Cryptocurrency is a phenomenon sweeping the digital and real world – but what exactly is it?
Unless you’ve been living under a rock, chances are you’ve heard words like ‘Bitcoin’, ‘blockchain’, and ‘Ethereum’ floating around, particularly across social media platforms like Twitter, Reddit, and Meta (formerly Facebook). Terms such as these belong to the glossary of ‘cryptocurrency’, a monetary phenomenon that has spread rapidly across the world, adopted by people of many different backgrounds and circumstances. But just what is cryptocurrency, and is it worth the fuss? Let’s take a look at and (hopefully) demystify the world of ‘crypto’.
What is it?
Although there are many different descriptions and explanations surrounding cryptocurrency, in layman’s terms it is a virtual currency that uses digital files as money, files made secure by cryptography (hiding information using coding). This type of security means that it is near impossible to counterfeit or double-spend. Cryptocurrency can be traded and used to buy things, with the value of each asset determined by supply and demand. Many of these currencies exist on decentralised networks that are based on ‘blockchain’ technology – a type of digital ledger that ‘records’ every transaction of every piece of cryptocurrency in a line of ‘blocks’. ‘Miners’ use computing power to solve very complex mathematical equations to verify the transactions in these blocks – once they have done this, they are rewarded with a fee, or ‘coin’ – this method is known as ‘proof of work’. Owing to the decentralised nature of cryptocurrency, one of its main features is its ability to exist outside of government control and central authorities and banks, making it largely immune to things like inflation.
How do you get it?
So, how do you go about actually getting cryptocurrency ‘tokens’ (the official ‘denomination’’ of cryptocurrency)? There are several steps in the process. Firstly, you must find a broker or a crypto exchange. A cryptocurrency exchange is a platform where buyers and sellers can trade cryptocurrencies. Some of the main exchanges are Coinbase, Gemini, and Binance.US. Although many exchanges have relatively low fees at the point of use, the trading interface can perhaps feel a little daunting for any new investor, so it is worth familiarising yourself with how each specific exchange operates – many exchanges offer ‘user friendly’ purchase options for beginners. The other method – finding and using the services of a ‘broker’ – is purported to be more straightforward. A crypto-broker is essentially a firm or individual who acts as an intermediary between crypto-markets to facilitate the buying and selling of cryptocurrency. Brokers are cheaper to use than exchanges but may offer less trading options – there is also occasionally a risk of brokers (especially individuals) claiming to be free and selling on your information regarding buying and trading. To avoid this, stick to more established brokers like Robinhood and SoFi. Having decided between broker or exchange, you can set up an account – in most cases, the verification process can be fairly stringent to prevent legal issues, so having some form of identification (such as a driving licence or passport) at hand is essential. To actually start buying currency, it is necessary to have funds in the account – the best way to do this is by linking your bank account or organising a wire transfer. Using a credit or debit card is possible, but subject to higher interest rates. After all these things are taken care of, it is time to place your order, with hundreds of currencies to choose from. Once you have your currency tokens, you must choose a method of storage (as exchanges are not protected by governmental bodies and as such, they can be hacked or stolen). Storage can include leaving your currency on the exchange in an online wallet or choosing a ‘hot vs. cold’ wallet option. A ‘hot’ wallet is a crypto wallet stored online and connected by the internet and can be run on devices like phones or tablets. Although convenient, there is a larger risk of theft. A ‘cold’ wallet is a safer option – these wallets are external devices disconnected from the internet, taking the form of USB or hard drives.
What types are there?
As stated above, there are many different types of cryptocurrencies, with some more viable than others. While there were attempts at making a version of cryptocurrency in the late 1990s, it was in 2008 that it arrived as we know it as the early version of Bitcoin, created by an unknown person or group of people under the pseudonym Satoshi Nakamoto, with use of the coin beginning in 2009. Since then, more and more cryptocurrencies have sprung up, competing with one another. The top cryptocurrencies (in terms of overall valuation) as of January 2022 are:
- Bitcoin ($822 Billion)
- Ethereum ($447 Billion)
- Binance Coin ($86 Billion)
- Tether ($78 Billion)
- Solana ($52 Billion)
- Cardano ($44 Billion)
- S Dollar Coin ($42 Billion)
- XRP ($39 Billion)
- Terra $33 Billion
- Polkadot ($29 Billion)
Who is using it?
In theory, anyone with a stable internet connection and some money to invest can access and use cryptocurrency. Because it is a controversial monetary entity, different countries have different laws regarding the purchase and sale of cryptocurrency – it is illegal in China, Iraq, Tunisia, Indonesia, and Egypt, for example. However, with more and more companies and trading platforms accepting cryptocurrency (particularly Bitcoin) as a viable form of payment, the entity is gaining a larger following as time goes on. The top five countries (as of December 2021) with the most cryptocurrency holders are:
- India (100 million)
- USA (27 million)
- Russia (17 million)
- Nigeria (13 million)
- Brazil (10 million)
Having given an overview of the basics of cryptocurrency and its place in the world, it is worth also looking at its pros and cons.
- Minute risk of fraud – because it is secure and digital, cryptocurrency is less at risk from manipulation in comparison to credit/debit cards and online banking.
- Instant transfer and 24-hour access
- Decentralised system – unbeholden to monetary institutions, cryptocurrency systems do not risk collapsing from a single point of failure that would cause further crises across the system – such as the banking crash of 2008.
- Chance of making huge profit
- Difficult system to comprehend
- No security in case of loss
- Limited use
- Damaging to the environment – the process of mining requires a huge amount of energy, sometimes as much as a whole country can produce
- Price volatility/speculative bubbles
- Can be used for money laundering/criminal purposes
Cryptocurrency is going nowhere at present – with billionaire moguls like Elon Musk singing its praises to his legion of loyal fans, many are coming round to the idea of this new form of money and the opportunities that it presents. However, it is not for everyone – competitive, complex, and highly speculative at times, it is best to caution newcomers to familiarise themselves with the risks and benefits of cryptocurrency before investing too much of their income. Still in its infancy, it is hard to tell whether in 100 years cryptocurrency will be the primary monetary format, or whether it will become obsolete as financial and climate crises loom.