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Cryptocurrency For Beginners

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Introduction

If you’ve seen the news in the last few years, chances are you’ve seen or heard the word “cryptocurrency” both online and offline.

But your understanding of the concept might roughly translate into “magic internet money.” Of course, this isn’t your fault. Cryptocurrency and blockchain are complex topics that can get highly technical.

In fact, it seems like every person or web article offering a basic explanation of cryptocurrency ends up sounding like those computer hacking nerds from the movies.

But don’t worry. If you’ve been searching for a simple explanation of what cryptocurrency is, its history, and its prospects for the future, this article will break it down in the simplest way possible.

So what is cryptocurrency all about?

What is Cryptocurrency?

Frankly, “magic internet money” isn’t far from the actual definition of cryptocurrency (if you replace magic with tech-based). Cryptocurrency is simply a digital currency on a decentralized network. In an age defined by the domination of information technology, most of the money we spend is already kept and transferred digitally. So, “Isn’t the money I spend online essentially cryptocurrency by definition?” is a valid question to have at this point.

The difference between cryptocurrency and “real world” money in your bank account (also known as fiat) is the decentralized network called blockchain where payments are processed.

You see, every transaction you make through your bank account is controlled by a single entity — this may come as a surprise, but that entity isn’t you. Sure, you initiate the transaction yourself, but it is processed by your personal broker or bank and approved by the central bank. If you are a citizen of the United States, for example, the U.S. government can exercise the highest degree of control over all of your financial assets in a U.S. bank account through the Federal Reserve System.

This is precisely why it’s possible to freeze the account of a criminal on the run from the police.

With cryptocurrency, all this power is taken from any singular entity and delegated to the blockchain. This blockchain acts as a digital ledger where every single transaction is shared with and confirmed by all the computer systems on the network.

This makes the blockchain essentially hack-proof because for you to control every transaction on the network, you’d have to take control of every device around the world that has been used to access cryptocurrency, which is, quite simply, impossible.

To control any fiat transaction, you only need to control the central bank of the country the transaction is being made from.

History of Cryptocurrency

Most people erroneously equate cryptocurrency in its entirety to the most famous crypto coin: Bitcoin (BTC). However, the concept of cryptocurrency has been around far longer than Bitcoin.

The technical foundation of cryptocurrency was set in 1983, when an American cryptographer, David Chaum, developed a cryptographic system with an algorithm that is still responsible for a lot of the web-based encryption processes active today.

The term cryptocurrency was officially coined in 1998 by Wei Dai, a Chinese computer engineer. Wei was trying to develop a new payment method based on David’s cryptographic system whose main characteristic was decentralization. This payment method was meant to be a permanent fix to the political and practical limitations of the traditional fiat system.

Wei went as far as publishing a white paper on a virtual currency structure he called b-money, which included many of the basic components that can be found in present cryptocurrencies. His idea captured the interest and imagination of people all around the world, but b-money was never officially used as a means of exchange.

It took over 10 years for Dai’s dream to finally become a reality. After the global financial crisis in 2008, a person or group of persons under the alias Satoshi Nakamoto published a white paper outlining what is now known as Bitcoin. This Bitcoin was to become a new, limited-supply, decentralized form of payment with no financial institutions backing it, user privacy protection, and a record-keeping system. These features were developed as a solution to the issues with traditional fiat that caused the worldwide economic crisis.

Bitcoin was eventually released to the public on January 3, 2009, and was immediately adopted by a group of ardent believers who started mining the currency and using it as a means of exchange. Though the notion of an invisible currency that wasn't backed by any of the recognized institutions was met with a great deal of skepticism from many, the world of cryptocurrency has been growing steadily ever since.

Towards the end of 2010, a bunch of cryptocurrencies similar to Bitcoin were released, and the initial crypto exchanges were established. By 2017, we began to see the so-called “third-generation” of crypto (First generation being Bitcoin and second being Ethereum) with Cardano, which improved on the shortcomings of previous generation cryptocurrencies like scalability. These improvements brought the concept of cryptocurrency as a whole closer to the complete vision the early developers of crypto had.

Cryptocurrency: The Future of Fiat?

In 2021, following the adoption of Bitcoin as a legal tender in El Salvador, financial analysts started seriously considering the possibility that cryptocurrencies could fully replace fiat.

Over the past few years, many multinational corporations started accepting payments with crypto. This had sparked minor debates and discussions over what crypto means for the future of fiat. But it wasn’t until Bitcoin was adopted by a sovereign nation that crypto replacing government-issued currency seemed like a very likely possibility.

Experts believe that the extreme volatility of cryptocurrencies poses the biggest challenge to its potential for worldwide adoption as a means of payment. But with the creation of stablecoins, such as Tether (USDT), as well as other cryptocurrencies that have their values pegged to fiat assets, we could see the full adoption of crypto as legal tender worldwide within the decade.