here, you can give +$100, and there, minus $100, to the recipient. You can also add +$20, or -$20, to the buyer. Paper is easily distributed and used and can be used in an economy as a common measurement option.
Medium of Exchange
Money must also be used as a medium for exchange. Money must be widely accepted. For example, you could use corn or guitars to pay, but the seller might not want these things. The seller may be saving for a television or car. Storing paper money as a neutral exchange medium makes it easier to trade goods and services.
Why do we need cryptocurrency?
The problem is the financial system that we have today and the way they produce money. All governments and central bankers around the globe are printing record amounts money. The value of goods and service increases when you print too many dollars. The money you have saved yesterday will not buy as many goods or services tomorrow. Inflation is a kind of hidden tax that the society must pay.
Unfortunately, it means that leaders around the world are breaking the first rule about money – store value. A limited amount of money is needed to make it effective. The history has repeatedly shown that printing too much paper money will eventually lead to its destruction.
Bitcoin is different. The limited stock is only 21 million Bitcoins. Decentralized means it is not controlled by a central authority such as a bank or government. Why is this important? The failure point is almost always a central location due to poor management or corruption. Bitcoin relies on a global network of computers to manage and record transactions.
Cryptocurrency Recap
You should now have a good understanding of cryptocurrency (specifically Bitcoin) and why it is necessary. It is a form of digital currency that has all the characteristics of paper money, but won’t have the same problems.
You can still be convinced if you think about the 2008 financial crisis or the 2000 dot-com crash. Both crises were temporarily saved by money printing, which benefited the wealthy. Bitcoin was introduced in 2009. Since then, its value has increased by over 200 000% against the dollar, euro, and other currencies. This is not a mistake. Many people are trying to save their money. You’ve come to a good place to learn how to do this.
At Ethbits.com we offer you all kinds of guides, tutorials, in-depth reviews and comparatives to understand and get the most out of cryptocurrencies, always paying attention to security and risk control.