Cryptocurrencies: What Are They and How do they Work?
Cryptocurrencies are quickly breaching the national consciousness. News reports of Bitcoin turning early investors into overnight millionaires are now commonplace, and a wide range of similar stories featuring newer cryptocurrencies like Ethereum seem to pop up on a regular basis.
But if you're like most people without a deeply technical background, you're probably wondering just what these currencies are made of. Are they real money? What are they based on?
First – A Short History of Money
To understand cryptocurrency, it's important to understand money in an abstract way first. Money is a store of value used to purchase goods and services – everyone knows this.
However, for most of human history, money has been backed by some tangible commodity. For most societies and civilizations, this commodity was gold.
This commodity-based system had a number of problems. For one thing, moving gold about is both difficult and dangerous – for this reason, piracy was a common danger for merchants in the 17th and 18th centuries.
From the 19th century onwards, governments began experimenting with the idea to print paper money that referenced gold so they could simply print banknotes. These could be carried from place to place much more securely – a system called the Gold Standard.
Following World War II, the United States set up an intermediary standard by which the value of every country's national currency was pegged to the United States Dollar, which was then pegged to the value of gold. This was called the Bretton Woods System. The United States could do this because at that point, nearly every country in the world owed it money.
It wasn't until 1971 that the United States completely severed its dependence on gold as a store of value, floating currency – the value of which is based purely on the economy of the country it represents. Since the United States Dollar was still the international reserve currency, almost all national currencies became de facto floating currencies – called fiat money.
The important thing to realize here is that money doesn't need to be tied to a specific value in order to be valuable. It needs only to be accepted as payment for goods or services that have value.
So How Does Cryptocurrency Store Value?
Cryptocurrency fulfills all the functions of fiat money – it stores reliably stores value between parties who wish to exchange goods or services. However, unlike floating currencies that gain value by representing the power of their respective national economies, cryptocurrencies like Bitcoin and Ethereum gain value directly through the actions of the currency holders.
In this sense, cryptocurrencies are much like gold – but much easier to carry around, and much harder to steal.
Global cryptocurrency networks are focused on exchanges. It can be tempting to think of these exchanges as cryptocurrency banks, but they are not. They are more like stock market exchanges – a place where individuals can buy and sell various currencies according to their current agreed-upon value. Exchanges like Coinbase, Bittrex, and Poloniex simply provide the platform that makes transactions possible.
So how do exchanges agree upon a specific cryptocurrency value? This is done through the actual technology underlying cryptocurrencies.
Introducing the Blockchain
In a physical sense, cryptocurrencies are made up of code. An individual Bitcoin is simply a unique string of code that represents a value within the cryptocurrency system. However, you can't just "write your own" Bitcoins because each transaction is verified through the Bitcoin network using what is called blockchain technology.
For example, imagine that you are a bank. You keep careful records of each and every transaction that you make in a ledger. At the end of the day, you can look through that ledger to determine how solvent your bank is, and determine the value the bank's activities represent.
In a fiat currency system, you are obliged to show that ledger to the government. The government exerts the authority to check your ledger and make sure you are banking honestly – if you attempt to write transactions that don't exist, you're committing fraud, which the government will punish you for.
With cryptocurrencies, that ledger is embedded in every transaction throughout the system. The blockchain is simply a running record of every transaction made on a specific cryptocurrency platform. In order for a transaction to occur, it must be verified throughout the blockchain.
This way, if you attempt to commit fraud by giving yourself a million Bitcoins, the open ledger system will immediately see that there is no record of such a transaction occurring. You would have to hack every Bitcoin wallet in the world to do this.
Blockchain technology is what makes cryptocurrency secure. It's much easier to rob a bank than to pilfer a Bitcoin wallet.
Why Are Cryptocurrencies So Valuable?
The blockchain system offers users some very useful benefits:
Anonymity
Unlike fiat currencies held in traditional banks, it is possible to hold currencies anonymously. No government has jurisdiction over the blockchain system. With a little bit of work, you can hold, store, and transact value in a completely private, anonymous way. This eliminates the possibility of identity theft – a common problem for credit card holders using fiat money.
Automation
While Bitcoin is simply a currency, next-generation currencies like Ethereum offer even greater advantages in transaction automation. Ethereum has the capacity to run smart contracts, which ensure that certain tasks are carried out once certain conditions are met – this can revolutionise the way the Internet works.
Immediacy
Large purchases tend to take time. Escrows, lawyers, notaries, banks, clearinghouses all need to work to make sure that funds travel from one account to another successfully. The blockchain accomplishes these things automatically – and nearly instantly.
As the cryptocurrency industry moves forward, more and more people will see the value that it represents. The future economy of the world may be one in which each person issues their own personal currency tied to the value of their work – becoming, in a sense, their own bank.
Cheers
Ckcryptoinvest!
Very clear - thanks for writing this.
clear words about clear stuff!..thank you..
Thank you. I think there are many more reasons for cryptocurrencies to be valuable other than the mentioned ones. One of the most important is security and safety.
Another reason is the ability to have micropayments, and many more.
In addition, individual projects have special benefits.
Great information you have here on cryptocurrency. Do you genuinly think that cryptocurrency has come to stay? Do you see any threat on cryptocurrency in the nearest future? Have you heard of the quantum computers that may have power that can hack cryptographic currency? If such computers are made, what danger do you think they will pose on crypto?
I think it´s too much to cover all of your questions in one comment. I´m going to write a Blog post and I´ll post it here. Thank you.
Cryptos are hot now thats a fact, but it they will stay it depends if they can stay indpeendent from manipulation especially external. Such as government regulation attempts and things of that nature. Also bad press might have and effect in the long term, but who knows. Cryptos threaten establishment and the controlled systems because essentially they are rigged and manipulated, cryptos such as bitcoin aren't which is what worries them to have a whole new currency that cannot be controlled by them especially the government who will miss their piece of the pie. Ill have to look into quantum computers and give you my thoughts another time.
Awesome article, my friend! I think far too many people come into this space without a clue about the underlying tech or economics. They then invest blindly without understanding anything about the space, and there's only one way that will go.
Posts like this are invaluable! More people need to read posts like this, once they truly understand what it is they are investing in then they can move on to posts like mine about which cryptos are the best to invest in.
People can look at charts all day, but ultimately, whichever coins rise only rise because they fulfil the pre-requisites of a cryptocurrency.
If you ever wanna talk about crypto hit me up - @jhcooper7
plz explain why cryptocurrencies are volatile.
Good Idea! Thank you. I thought about a series of small blog posts.
And Interesting facts about cryptocurrencies, for example, ETH/ETC there is a lot of fake news out there on ETC and I think we should look at the facts.
Anyway I´ll keep you posted...
@harikrish here we go
https://steemit.com/cryptocurrency/@ckcryptoinvest/how-valuable-are-cryptocurrencies-are-they-part-of-a-passing-trend-or-will-they-truly-change-the-way-people-make-transactions
Hi @ckcryptoinvest, I just want to have your attention for a petition about the acceptance of Bitcoin and Litecoin at Amazon, as can be seen in the link below. If we can take care of this, the crypto market will become much bigger and will be taken serious. Please take a look and share it to make this big. I know Amazon is one of the biggest companies out there but if we can collect thousands of signatures we will give a serious sign for acceptance. I if you don’t like the promotion of this petition please give me a call and I will remove it. I just want to make this big. Thanks in advance (upvoted your post).
https://steemit.com/crypto-news/@unknowncrypto/amazon-a-big-step-for-crypto-acceptance
It´s fine. Thank you. Good luck :)
I like it ! Gotta start somewhere. Keep hustlin!!!
Thank you for the support guys @ckcryptoinvest and @themellenial
thank you. you post added great value to how i understand cryptocurrency. now i can invest in it with confidence.
Great post, i resteem and follow :)
Can you help in in mining of cryptocurrency?
@piyush11 Yes for sure! What do you want, exactly?
Good post, I like it. And it's true, we will all become millionaire with this stuff.
This kind of gave me a clue, but I am still not confident in my understanding of cryptocurrency.
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What this also applies in the country of indonesia?
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Congrats @ckcryptoinvest
haha ;)
https://steemit.com/chainbb-general/@jonipilo/free-money-for-newbies-minnows-unite-free-sbd-just-for-upvoting-resteeming-following
Global economy it´s not the same, this kind of information help some people to know a modern way to make bussiness, a new economy. Thanks for this post
BITCOIN PRICE WILL HIT 10,000$!!!!!!!!! WATCH THIS VIDEO...
https://steemit.com/bitcoin/@ankansheth/bitcoin-price-may-hit-10-000usd-in-2018
Very well put, its the basics I know, and even with crypto becoming a must have, I still say silver and gold will continue to be an asset to have.
But again very good history lesson and explanation about money or what is believed to be money.
Cryptocurrencies Are the global goal in finance world, unfortnulately global goal for regular people, not for the big boys that can actually make IT happen. A world with one universal currency can make economic global crises vanish like thin ash, problem is that international world banks would be unable to manipulate the values of currencies That's the main problem about making world economy based on one universal currency, anyways hopefully itll happen one day, Because in the End its an inevitable scenario
Cheers
Good one!
Wow, this was incredible, this will actually be able to help a lot of people, so many people are still horribly confused as to what cryptos are, that'll all change in 2-3 years once prices have skyrocketed however
I like to say that money becomes "money" if and only if people acknowledge and accept its use. The major hurdle regarding cryptocurrencies is mainstream adoption. Until we can use bitcoins to pay for gas and buy bread, cryptocurrencies cannot be considered as money.
It will be interesting to see how things play out in the first few years. Perhaps, there will be major tokenization of currencies as we've already seen in Singapore and Canada.
nice story telllin
informative...Thanks
Thank you for the informative article!
Great post, thanks! I am going to follow you :-)
Thanks for the info. Now I can just link this to my people instead of taking the time to explain. :)
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Thank you.
Reqlly happy to see this article though it is full of informative for biggeners. Resteemit...
Nice post ...clear info ....good writer u r
great piece of info! thx!
new follower+upvoted+resteemed
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This is a very informative articel that would be great for people who are new to cryptos. should make a post or something like " cryptos 101 things you need to know" Very impressed with the details that explained everything, but also felt short and simple by gettinig to the point. Again Great article and Great work!!!
Holy crap that was a very good way of explaining things its really easy to grasp it cleared out so many doubts.. thanks!
Cryptocurrency has changed my life in an amazing way. It allowed me to obtain financial freedom, and led to a path where I am now a more conscious being.
Hello The best thing about the article is about the ongoing revolution of cryptocurrency, its the time to check out the crypto world & learn from it to earn the best one could do with it , cheers & thanks for the amazing response @abrocks12
what a post very useful for noob's and newbie's .thanks a lot for the post :)
Excellent work !
Lot of great information in less words.
Great post. I follow
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great post. up-vote :D
upvote resteemed
Simple and to the point - thanks!
This is the best article I have ever read about cryptos :-)
Please spare some time to read my post:
https://steemit.com/steemit/@hasannaqvi/steemians-i-have-something-for-you-2017630t23442400z
Great info, I am still new and learning about this currency. All pretty much like Greek to me!
Zeker een mooie uitleg over cryptogeld...
Nice post! I followed you
@ckcrytoinvest Thanks for the information, cc is getting bigger and bigger part in our day, and it would be useful article
I'm going to refer people to this article when I get asked next time. Well put!