Jun 26, 2018
What Are Cryptocurrencies?
What must our parents or grandparents have thought the first time somebody mentioned the idea of a debit card? After carrying around cash and a checkbook their whole lives, here was a piece of plastic with some numbers that tracked account balances by swiping a black stripe through a box at the checkout counter. And it was supposed to represent a real transaction using real money from a real bank account? Give me a break! It cannot possibly work!
Of course, that’s exactly what Visa, Mastercard and all those other payment networks do. They took currency and digitized it, making it easier to do business. It solved the problem of not having enough money on hand to buy what you wanted. It also increased the speed in which you used to pay for things. It took time to write out a check, then enter the transaction into your checkbook.
Debit cards made paying for things a lot faster and easier. When balancing a checkbook, you had to manually do the math to figure out how much money was in your bank account, and what got spent where. Part of the debit card world was getting a monthly statement (or viewing your account in real-time on the internet) which did all of the calculations for you. People used to have to sit down at their desk and figure out all of these calculations for themselves, and could have taken an hour every month or even more, depending on how often you bought things were purchased. This was normal, and nothing was wrong with this system, but it could have been better.
That is where we are at today. Nothing is wrong with Visa, or banking, or shopping on the internet, but it could be better. Better means lower fees, faster transactions, more security, more privacy, and so on. And the solution is now here. The solution is cryptocurrencies.
Cryptocurrencies are not replacements for Visa or Mastercard so much as they are replacements for the US dollar, the EURO, the Franc, etc. Normal currencies, like US dollars and pesos are issued by governments and are vastly controlled by central banks and other governmental institutes. Cryptocurrencies, on the other hand, while still issued by someone, are (in most cases) not controlled by any authorities, although many governments are releasing their own (please listen to podcast 14, Crypto is Going Country (http://cryptoandblockchaintalk.com/episode-14-crypto-is-going-country).
Cryptocurrencies are controlled and transactions are verified by the network of people who have devoted their computers to do this work. These people and their computers are called miners. They do the work that is done by banks with normal currencies or fiat. Since there is more than one computer doing this work, and this work requires a lot of power, it creates a situation where manipulating and corrupting the data about the currency and its transaction becomes unfeasible. This new financial structure brings many new interesting possibilities to the table.
International money transfers used to take days or weeks to complete. You’d have to go to a bank branch and create a wire transfer. The bank would then need to find a partner bank in the country your recipient lives in. They need to do anti-money laundering checks and make sure the people involved are not known drug lords or terrorists. All this is done manually by people, so a wire transfer comes with a sizeable fee to pay for this extra work, and at any point, they can decline the transaction without a reasonable explanation.
Bitcoin was invented to solve this problem. It allowed anybody in the world to bypass the wire transfer system, and send any amount of money across the world in a matter of hours. There were no middle men, just a small network fee to pay for the computers running the software that supports the transaction network. While it is not 100% private, it is private enough that it only required a wallet ID address for Bitcoin, yet no personal identifiable information was included in the transfer. With this, comes both good and bad usage.
Today, Bitcoin is the largest cryptocurrency by market cap, but as a technology, it is almost obsolete. There are many projects today that can do the same thing, but much faster, cheaper, and require tremendously less energy than what Bitcoin is currently consuming, which you can listen to on podcast 18 Cryptocurrency and the Environment (http://cryptoandblockchaintalk.com/episode-18-cryptocurrency-and-the-environment). Many countries have taken notice, and are contemplating accepting Bitcoin as a nationally legalized currency, or even debating on starting their own cryptocurrency, as talked about in podcast 14, Crypto is Going Country.
If you are in the United States, Russia, China, or Australia, you can travel 500 miles in whichever direction and your native currency is still accepted everywhere. But if you travel a lot or live in regions where currencies change every 200 miles, it is a problem figuring out how to pay for things. Cryptocurrency is aiming to solve this problem as well, with many projects aiming to create Visa-supported debit cards that allow you to pay with your cryptocurrency of choice anywhere in the world.
Aside from using cryptocurrencies to just pay for stuff far away from home, there is another type of cryptocurrency referred to as a utility token. Think of them as going to an arcade where you need to change your money to the arcade’s tokens that can only be used at that place. This format allows them to raise or lower their prices of the arcade games without having to reconfigure every single machine there. In addition, discounts, bonuses, and payouts can be tailored to the token holders. This is the main idea of utility tokens. A company provides a service and users pay for it with the company’s tokens, and there may be extra benefits for holding these tokens, such as discounts and bonuses for paying for company products and services with their tokens.
The greatest example of this is on Ethereum, which is a blockchain platform for developing DApps, other tokens, and creating other services. While you can use Ethereum to pay for things, its main purpose is to do things within the Ethereum network. That’s the main difference between Ethereum and Bitcoin; it can be used for much more than just paying for things.
There are over 1600 cryptocurrencies listed on coinmarketcap.com – the crypto industry market tracking web site which tracks these things. There are many more cryptocurrencies and utility tokens which have not yet made it onto coinmarketcap, but as they grow in value and market size, they will add to the growing pot of viable cryptocurrencies.
The entire cryptocurrency market is extremely volatile. If you lost half your portfolio value in a week on the stock market, the stress would drive some people to the edge. If you lost half your portfolio value in a week in the crypto market, you shouldn’t do more than shrug your shoulders as there is a good chance it will bounce back just as high in a shorter space of time. The downside is that the market is still considerably small and it is easy for very wealthy people to manipulate the prices. A huge dip in the cryptomarket is not a cause for real panic; just wait awhile, or as they say it in the world of cryptocurrencies – “HODL!”, and hold on for dear life.
Listen to Crypto and Blockchain Talk for more interesting topics!