From a vague concept that sounded fairly dark-web-esque (to the uninitiated) to a modern term that everyone recognizes, cryptocurrencies like Bitcoin and Ether are now part of regular jargon. Even if people don’t exactly understand it, they know what it entails.
That being said, cryptocurrency can be difficult to explain.
Many technical terms come into play and, if one is unfamiliar with this particular niche, the use of jargon can get in the way of a clear, concise explanation.
That’s why we’ve decided to give it a go ourselves. We’ve managed to condense the definition of cryptocurrency (and all that it entails) into a simple, three-sentence statement.
Here it is:
“Cryptocurrency refers to electronic currency. Transactions using cryptocurrency are cheap, quick, and secure due to decentralization. The value of these currencies depends on a number of factors, like government regulations and global businesses.”
Let’s break that down, sentence by sentence.
I. Electronic Currency
Cryptocurrencies are electronic peer-to-peer currencies that don’t have a physical component. You can’t hold, say, a Bitcoin in your hand the way you would regular coins and bills. However, that doesn’t mean they don’t have value. Cryptocurrencies are basically represented by numbers stored in your digital wallet. You can use these numbers like you would regular currency—buy goods, pay for services, transfer funds to another digital wallet, etc.
II. Cheap, Quick, and Secure Due to Decentralisation
Decentralization is one of the critical features of crypto that initially sparked a lot of interest – and eventual investment – in virtual currencies.
In order to illustrate why we need to look at the general basis of cryptocurrency’s creation. It is, surprisingly, not a new concept. Bitcoin may have been conceived in 2008, but the concept of electronic peer-to-peer currency has existed decades ago. And it was borne out of a desire to fix the problem of centralization – as well as a few other perceived flaws – with fiat currency transactions.
Physical currencies are limited by area and manpower. Think of cross-border payments and how long they take to settle. Think of how some financial transactions cannot be conducted at night or over the weekend because the banks are closed. Think of sending or receiving money in different currencies i.e., the time it takes to convert the amount on top of the time it takes to transfer the funds.
Because cryptocurrency transactions depend on blockchain technology (which we’ll discuss in a second), there is no middle man. Everything is decentralised, so no third-party bank or institution is needed to oversee crypto transactions. And since there are no financial institutions to reap the rewards of every electronic fund transfer, transaction fees are minimal (or may not exist at all).
Again, thanks to blockchain technology, there is no global data centre where all cryptocurrency transactions are recorded (unlike fiat currency). Instead, the data is stored on hard drives and servers scattered all across the globe. Basically, there is no one institution or establishment that holds the information of every single cryptocurrency transaction ever made.
This significantly lessens the chances of one person or organization holding central authority over all cryptocurrencies. It also safeguards against cyber attackers looking to gain control over certain virtual currencies to exploit its holders.
A Quick Note on Blockchain
We’ve mentioned blockchain several times now, but what exactly is it?
Simply put, blockchain functions as a digital ledger. It’s where all transactions involving cryptocurrencies are recorded. Bitcoin, Ether, Dash, Cardano, NEO … every time someone uses these virtual coins, for whatever reason, the incident is stored (in encrypted fashion!) on blockchain.
This makes blockchain technology the foundation of all cryptocurrency—and the reason why it can afford to be decentralized.
III. Value Depends on a Number of Factors
Finally, we get to the question of value. How is the value of different digital currencies determined?
There is, unfortunately, no straightforward answer. Just as with physical legal tender, the worth of cryptocurrencies is dependent on a few different factors.
· Whether or not merchants are willing to accept virtual currencies
· If global, big-name businesses are willing to adopt blockchain technology
· Whether government institutions around the world will consider cryptocurrency as legal currency or not
As with physical currency, the value of Bitcoin, Ether, and the like can increase or decrease drastically at any point in time without warning.