Updated: Mar 5
It is no longer a secret that cryptocurrency is a disrupter in the financial world. An estimated 15% of Americans (Forbes) currently own some form of digital currency with the most common ones being Bitcoin or Ethereum.
Most of the investors have bought into it over the past two years. With the advent of fintech such as Robinhood, it has made it easy and appealing to trade not just crypto but all types of securities.
Another likely contributor is the amount of cash from stimulus checks that has been pumped into the system.
It is fair to say whether you invest in crypto or don’t even care there is a strong possibility that it may be part of your world someday.
How Crypto Works
Cryptocurrencies use cryptographic protocols, or extremely complex code systems that encrypt sensitive data transfers to secure their units of exchange. They are built using advanced mathematics and computer engineering principles that render them virtually impossible to break.
The blockchain is the master public ledger that stores all prior transactions. In addition, Identical copies / backups are made in servers in the farms by the miners.
Most crypto does not have refunds or chargeback functions; however, some newer cryptocurrencies have rudimentary refund features.
When crypto is being transacted there is lag time meaning, the units aren’t available for use by either party. Hence, this prevents double-spending or modification of the code to prevent duplication so that it is not sent to multiple recipients. Private Keys
Every crypto owner has a private key for authenticating their identity so they can buy and sell units. Users can also create their own private key up to 78 digits long.
Here’s the kicker: if your private key is lost, you can create a new one; however, it cannot be recovered so that asset is lost for good. This stresses the need to store private keys in multiple locations not connected to the Internet.
Cryptocurrency Wallets Each crypto user has a wallet to confirm he/she is the owner of their units. This is different from a private key that validates identity whereas wallets confirm the authenticity of a crypto transaction. (wallets lessen the risk of theft for units that aren’t being used)
Miners Miners are the record-keepers for crypto and they create the digital currency. Mining is developed using highly technical and highly powered computers that solve complex computational math problems; the complexity reaches a point where the problems cannot be solved by hand which is why a large amount of computing power is required to transact them. This process is what makes crypto difficult to hack.
Miners periodically create new copies of the blockchain. From there they add recent and previously unverified transactions that have not been part of a previous blockchain copy.
To help with fraud on the part of miners, they are compensated in crypto units and a variable number of existing units collected from optional transaction fees. This is typically less than 1% of the transaction value hence, part of a crypto transaction is baked in the price of a buyer’s transaction.
A Small Float of Digital Coin
Most cryptocurrencies are designed to have a small supply. Hence, as more coins are created miners receive fewer new units per new block. Based on the current trend, observers predict that the last Bitcoin unit will be mined sometime in the mid-22nd century. As they have a finite supply it makes them inherently deflationary, more related to gold and other metals.
There is a fixed number of Bitcoins which is 21 million and most of them have been mined. Once this occurs, the party is over unless the Bitcoin people change their mind.
How Many Types of Crypto Are There?
The different types of crypto generally fall into one of two categories:
• Coins, which can include Bitcoin and altcoins (non-Bitcoin cryptocurrencies)
Alternative Cryptocurrency Coins (Altcoins)
Altcoins usually refer to any coins that are not Bitcoins. Actually, altcoin means an alternative to Bitcoin. Some altcoins include:
Though most altcoins are built upon the same basic framework as Bitcoin, many claim to be better versions of Bitcoin.
Each system can differ from the next, as they’re created to serve various purposes and applications, and identified in different ways.
Some coins don’t work with the same open-source protocol that Bitcoin does; however, the following list of cryptocurrencies have created their own separate systems and protocols:
Who is on the Crypto Train?
PayPal has can be considered a pioneer of an early adopter into its platform. Their functionality allows its users to globally process transactions for buying and selling with crypto including Litecoin, Ethereum, Bitcoin and Bitcoin Cash. The one hindrance is that users cannot transfer their coins from their private wallet.
On February 10, 2021, Mastercard announced that it would start supporting a select few cryptocurrencies on its payment network. According to the payments giant, the inclusion of cryptocurrencies will allow customers to “save, store and send money in new ways,” while opening up new opportunities for merchants as well.
On January 30, 2021 Visa reaffirmed its plans to continue to push for cryptocurrency payments and on-ramps, showing that the company has long-term plans for the sector.
On February 8th, 2021 Elon Musk the man behind the wheel at Tesla bought $1.5 billion dollars worth of crypto. In addition, they said they will start accepting bitcoin for their products.
With all these payment and processing platforms in place, it is a fair argument to say that crypto may not just be a stored asset but in time used as universal digital currency.
How Crypto Differs from the Dollar
When asking how crypto is different from the dollar, many will say that crypto is not backed by anything; however, the same is true for the dollar.
All in all, unlike traditional currencies, Bitcoin:
-There is no central authority which claims it backs money.
-Can face deflation by way of artificial scarcity. With central banks, they can print money as they see fit
-Each and every transaction is recorded in a public ledger.
-Fees for mining are paid to miners which makes it indisputable meaning, a crypto transfer cannot be completed without paying a fee. Hence, this cannot be disputed for tax purposes.
As transactions are completed over the Internet with public addresses, this differs from transactions made from cash as they can leave no paper trail.
Will Crypto be Used in the Future?
The trend is that crypto is slowly inching its way into the mainstream. It is plausible that you could go to 7-11 and buy a Slurpee with crypto. Right now, if I buy crypto on an exchange I use US dollars to do so. In addition, it is the most prevalent currency in the world.
So as these currencies intertwine, when you pay with crypto it will be based on how much the product is for a coin or token.
For example, if I have 1/10 ownership and it is worth $50,000 then I have $5,000 worth.
One of the interesting questions is what crypto will be used when you pay for things in the distant future? As we said earlier, over 10,000 forms of crypto exist.
What if I go to China and there are 200 currencies to pay with?
Will the dollar exist and then I just buy/pay the equivalent amount of crypto based on the type that I choose? I suspect there will only be a handful of widely accepted forms to choose from.
Crypto Versus Cash Comparison - Recap
TRADITIONAL MONEY CRYPTOCURRENCIES
-Exchange of money to acquire -Value is exchanged in the form something of value of cryptocurrencies
-They are physical -They are virtual
-Its core is located in a specific -They are global
country or group of countries
-Banks and financial reserves -They are controlled by all users and blockchain technology control them
-Become part of the economic -Become part of the market directly
system through bonds
-Great inflation and interest -Supply/Demand is the only influence
-Issued by governments -Decentralized mining offers
-Value transfers are very slow -Peer-to-peer payments are made
and bureaucratized instantaneously without intermediaries
-Commission costs -Costs come from software maintenance
-Not every person in the world has -They can be used by the whole society
the power to have a bank account including those parts of the population
without access to financial resources