If you came here wondering, “what is cryptocurrency?” Let me start by telling you a little about myself. I first read the Bitcoin whitepaper back in 2009. I played poker professionally at the time and spent a large part of my days learning about technology and looking for the next big thing. When I read the WhitepaperI knew I was reading something profound. I had suffered what I felt were great injustices by banking institutions, and Bitcoin brought a new kind of hope that things could be different. I knew it was significant, and if you ask my family and friends from that time, I couldn’t shut up about it.
Technical Answer: Cryptocurrency is a digital payment system that uses cryptography to secure and verify transactions through decentralized, peer-to-peer computer networks. It is an encrypted virtual currency from which the coins are transferred digitally. It can be sent instantly over the internet and allows you to remain anonymous without any extra fees charged by intermediaries, but instead reasonable fees that match transaction costs built-in and captured by its network itself.
However, there are a ton of caveats to this explanation. For instance, you can remain anonymous, but most people have no clue how. Also, it’s not as instant as some people would like, but if you run your own node, you can verify your own transactions a little faster. Last, this description comes from Bitcoin. The issue with that is so many other tokens, and currencies operate with entirely different principles, freedoms, and constraints.
Keep reading as I try my best to give some analogies and make the concepts easier to understand as we dig into understanding what cryptocurrency is.
What is Currency? (You Must Know To Understand)
Most people think they know what currency is but have an understanding similar to understanding how your sink works. You turn the water on, and it goes down the drain. You can plug the sink to save some water for washing dishes or other activities. But the understanding stops around there. Most people don’t know how the valves work, how the water arrives at their sink, where it goes, or why it is safe to drink in many countries but not all.
Currency is very similar to this. You may know how to earn it. You may know how to save it. And we all know how to spend it. But do we know much more than that?
To really understand, we must imagine a world without currency. We have things of value in our world, such as our smartphones, or vegetables, or meats, or houses. So when we go out in the world and work very hard to grow some vegetables and animals for meat, we may have some extra that we want to get rid of to a neighbor, we can trade this for raw materials, or if we have enough maybe a smartphone.
There are limits on what we can trade because these physical objects have weights, or maybe they spoil after so many days. In some ways, these limits are artificial, as we will see in a moment.
For instance, making smartphones requires tons of raw materials. So our friend Kisha is a miner, and she gathers these materials, but she has no time to farm while searching and digging, so we can trade her some food for the materials to make a smartphone. On the other hand, Jim builds houses, and he is a huge fan of always having the latest smartphone. If you trade him two smartphones, he will sell you a house.
So in this theoretical world without currency, we can all trade back and forth, eventually getting what we want from other people. However, it is very inefficient, and some people lose due to inefficiency while others gain. For instance, our farmer’s crops and meat are constantly going bad before being efficiently traded, maybe waiting on Kisha to mine more materials. Perhaps Kisha has found a cold cave and stored excess food, but the cave is now full.
The main idea is that bartering is very inefficient. There is evidence that we started using currency tens of thousands of years ago due to this inefficiency.
Currency allows us to trade the value we create today and store it as a promise for value tomorrow.
So when you work at a job, you trade your time at an hourly rate or your skill in a piece work fashion. What you are doing is storing the value you create today in a currency that is just a promise of the ability to spend that value you made at a later time.
If you want to learn more about the history of money, check out: Debt the First 5000 Years by David Graeber.
What is Cryptocurrency?
Cryptocurrency is not as scary as it can sound, and some people may be wondering how it’s different than regular money.
But now that we know currency is a store of value, it makes understanding cryptocurrency a little easier. So I’m not going to be too technical here.
The most significant point is there needs to be a way to transact where people currently use paper, coins, and electronic bits with a “trusted” third party. Cryptocurrency attempts to remove the need for trust from the system, eliminating the third party.
On the surface, this means you can eliminate the bank, but it has much more profound implications.
It is essential to draw the parallels between currency as it exists to understand cryptocurrency. You can visit a vendor and buy something like a sandwich or a new TV with cash. The bank doesn’t need to be involved. No bank manager is required to come by and verify that you have enough money or that you didn’t spend the cash already. The currency in your hand is the verification system. It is a non-fungible token (NFT) that I will have another article explaining. Holding the cash is proof that you have the money to spend.
However, things are a little more complicated when you use your debit card or write a check. Now we must involve the bank. The rules surrounding checks and debit cards are different in each respect, but most stores these days have a way to “run” your check and verify with the bank that you have enough money.
The same thing happens when you swipe your debit card, but the store must contact the bank to do this. Years ago, if you wrote a large enough check, the store might call the bank directly and vocally verify with a bank manager if they didn’t have a prior relationship with you.
Cryptocurrency, using a public ledger and system of public and private keys, serves to act as a self-verifying system for payment using any communications system with sufficient capacity to transmit enough data.
It gives us a method similar to cash, allowing us to have a trustless system of transactions in the electronic space that doesn’t require a third party.
There is so much more to the implications of having systems that do not require trust among parties. Cryptocurrency can ironically use such a system to verify trust relationships. If you are interested in learning more about the technical aspects of cryptocurrency, please keep reading and check out the video below.
How Does Cryptocurrency Work?
Cryptocurrency works by confirming transactions across many instances of the same blockchain ledger.
So, in short, a Cryptocurrency like Bitcoin is a ledger of the transactions happening on the network. I will have another article giving details on the blockchain and Bitcoin specifically.
But from a technical aspect, cryptocurrency is a system by which transactions are stored on a blockchain and verified using the blockchain. The crypto portion of the name comes from the cryptographic methodologies and techniques used to calculate and verify transactions. The currency portion of the name comes from the simple fact that this is an accessible store of value that anyone can trade amongst individuals without oversite or interaction from governing 3rd parties.
Watch this video by 1 Brown 3 Blue for an excellent breakdown of the technical aspects of cryptocurrency:
Regarding the Video
The video gives a breakdown of how the blockchain works with visual representations. The essential point is that everybody has access to the ledger. Totals and everything related are “signed” via hashing and then tacked to the ledger’s end as verification.
It is like if you had some Order of the Order that was a group of people that had perfect copies of something, and then each time they wanted to make another new ideal copy. They would have to document the existence of the new composition in their current copies and all sign the bottom.
Then someone takes a math validator which is a magical method they can use to verify the other copies without reading them all the way through.
Can You Hold Cryptocurrency?
One question I have gotten a lot over the years is, “can you hold cryptocurrency?”
The answer I know people are looking for has to do with whether or not they can physically hold cryptocurrency. This is partially no, however, you can hold physical representations of the cryptocurrency very much similar to how you can hold physical representations of the value you have created and might spend in the future, we call this cash. You can hold the physical medium that the private keys are printed on.
In a metaphorical sense, you can do what the kids are calling hodling your cryptocurrency which basically means to hold on to it for dear life as if nothing else matters.
What Now?
Ok, so there is a ton of ground to cover. This article is only a start, but if you found it interesting maybe you want to read some other articles and learn more. I would start with: What Is Dollar-Cost Averaging or DCA? I explain a simple concept that can help you start acquiring some cryptocurrency and get started in the ecosystem.
If you are feeling really brave you can check out my article about Crypto Domains: What Are Crypto Domains?
Leave a comment below telling me what your questions are!