An Introduction to Cryptocurrencies

Cryptocurrencies are the talk right now, with a market whose market capitalization stands over 500 billion dollars as of today. And, every day, more and more people hear and learn about their existence which creates a constant influx of investors and entrepreneurs that ends up in an ever-increasing demand for these digital assets, driving prices further. Since their insertion in the market around 2012, cryptocurrencies have become a staple of this generation and a well-established part of our world.

However, despite their presence being felt by economists and technology enthusiasts all around the world, there are still many people who just have no idea about what they are.

Even if they’ve heard the term before and saw the numbers, there is still a big part of the world that just has no idea about how they work or what are they offering.

This is partly because of the number of complex concepts and terms required to understand in order to see cryptocurrencies for what they really are.

So, if you’re interested in the topic but have no time to look up dozens of pages in search of the answers, then you’re in luck. Here you have a simple and easy-to-understand guide to the basics of cryptocurrencies.

And the first question we need to answer is:

[1] What Are They?

Cryptocurrencies are a form of digital asset. That means that they aren’t physically available to anyone and must, instead, be acquired and stored in digital means.

For this, you need a virtual personal wallet or an e-wallet, which is just an application that provides you with a public key, an address where Bitcoins are sent for you to have them.

As you may have heard, Bitcoin is the pioneer of the new digital currencies, leading the way for new innovative uses of the blockchain technology and financial technology alike.

Cryptocurrencies function thanks to several nodes or computers spread around the world and maintained by the community itself to form a decentralized form of economy. Therefore, this decentralized system can avoid and/or counter any monopolies or regulation attempting to restrain it.

They are an inherently anarchic concept since no state can control them, nor can any company.

Why? These cryptocurrencies run on a distributed public ledger called the blockchain.

This blockchain essentially holds the records of every transaction ever made, and it’s stored on every computer dedicated to keeping it updated, making it virtually impossible to hack or tamper in any way.

The value behind cryptocurrencies comes from the innovation they offer (which we’ll also evaluate in a minute) and the advantages it presents over regular, fiat currencies like the US dollar.

[2] What do They Provide?

When Bitcoin was released, it was worth a fraction of a dollar.

Now, the value continues to grow as people begin to adopt them and understand what these coins can now bring to the table, unlike its fiat counterpart.

There are many reasons for cryptocurrencies having the ‘seemingly absurd’ value they have today and the belief of so many people that swear by them becoming the future of the economy.

Here are a few standard reasons:

a. Decentralized Economic Structure.

The initial promise cryptocurrencies have is to create a genuinely decentralized economy that will make individuals less dependent and subject to central entities like governments and banks.

While fiat currencies are issued by central banks and are backed and defined by each country’s government, every aspect of cryptocurrencies is based on decentralization and the legitimate property of each coin by their owner.

For starters, we have that transactions are recorded by the community itself (by people called “miners” who dedicate themselves to do so) and that each of those who do have their copy of the blockchain. Transactions are stored in the “blockchain,” the underlying technology behind most of these cryptocurrencies.

Then, we have the fact that cryptocurrencies are kept in personal wallets and not bank accounts. These personal wallets provide users with keys and features that ensure only they can interact with their coins in any way.

These wallets are also the way coins are traded, even though there are exchanges that facilitate buying and selling cryptocurrencies, the only requirement for a transaction to be made is for the emitter to know the address of the receivers’ wallet. Making it unnecessary to have a third party involved in the trades.

b. Transparency.

The blockchain is an open source software. This means that anyone with the required knowledge can verify the transactions recorded in it and the amounts sent, making it so that no foul play can be done without it being visible to the community.

c. Privacy.

Despite the fact that transactions are verifiable, personal information about the parts involved are not available in the logs; instead, it shows the public addresses to where the coins were sent. Imagine having a banking a number but no name associated to it.

Privacy is one of the main concerns of most cryptocurrency developers. As such, they are tailored so that no information other than public keys are needed in order to perform transactions.

d. Efficiency.

Cryptocurrencies can be traded just by entering an address, an amount, and hitting sent and need no external assistance to perform an exchange and coins are sent in a matter of minutes. Moreover, these payments can be sent internationally at a very low fee.

e. New Technologies.

The blockchain is a technology that can be used to record much more than just transactions, governments like Japan and many banks are studying ways to implement this technology into their regular functions.

Additionally, many cryptocurrencies are adding their own twist to the blockchain technology, such as Ethereum with its smart contracts and Monero with new encryption techniques.

[3] How do they work?

This is the part that confuses people the most: the underlying technology that makes everything function. So we’ll simplify it as much as we can.

Even though every cryptocurrency is generally different, all of them contain the same foundation: the blockchain.

The blockchain is a series of blocks that contain the information regarding every transaction ever made.

Transactions are recorded by miners, people who dedicate their resources to the recording of new operations. These transactions get pooled into a block which is then added onto a chain, where we then have a chain of blocks that are each individually verified by these miners.

Even though there are many types of mining, it essentially boils down to solving hashes, especial equations with varying difficulty that, once resolved, provide the miner with a new block on which to start logging transactions.

These coins are only moved once the transaction is logged into the blockchain (i.e. confirmed) and every time a new block is mined, the miner is rewarded by freshly-generated tokens (a similar concept to minting new dollars).

So, mining is both what makes cryptocurrencies function as a payment system and what brings new coins into the market.

People are concerned with the vulnerability of cryptocurrencies, however, there are thousands of miners around the world, each with its copy of the blockchain. So, in order to hack the chain, the attacker would need to access the majority of these computers (if not all), a process too expensive to yield any profit as well as statistically improbable.

[4] Conclusion

Hopefully, this shallow informational guide can help you break into the world of cryptocurrencies. It certainly is quite complex and something difficult to wrap your head around at first, but something of which is very valuable to learn.

My advice to you is to keep an eye out for cryptocurrencies and to always remain open-minded to new ideas and technologies

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