First of all, what is Cryptocurrency?
Broken down in the easiest possible way, ‘crypto’ means secret, hidden, [in this context using digital encryption.] Currency is a system of money. Therefore, together the word cryptocurrency refers to a digital system of money encrypted. It is independent of a bank which means that when making transactions using cryptocurrencies, it does not go through a third-party such as a bank.
How does it work?
Cryptocurrency works using what is known as Blockchain. It is the technology behind it all. It is how cryptos work. Banks keep data in a server, but this can (and has been) hacked, altered or deleted. Blockchain on the other hand uses encryption to store all it’s data and this is spread across many digital computers that keep track of all transactions. In summary, it is a decentralised ledger of all transactions that cannot be traced or erased. The blocks of data are ‘chained’ [or connected] to themselves such that each next chain is linked with the former making it harder to hack.
Why all the fuss about it over the last couple of months?
The way Bitcoin / Cryptocurrency works is that it takes away the ‘middle man’ you’d have to go through when making any transaction over the internet. Since the last financial crash in 2008, customers have lost their confidence in banks and consciously or unconsciously been looking for an alternative. Here comes cryptocurrency cutting off those institutions such as banks or Paypal which have been the middle men in making transactions and as a result charged fees for their services.
Although typically you don’t pay money to the bank directly when buying something, the second party usually will. For example, if you’re buying clothes over the internet on Asos for £20. You pay Asos £20 which is verified and approved from your bank so that Asos has the right to take the money from your bank to theirs. That’s all the money you pay, however that’s not all the money Asos will receive. Asos may receive the money net of bank charges (i.e. the cost of doing business using the bank will be deducted as a small fee). If you’ve ever sold anything on eBay, you may be familiar with seller fees. eBay is the middle man between the seller and buyer. What cryptocurrency wants to do is to take away eBay as a middle man, so that you can send anything to anyone without a fee.
The fuss over the last couple of months have been because of the value of Bitcoin or the Cryptocurrency market.
You see, the only value of money is the trust that it carries.
A $100 bill is nothing if you don’t trust that it can be exchanged for goods or services. It is worth nothing TO YOU if you do not trust that it can add value to you. It’s only a green piece of paper, it has no ‘intrinsic’ or ‘real’ value.
OK, so what is Bitcoin?
Bitcoin is a type of cryptocurrency. It is not the first cryptocurrency, but the first which came with blockchain in 2009. The blockchain became part of storing and recording all of the transactions that went through using Bitcoin. Because of this, to access any other coin (called ‘altcoins’), you will need to purchase Bitcoin or a percentage of it.
So can I trust it? Is it real money? What are the pros and cons?
You can trust it if you can trust in paper money. It is as real as you believe it to be. Pros and cons are:
- Bitcoin cannot be forged or altered because of the nature of the blockchain system.
- There is no printing of Bitcoin after it reaches 21,000,000 coins. This will prevent your money from being devalued by printing too much money.
- Bitcoin is private (also a con) which means people sending money to each other cannot be ‘seen’ by a third-party. Currently if you send money to your sister, your bank knows about it, her bank knows about it and every other bank knows about it.
- Bitcoin’s privacy is a big risk as it allows criminals to make illegal purchases without being caught. Fraud can be traced back to a specific person or entity with an IP address under our current banking system but this cannot happen in Bitcoin.
- Fees: Although Bitcoin fees don’t cost as much as any of the banks, it has small fees for storing your money in what is known as an ‘exchange’ [i.e. so called decentralised but really middle man in making these transactions. (we will talk more about this in Part 2) ].
- Theft: Bitcoin can be printed and so can be (and has been) stolen physically. Because it’s not backed by any organisation there is no way to get your money back or trace it.
In conclusion, invest at your own risk on what you can afford to lose. In Part 2 we will talk about the different types of coins, where you can purchase them etc. Do your research thoroughly and speak to an investment advisor for more info. This is not an investment advice but my opinion and research conducted.
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Wishing you the very best of 2018. Let’s make the most out of it!