What is cryptocurrency?

What is cryptocurrency?

Cryptocurrency is a digital or virtual currency. It’s a relatively new type of currency that uses cryptography to secure payment transactions, making it verging on impossible to counterfeit or double spend. Cryptocurrency is denominated in terms of "virtual" tokens, which you can spend on goods and services via a digital payment system that operates on blockchain technology. 

What is cryptography?

Cryptography keeps data private using encryption and decryption. Encryption is a process that scrambles data into an unreadable format, so it remains secure both when it's being stored and when it's being transmitted. Decryption reverts the data into its original format.

What was the first cryptocurrency, and who invented it?

Bitcoin was the first cryptocurrency. It was founded in 2009 by a programmer – or possibly even a group of programmers – who used the pseudonym Satoshi Nakamoto. Interestingly, the true identity of Nakamoto has never been confirmed despite ongoing attempts. It's even been suggested that Elon Musk could be Nakamoto – something he's vehemently denied.

How many cryptocurrencies are there today?

As of January 2021, there were more than 4,000 cryptocurrencies available. Many of these cryptocurrencies are hugely popular within very small communities. However, the dominant players in the market in July 2021 were Bitcoin, Ethereum, Tether, Binance Coin and Cardano.

 Why is crypto popular?

In the years following the global financial crisis, a payment system that avoided the use of third parties - such as banks - had its appeal. With a growing number of people holding the banking industry responsible for the crisis, many liked the idea of a payment system that decentralised control, moving power away from financial elites and into the hands of the people.  

 The new blockchain technology used to circulate cryptocurrency heightened crypto's appeal. The appeal wasn't just because blockchain operates outside the control of governments and central authorities. It was also because the technology ensures that the data can't be interfered with, minimising fraud and making it an attractive alternative to our current banking system for obvious reasons. 

Another reason cryptocurrency gained popularity is because you can choose to trade crypto anonymously – or at least semi-anonymously – depending on which crypto you buy. On the other hand, the transaction details can be accessed by any user on the system.

Despite ongoing concerns that cryptocurrency is used to launder money, support ransomware attacks or enable trading on the black market, the growing movement towards privacy suggests that demand for crypto is likely to grow. Because of this, many investors believe it could be the dominant currency of the future, leading speculators to invest in cryptocurrency as a long-term alternative investment.

What are the disadvantages of crypto?

Many financial commentators believe there are some significant barriers to the mass adoption of cryptocurrencies. The first is scalability. Much work will need to be done before crypto transactions can compete with the sheer number of transactions made by MasterCard and Visa every day. 

Then there's the risk that your entire digital wallet could be lost in a computer crash or stolen by a hacker. That said, these risks may be overcome by advances in blockchain technology in the future. In the meantime, there will always be the threat of cyber-attacks. 

On top of that, the price of crypto is volatile because it's a new currency that's changing all the time. Innovation plays a massive role in price fluctuations because it affects the rate of adoption - which right now remains relatively low. Additionally, crypto is unregulated, and this lack of government oversight means that many large investors will be unable to invest in it. This in turn leaves it to day traders and short-term investors, making it a far more volatile investment.

How do I buy crypto?

If you decide to go ahead and purchase some cryptocurrency, you need to buy and sell using an exchange. A quick online search will show several options, so once you've decided which exchange to use, simply set up an account and store your cryptocurrency in your digital wallet. If you choose to start trading cryptocurrency, you'll need to set up a separate brokerage account.

 Can I convert crypto to cash?

You most definitely can. If you'd like to sell your cryptocurrency, there are a number of providers that can do this for you. But take care, the unregulated nature of the sector has its challenges and some people have reported delays in accessing their funds, or not having their withdrawal requests honoured. 

Is it safe to invest in crypto?

As investments go, crypto is far from the safest investment. However, prices have been escalating over the last decade, with many speculators trading for significant profits. Nonetheless, Warren Buffet has made it very clear that he believes it's a bubble waiting to burst. And he may have a point. China's banning crypto in May 2021 led to Bitcoin losing close to half its value in a matter of days. Buffet is not alone in expressing his concerns. Many others agree.

Is crypto the future?

Despite all the barriers crypto faces, one thing's for sure, it's undoubtedly disrupted the global financial system and created a paradigm shift in the way we view money. But there is a paradox. The more popular cryptocurrency becomes, the more scrutiny by governments and the more regulations will be introduced, which calls into question why it was created in the first place.