Cryptocurrencies are all over the news, with stories about people making and losing money quickly. These digital currencies, like Bitcoin, can change in value a lot, which makes them risky for investing.
It's common to feel confused about cryptocurrency. When people try to explain it, they often use complicated terms that make it harder to understand. In this article, we're going to simplify things. We'll explain cryptocurrency in easy terms, covering topics like Blockchain (the tech behind these currencies) and even talking about lesser-known ones like Dogecoin. We aim to make this information clear and easy for everyone to grasp.
What is Cryptocurrency?
Any digital currency that only exists electronically or virtually can be referred to as a cryptocurrency. Cryptos are used as a medium of exchange and the transaction is recorded in an online ledger built on blockchain technology. The online ledger uses complex hashes (basically encrypted binary of 0s and 1s) to optimize the security of the held digital coins.Bitcoin (BTC) has played a major role in the cryptocurrency world. Since its inception in 2009, the digital currency has continually improved and led to the innovation of better and other altcoins (introducing a lot of scam coins as well). As of 2023, there are over 10,000 variances of cryptocurrencies, with this list, making some of the popular ones; Ethereum, Dogecoin, Litecoin, Tether, Cardano, and Dogecoin, among many others.
As of December 2023, Ether (ETH), which is a cryptocurrency of the Ethereum blockchain platform, has the second-highest value after Bitcoin. Ethereum distinguishes itself from Bitcoin because it is a programmable blockchain with much more flexibility. The platform offers a marketplace for developers and other merchants to conduct business theoretically fraud-free. It is important to note that the supply of Ether is limited to how much can be made a year. As for Bitcoin, there is a limit on how much can be created in total in its entire lifespan (hence why Bitcoin is often compared to Gold due to its total limited scarcity).
Another popular altcoin is Dogecoin (DOGE). The creators of the digital currency were initially creating a fun coin that would appeal to more people than Bitcoin, as its theme was adopted from a dog meme. When Tesla CEO Elon Musk tweeted that Dogecoin was his favorite coin, it gained popularity and has since become an actively traded crypto. The coin’s value was initially worth fractions of a penny, before skyrocketing to nearly $1. Keep in mind its creators only made it as a joke, which was never to be taken seriously. Compared to Ethereum and Bitcoin, there is no limit on how many Dogecoins can be created.
Note that these altcoins are mostly built on the original idea of blockchain technology. Every coin has been altered and improved with enhanced features to make it function better than Bitcoin.
Unfortunately, many fake coins have also been created, that show up magically overnight, where naive investors pour their hard-earned money only for the creators to dump everything and run! It's important to do your due diligence and not play this market like a lottery!
Blockchain – Simply put, this technology allows digital transactions to be recorded and distributed but cannot be edited. The transactions are recorded in an electronic public ledger; the information is stored in blocks that are chained together in a continuous form. There is no one central blockchain, but rather a distributed set of nodes, that can process transactions for you. Just think of it as many banks sprawled across the land versus just one bank where you have to wait in line for your transaction to be computed.
Decentralized – Most cryptocurrencies are not controlled by any financial regulation board or country. This is because digital coins exist virtually and are distributed around the globe in the blockchain system. Hence, your blockchain is decentralized, where you can go to many nodes to process your transaction. It's important to note, that currently, this results in cryptocurrencies being high risk as they are not controlled or regulated (since it's everywhere!).
Crypto Wallet – There are two ways of storing your digital currencies to enable you to conduct transactions. These are; Hot wallet and Cold storage with the difference being connectivity to the internet. Hot wallets are connected to the internet while cold storage is not. Cold storage has been deemed safer as they are immune from online hackers. I'm sure you've read countless stories of how people lost their digital wallets which contained millions of dollars worth of digital coins. Crypto wallets have some pros and many cons such as a high rate of hacking, and the ease with which people can lose their coins by misplacing their wallets!
Mining – Most cryptos are brought into existence through mining. Mining is the use of high-performing computers to generate units of digital currencies (basically 0s and 1s generated by complex math equations called hashes). The mining process is tedious, expensive, and time-consuming and recently it is only done by large corporations with large cold mining rooms (mostly located in China). In Bitcoin’s early years solving mathematical equations was easy and anyone could mine, but the equations have become more complex and demanding, as more and more Bitcoins are created (remember there is a total limit).
Cryptocurrency Vocabulary Explained
All the digital currencies have similar themes and features, here are the main ones:Blockchain – Simply put, this technology allows digital transactions to be recorded and distributed but cannot be edited. The transactions are recorded in an electronic public ledger; the information is stored in blocks that are chained together in a continuous form. There is no one central blockchain, but rather a distributed set of nodes, that can process transactions for you. Just think of it as many banks sprawled across the land versus just one bank where you have to wait in line for your transaction to be computed.
Decentralized – Most cryptocurrencies are not controlled by any financial regulation board or country. This is because digital coins exist virtually and are distributed around the globe in the blockchain system. Hence, your blockchain is decentralized, where you can go to many nodes to process your transaction. It's important to note, that currently, this results in cryptocurrencies being high risk as they are not controlled or regulated (since it's everywhere!).
Crypto Wallet – There are two ways of storing your digital currencies to enable you to conduct transactions. These are; Hot wallet and Cold storage with the difference being connectivity to the internet. Hot wallets are connected to the internet while cold storage is not. Cold storage has been deemed safer as they are immune from online hackers. I'm sure you've read countless stories of how people lost their digital wallets which contained millions of dollars worth of digital coins. Crypto wallets have some pros and many cons such as a high rate of hacking, and the ease with which people can lose their coins by misplacing their wallets!
Mining – Most cryptos are brought into existence through mining. Mining is the use of high-performing computers to generate units of digital currencies (basically 0s and 1s generated by complex math equations called hashes). The mining process is tedious, expensive, and time-consuming and recently it is only done by large corporations with large cold mining rooms (mostly located in China). In Bitcoin’s early years solving mathematical equations was easy and anyone could mine, but the equations have become more complex and demanding, as more and more Bitcoins are created (remember there is a total limit).
As a result of the difficulties of mining, you will hear a shortage of computer graphics chips (GPUs) being hard to come by, mostly because miners have been taking them as they yield the best performance in the mining coins. Where often the biggest cost of creating coins is the electric bill.
Altcoin - Any cryptocurrency that is not Bitcoin. 'Alt' stands for 'alternative', so it's like an alternative form of digital money.
ICO (Initial Coin Offering) - Similar to an initial public offering (IPO) in the stock market. It's a way for new cryptocurrencies to raise money by selling coins.
ICO (Initial Coin Offering) - Similar to an initial public offering (IPO) in the stock market. It's a way for new cryptocurrencies to raise money by selling coins.
Token - A type of cryptocurrency that represents an asset or specific use and resides on a blockchain.
Fiat - Regular money issued by governments, like dollars or euros.
Exchange - A platform where you can buy, sell, or trade cryptocurrencies for other digital currencies or traditional currencies like US dollars or euros.
Private/Public Keys - These are special passwords used in cryptocurrency transactions. The public key is like an address that others can see, while the private key is secret and used to access your wallet.
Ledger - A record-keeping book where all cryptocurrency transactions are permanently stored.
Smart Contract - This is a contract that's executed automatically under specific conditions within a blockchain, without needing a middleman.
HODL - Originally a misspelling of 'hold', it's now used in the crypto community to mean holding onto a cryptocurrency rather than selling it, even when prices drop.
Fiat - Regular money issued by governments, like dollars or euros.
Exchange - A platform where you can buy, sell, or trade cryptocurrencies for other digital currencies or traditional currencies like US dollars or euros.
Private/Public Keys - These are special passwords used in cryptocurrency transactions. The public key is like an address that others can see, while the private key is secret and used to access your wallet.
Ledger - A record-keeping book where all cryptocurrency transactions are permanently stored.
Smart Contract - This is a contract that's executed automatically under specific conditions within a blockchain, without needing a middleman.
HODL - Originally a misspelling of 'hold', it's now used in the crypto community to mean holding onto a cryptocurrency rather than selling it, even when prices drop.
Is Cryptocurrency A Safe Investment?
At the current moment, cryptocurrency is in shambles as it's basically showing up to be a Ponzi scheme. With the latest news (late 2020_ Crypto exchanges have been going up in flames (such as FTX BlockFi, and LUNA), and exchanges are likely to follow. With the demise of these exchanges, it is currently more of a gamble rather than an investment.Aside from the Ponzi scheme-like failures, here are a few of the challenges Cryptocurrency currently faces that need to be solved for it to be increasingly adopted by the world:
- Uncertainty about the future – Since digital currencies are virtual and not backed by any physical value, their existence in the near future is always uncertain. A new and better version of a digital currency pops up every day making some of those in existence obsolete. E.g. Ethereum and Ethereum 2.0.
- Limited usage – To use your cryptos as a medium of exchange, you have to check with the merchant if they accept that form of payment. This can create inconveniences as not all have embraced the concept. Some countries have also imposed bans and regulations such as China recently. Lately, Tesla ($TSLA) has removed the ability to purchase their cars by Bitcoins. However, AMC Movie Theatres currently accept it as a form of payment (trying to cash into the meme stock craze)
- Pyramid Schemes- If you go through the history of Bitcoin, you’ll be in a position to point out major scams that led to huge losses. Lately as described above, FTX is probably the biggest exchange to go bust, as well as the Luna coin creator is still on the run from authorities!
- High volatility – Unexpected dips and breakouts make cryptocurrencies highly risky. The value can move from $6000 to $500 in a split second.
- Security concerns – As I have pointed out earlier, hackers and online fraudsters can wipe out a hot wallet in a matter of seconds. A cold wallet can easily be lost and never recovered if you lose the address or password, in this case, it will never be recovered and will be lost forever. With money when an issue arises it's often recovered via Federal Insurance or by your Bank. This is made worse by the latest hacks in FTX, where employees just stole whatever remaining money was left over from people's wallets!
Cons of Cryptocurrency
I prioritize the importance of educating my readers about the risks associated with trading Cryptocurrency, enabling them to make more informed choices. For those who are fully invested in crypto, please understand this perspective is not meant to offend. In this section, I'll outline several key concerns related to cryptocurrency trading, acknowledging that this arena still resembles the untamed nature of the Wild West.
- A coin's Market Cap and trading volume can be faked and manipulated. Don't feel FOMO when you see a new coin rocketing to the moon, with a huge volume and insane Market Cap! All of this can be faked and manipulated. A well-documented example of how a 'nobody' pumped and dumped his own coin very easily.
- Environmental Concerns- Cryptocurrency requires the computation of complex math, which requires a ton of power. As it stands the majority of power drawn from the grid is not "clean energy", this applies to almost every nation in the world. Ethereum 2.0 seems to have solved this issue.
- Regulation is coming, like stocks, and online poker eventually felt the wrath of government intervention. Cryptocurrency will as well, and this will have a huge impact on price, but when it does happen it will likely be for the best, as it will be harder to profit from pyramid schemes, as well as funneling money for illegal activity. On the upside regulation of the security will garner an increase in respect.
- The majority of coins will eventually disappear and only a few will remain. Most of the prices are based on pure enthusiasm and speculation, that these coins will eventually be used practically. But unfortunately, only a few will win long term, be careful what you invest in.
- The majority of coins are traded like a pyramid scheme, where the investing strategy is simply to just buy a coin, then tell everyone else to buy so the price goes up. BEWARE! You can see the aftermath with all the Celebrity endorsement lawsuits going on, with many coins and exchanges going belly-up.
- Stay away from NFTs, as they currently stand are nonsensical scams. Perhaps in the future, they will have value, but at the current moment, it seems crypto whales pump up prices. If you see NFTs selling for millions, you will see that no one else is bothering to purchase them after the initial purchase (NFTs can be bought out at any moment). For example, you will see an NFT sell for one million, and displayed on an auction site you will see offers ranging from $5000 to $500 (ouch!). Here is a breakdown that shows how 97% of NFT prices are manipulated and artificial.
Conclusion
In this article, we've simplified the complex world of cryptocurrency, from Bitcoin to Dogecoin, and the underlying blockchain technology. We've discussed the risks, including market volatility and scams, and the intricacies of cryptocurrency mining. With this guide, our hope is to bring you closer to understanding the intricacies of cryptocurrency, a digital currency landscape that shows no signs of fading away. As of now, it's clear that cryptocurrency is not a fad, but a significant part of our evolving financial landscape.If you would like to read similar articles to this, check out Explaining A Gamma Squeeze In Layman’s Terms.