Bitcoin, blockchain, Ethereum, Dogecoin, NFTs… Everyone is talking about cryptocurrencies these days and you would not be the only one if all the crypto lingo makes your head spin! So what is cryptocurrency? In this article, we are going to guide you through the fundamentals of cryptocurrency without getting too much into the nitty gritty. Whether you just want to be able to keep up next time you accidentally end up in a crypto convo or you want to deepdive into the topic, you have come to the right place.
The evolution of currencies
To many people, the concept of digital currency seems very abstract and intangible. That’s why it’s important that we approach this step-by-step, starting with what you already know: traditional currencies. The first known currencies actually date back to 5000 years ago. Before that, people bartered, trading goods and services against, well, goods and services.
However, even on a small, isolated scale, bartering has its drawbacks. A chicken farmer might struggle to calculate how many apples a chicken is worth, and the two farmers may disagree about how to make that calculation. And what if the apple farmer had a bad harvest and his apple stash is rotting away? Money is a medium of exchange and a much more efficient way to facilitate trade and exchange. Best-selling author Yuval Harari noted in his book, ‘Sapiens: a brief history of humankind’, that the rise of money was “a purely mental revolution,” in which people realized that any object can be used as money as long as people agree on its value, which makes it the world’s most powerful imagined order.
Money facilitates mass cooperation because it convinces all of humanity to agree that something is valuable and trust that everybody else will too. For a long time, people used precious metals, such as gold, and even tobacco as money. However, governments have adopted a form of money called fiat currency which is centralized, backed, and managed by a recognized government entity. In essence, a country’s government and central bank vouch for the currency’s worth. A 10 euro note in itself doesn’t actually have any intrinsic value because it’s just a piece of paper. It has value because the government says it has value. When managed by economically strong governments, fiat currency is generally stable.
By now the technology around money has moved even further and many exchanges take place online using credit cards and other forms of digital payments. At this stage, money does not have a physical representation anymore like coins, gold, notes, or apples. We don’t even see it. Now that we have covered the historical evolution of money we have created a contextual framework for your understanding of cryptocurrency.
What is cryptocurrency?
Cryptocurrency is seen by many people as the most convenient era of exchange ever. Unlike fiat currencies, cryptocurrencies are completely virtual so there is no physical representation.
What is cryptocurrency used for? Well, the core concept is exactly the same. Just like any fiat currencies, such as the Dollar and the Euro, cryptocurrency is a form of payment that can be exchanged against goods and services. Unlike fiat currencies, cryptocurrency is decentralized which means that it operates peer-to-peer without any intermediary.
What’s all the fuss about?
Between 2018 and 2020, the amount of cryptocurrency users around the world has tripled and everybody is looking for the next big crypto. But what is the appeal? Some people believe it’s the currency of the future and aims to get them early. Since cryptocurrency is decentralized, typically third-party entities that would normally oversee the security and transfer of assets (e.g. banks, government institutions, etc.) are substituted by a blockchain or distributed ledger. Without intermediaries, consumers feel more in control over their finances and privacy. Other supporters like the technology behind cryptocurrencies, the blockchain, because it can be more secure than traditional payment systems. There are also people who buy cryptocurrencies as an investment because they expect it will result in high returns based on increase in the past. Bitcoin was one of the first and still one of the most well-known examples of cryptocurrency. If you invested €100 in 2010, you’d have been able to buy about 1,000 bitcoins. In October 2021 those 1,000 bitcoins would’ve been worth more than 55 million. Many crypto users are hoping to find the next big crypto that will turn their €100 into millions.
So what’s the catch?
Since it was first introduced to the world more than a decade ago, Bitcoin has had a choppy and volatile trading history. This year, it reached nearly €52,000 in April before losing nearly half its value in May. By mid-October, the price had risen rapidly again: it hit an all-time high above €56,000 before falling back slightly. Last week, it was on the rise again, possibly on the way to breaking another record. The value of cryptocurrency is generally derived from the continued willingness of market participants to exchange fiat for cryptocurrency, which may result in the permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency diminish or disappear.
Even though crypto aims to remove mediating third parties, improve cost-efficiency, and advance customer access and control, it does not provide the backing, price stability, or protections of fiat currency supported. Despite this, many economists and those interested in the philosophy, technology, and evolution of currencies follow the topic of decentralization with heightened alert. A lot has changed since Bitcoin first came around - let's wait and see where we're heading next. Subscribe on the right to get notifications when more posts like this are published in the future.
Investing in cryptocurrencies is highly risky and speculative, and this article is not a recommendation by heyfina to invest in cryptocurrencies.