What is Cryptocurrency and Why do People Invest in It?
We’ve all heard about cryptocurrency, Bitcoin, and blockchain, but do we really know what it’s all about? What can be said about getting into cryptocurrency is that everything is digital and more secure. Known as digital money, cryptocurrency can be used to buy goods and services (quite literally anything). What makes this form of currency more secure is the fact that it uses an online ledger with strong cryptography to ensure online transactions remain secure.
Breaking down and unpacking cryptocurrency
Where most people get confused is understanding the difference between paper money and cryptocurrency or crypto (as it’s commonly known). Crypto sounds like a character from a science fiction movie, a bit extreme, but it is understandable for people to question the unfamiliar.
Centralized vs. decentralized
The most significant difference between crypto and paper money is that the former is digital and the latter physical. Another significant difference is that paper money currencies are centralized while crypto is decentralized. What this means is that a centralized currency is controlled by a country’s central bank or treasury in order to keep track of the funds in line with the country’s monetary policies. On top of this, if you pump too much of your own currency into your country, you run the risk of decreasing the value of the said currency.
Cryptocurrency is a digital asset on a network that is distributed across a range of different computers. Every computer in the network confirms the transactions, which is an added layer of security. It’s decentralized, which simply means that crypto exists outside of government control, and no single organized structure is in charge of it. This has proved to be one of the key reasons people across the globe are investing in crypto.
You know your physical money is held in a bank, and if you want to access your money, you will need to withdraw it from an ATM and use the bank’s online services or in-branch services to transfer money. While many banks offer digital solutions like apps and online banking services, it still presents challenges like an app lagging or going offline indefinitely, forcing you to go to your nearest branch.
As everything is online with cryptocurrency, it can completely eliminate the physical bank, as well as other centralized systems such as middlemen who charge you for every single banking service. One of the main reasons cryptocurrency works is because it depends on a technology called blockchain. This is what makes it decentralized.
What is blockchain?
Firstly, blockchain is not a cryptocurrency; we’ll look into a few examples of crypto a bit later. When cryptocurrency first started, blockchain was the term used only to describe how to structure and share data. Simply put, blockchains are basically just databases controlled, stored, and shared by a range of individuals. One thing blockchain is: technology that’s integrated on platforms across the globe. One thing it’s not: Bitcoin – remember this!
We’ve all seen a physical ledger at one point in our lives; now, blockchain is precisely that but digital—not like an accounting software tool like Quickbooks. Blockchain is a data structure that enables the creation of digital ledgers to share data across networks of independent parties.
Three common blockchains
- Public: As the name suggests, this blockchain is an extensive distribution network and is open to the public.
- Permissioned: While the distribution network is still large, individuals can only play specific roles within the network. It can be public as well.
- Private: Strictly controlled and do not utilize tokens like public and permissioned blockchains.
Types of cryptocurrency
I bet you have heard about Bitcoin one way or the other or even read about it online. Bitcoin was the first-ever crypto created. There were many attempts before it, but they were unsuccessful.
Created in 2013, Ethereum is second only to Bitcoin in market capitalization. Interestingly, it was a crowd-funded project and was co-founded by a millennial – they are everywhere! However, Ethereum is much more than just another crypto; it’s a crypto platform as well as a programming tool.
Created on a whim and to poke fun at Cryptocurrencies, DOGE is a legitimate investment prospect. With its logo showcasing the Japanese dog, Shiba Inu, Dogecoin has one of the most significant crypto communities in the world and even has a huge celebrity following.
Debunking the myths
Contrary to popular belief, cryptocurrency is not good for criminals. Ordinary citizens who want to store their money can most definitely do so through blockchain and cryptocurrency assets.
Transactions are anonymous
This is simply not true. People believe all transactions are done anonymously, which creates the misconception that cryptocurrency is only available to criminals. All transactions are made on a public blockchain.
You can only choose Bitcoin
False. You can select any application that suits your needs.
Blockchain is completely private
Again, a common misconception. Blockchain technology is open to the public.
Why do people invest in cryptocurrencies?
There are various reasons why people invest in crypto. For starters, the benefit of a decentralized system allows you the freedom to transact without the regulations of a government organization. A so-called censorship-free investing solution is quite attractive to the high-rolling businessman and the average Joe entering the crypto market for the first time.
People also want the reliable and often long-term investment that cryptocurrencies offer. Unlike state-owned banks and currencies, cryptocurrency has a limited supply, making it impossible for government agencies to dilute its value through inflation. Over and above this, cryptography makes it impossible for governments to tax or confiscate tokens without the cooperation of the individual who owns them. This is a win!
So why do people invest in cryptocurrencies? You, as the individual, have direct control over your investments with no government interference. You can invest in a wide range of things, and it gives you direct exposure to digital currency – oh, and no bank fees!