What is cryptocurrency?
Firstly, it is important to define what a cryptocurrency is. The simple definition of cryptocurrency is that “Cryptocurrency is a virtual currency that is supposed to act as a medium of exchange. It is based on a ledger (usually blockchain) which is decentralized (not based on issued or maintained by a central authority), and secured by cryptography.”
Even though cryptocurrency may seem a bit complicated, it can be explained by the means of an analogy. Down below, I have an analogy that explains the function of one specific type of cryptocurrency called Bitcoin, to help you familiarize cryptocurrency concepts much better:
“In a prison, there are no currencies. No one has access to money of any kind. But a prison, although small, is still a society. And a society needs to trade goods and services. Maybe someone is a barber. This person will cut people’s hair but wants something in return. Something that he can use to later go to his cellmate and give him in return for the book that he wants from him. The cellmate also needs something in return for the book to use for getting himself another book.
How do you do this without money?
Well, they use cigarettes as a currency. A hair cut is worth 20 packs. A chance to play basketball is worth 10 packs. A book is worth 5 packs and so on. There is a problem. There are not enough cigarettes inside the prison in each person’s hands to be able to do all the transactions. But everyone knows that once a week a new supply comes in. So instead of getting the packs from each other, they start “owing” each other some packs of cigarettes. Joey gets a haircut and he owes the barber 20 packs. The barber gets a book and owes John 5 packs. Once the new shipment comes in, everyone will settle their debts.
But how do we keep track of all this?
Well, everyone will have to carry a notebook with them. Whenever two people make a transaction, they both write it down in their books. Luke writes “I owe Johnny two packs” and Johnny writes “Luke owes me two packs”. This way we know who owes what to whom. But we all write everything in the same format. One transaction after another. So it becomes a long chain of transactions. If I know how many cigarettes I had at any point and go through the transactions after it, I can figure out how many cigarettes I will have.
Last problem: how do we know what people wrote in their books are correct and no one is faking transactions? I can go steal someones book and write a fake transaction in it.
Well, to overcome this we assign the wisest most trustworthy person in the prison as a witness. Whenever two people are making a transaction, he has to witness it and sign both books with his own signature. This way, we know that each transaction is witnessed by our trusted person and actually happened.
Cigarettes are bitcoin. Notebooks are ledgers. The agreed upon text format in the notebooks is blockchain. The wise persons are bitcoin miners.”
Positives & Negatives of Cryptocurrency
Now that you have understood the root of cryptocurrency, it is important to compare the positive and negative aspects of cryptocurrency.
Pros
Compared to modern monetary systems, cryptocurrency presents many benefits which is why it is known to be “the currency of the future.” One of the most defining features of cryptocurrency is that, as mentioned before, it is decentralized or it is not maintained or issued by any central authority (like a bank or the government), which makes it “theoretically immune to any interference or manipulation.” Another benefit is that cryptocurrency is usually very secure since it is secured by cryptography, so hacking accounts would not be logically possible. In addition, another benefit is that it is technical issues that may occur within banks would not likely occur with the use of cryptocurrencies. So, basically in the end, cryptocurrencies are very secure, decentralized, and accessible, which makes them an ideal form of currency.
Cons
Cryptocurrency is also very controversial because of the negative aspects of this form of currency. Firstly, one negative aspect of cryptocurrency is the complications involved in the technology since there can always be loopholes found (for example, even though this may be very difficult, some worry about double-spending and fraud). Another con is that cryptocurrency may be susceptible to illegal activity since many cryptocurrency forms like bitcoin are theoretically ‘anonymous.’ In addition, another negative is that many cryptocurrencies (like bitcoin) may have a massive environmental impact since they require a tremendous amount of computing power (energy) for the algorithms to function. For example, it is said that bitcoin uses approximately 0.2% of the global energy consumption; to put that into perspective that surpasses the electricity consumption of Singapore and Portugal.
Conclusion (TL;DR)
Bitcoin, Dogecoin, and other cryptocurrencies are receiving a lot of hype on social media platforms. Now you have a basic understanding of what cryptocurrency is and how it functions, it can provide you with useful skills and knowledge on cryptocurrency technologies. If you are considering investing in cryptocurrencies, I would advise you to read & discover a little bit more about these technologies and weigh the pros & cons to see if it’s a worthwhile investment for you. Always remember, your investment is not dependent on your family, friends, relatives, or social media’s opinions, but rather on your opinion & ideas, the amount of financial risk you are willing to take, and your investment goals; it’s your decision.
