Basically, anyone who manages (read: spends) money has heard of crypto. In fact, there’s no shortage of stories about cryptocurrency. You’ve likely heard how people get rich overnight, how stock prices reach unseen highs, or how just a whisper of the word bitcoin from Elon Musk could move the financial world. One thing you’ve probably never heard is what it actually is or how it works. That is, until this very moment. I am going to try my damnedest to make this global monetary mess make sense. Let’s get into it.
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
After much personal research, I think I have managed to create a somewhat simple and clean explanation of how cryptocurrency works.
This is the foundation of all cryptocurrency. Long story less long, the coding of your crypto of choice logs every transaction that takes place within its network. After a certain number of transactions are logged, that ‘block’ is essentially locked. They’re then given an unbreakable code, and a new block is started.
It is these chains that also act as the security of crypto. Each block has its own code which links to the next block creating the chain.
Adjusting any of the transactions changes the code that the system has already acknowledged and accepted, a system made up of the collective computing power of everyone within the network. Essentially, you would have to fool the individually logged blocks of, at this point, millions of people around the world. Spoiler alert, it’s not happening.
Basically, imagine this: when you get your monthly account report for your debit or credit card, it gets locked and no one can change it. That would be the block. The code used to lock that report is used to connect to next month’s report and then that report gets its own code when it’s locked. Those connecting blocks create a chain and attempting to change anything in those blocks is all but impossible. Security, thy name is confusing coding.
One of, if not, the greatest goals of crypto is to decentralize currency. Basically, instead of governments or large overseeing companies controlling the worth and properties of money, it is left in the hands of the masses that use the currency. This eliminates the growing concern that there are shadowy cabals lurking in the background keeping everyday people from reaching the financial heights they wish to attain.
Crypto Checks and Balances
Without traditional centralization, how does the system of cryptocurrency function? There is a system of checks and balances programmed into the cryptography of records and transactions.
As previously mentioned, the very system of cryptocurrency is the combination of the network’s computing power. Every transaction is logged within the ledger of every individual on the network (not viewable, just in the code) in order to verify every transaction that takes place.
With this system in place, the coding makes crypto operate very similarly to how we use online banking or debit/credit cards today. The cryptography prevents double-spending, fraudulent transactions, etc.
I know we have an inherent fear of what we don’t understand/ Honestly, cryptocurrency takes many of the concepts of traditional digital banking and puts the power in the hands of people instead of conglomerates and/or governments. Through crypto mining (explained below), blockchains, and networked computing/verification, there’s no need for one body to rule them all.
How Do You Get Cryptocurrency?
There are basically two ways to obtain crypto: paying for it or mining it. Either way you choose, you will require a cryptocurrency wallet. Since there is no cash equivalent, you need a digital place to store your money.
Major note, make sure you don’t lose your password/phrase because attempting to get back into an account once you’ve lost that info is an absolute nightmare. In some cases, it’s proven to be completely impossible. Just look at the case of Stefan Thomas, who is all but locked out of his million-dollar bitcoin fortune because he forgot his password.
Just like stocks or bonds, you can simply buy your cryptocurrency of choice. There are various ways you can do this ranging from going to your local bank to purchasing directly from another person to hunting down a bitcoin ATM. As previously stated, as long as you have a cryptocurrency wallet, you’re good to go.
Right, yeah. . .mining money. So, remember how the network relies on the computing power of everyone on it? Well, within that network, some people dedicate their computing power to verifying the aforementioned blocks to make sure all the posted transactions are legit. Can you see why I had to explain it in this order now? As a reward for policing transactions, if you are the first person/group to correctly verify a block, you get bitcoins.
So yes, there is a catch. Since we are talking about crazy amounts of computing power, there are companies that have dedicated mining divisions. (It is essentially another form of investing.) It makes it a bit more difficult for your average person to get in on the digital gold rush. There’s a solid breakdown of how competitive and difficult it is on Investopedia which features “explain it like I’m 5” type explanations which I appreciate.
Bonus Round: Fungible vs Non-fungible
Along with the crypto wave, NFTs or Non-fungible tokens have exploded onto the scene of art and entertainment. While cryptocurrencies are fungible or interchangeable (like all money), NFTs are unique creations. Essentially what you’re purchasing is a limited edition digital product. Whether it’s a song/album, a picture/painting, an exclusive gaming item, etc it is something that you would own sole ownership of.
This is like when the infamous Martin Shkreli purchased the unreleased Wu-Tang album. He alone owned it and could name his price to anyone who wanted it. The difference is NFTs can come with unique rights depending on who’s selling them.
Some might include exclusive rights that give you the rights to sell derivatives, make a profit up to a certain limit, or simply use for personal use.
When buying or selling NFTs, the rights involved are not a given so make sure that you read EVERYTHING before spending what will likely be an absurd amount of money on a creation. The Fashion Law has an awesome in-depth article about what you can expect with NFT purchases
Is It Worth It?
Yeeees? *he says while shaking his head no and shrugging his shoulders* It’s hard to call honestly. Like any form of investing, you have to weigh your personal risk/reward and move accordingly. Individually, cryptocurrencies can be quite expensive to purchase outright. Mining can be a major investment when it comes to purchasing the necessary equipment to have any type of real success. There is a myriad of cryptocurrencies so it is possible to get in early on a newer one, but make sure you do your due diligence as always.
Also, don’t forget crypto is taxable (at least in America) as property, so it falls under the capital gain tax. You had to know there’s no such thing as free lunch.
Hopefully, this made this Batman Beyond currency situation a bit clearer. For further info, I definitely suggest Investopedia.com and this video from 3blue1brown for its fantastic simplicity and visual aids.
Writer, rhymer, gamer: the easiest way to define the man known as Kenneth Medford. I’m a simple man who loves to learn and loves to help and I wander the digital world trying to find ways to sate my hunger for both. Basically, I’m Galactus but helpful.
Check out my other work here or reach out to me on LinkedIn.