You have already probably heard of the most famous cryptocurrencies such as Bitcoin, Ethereum or Ripple. You’ve also probably heard how people make thousands, if not millions of dollars, by “investing” in cryptocurrency. But what is it? Or a better question…what is the main purpose of cryptocurrency?
The main purpose of cryptocurrency is to fix the problems of traditional currencies by putting the power and responsibility in the currency holders’ hands. All of the cryptocurrencies adhere to the 5 properties and 3 functions of money. They each also attempt to solve one or more real-world problems.
Why You Should Care About Cryptocurrency
A cryptocurrency is a digital form of money that is a more secure medium of exchange.
The big idea is that because transactions are public, irreversible, mostly unhackable, and controlled by the people, users and their digital finances are more protected.
Of course, many benefits come with cryptocurrency. Below are 3 key reasons why people have begun to care about cryptocurrency.
Cryptocurrency Is Owned By Everyone
Cryptocurrency functions similarly to any traditional, national currency with a few fundamental differences.
Current “fiat currency” is created and regulated by a governmental body, all of which now represent debt. Anyone that owns a country’s currency holds an “IOU” issued by that respective country.
Cryptocurrency does not stand for debt. It strictly represents itself, and its value is determined by what someone is willing to trade for it.
The fact that cryptocurrency is decentralized plays an essential role in how its currency value is determined.
Cryptocurrency Is Almost Impossible To Forge
Cryptocurrency operates on a blockchain, which is the distributed ledger we talked about above. Understanding blockchain technology helps you understand why this is the key to the power of the digital currency.
The “block” is composed of chunks of encrypted data. The “chain” is the public database in which the blocks are stored and sequentially related to each other.
Every block in the blockchain has a specific code that distinguishes itself from all other blocks in existence. This unique code is called a hash. Blocks of information being added to a blockchain are added chronologically. A new block is added directly after the last block created, which also has its own unique hash.
The ledger or database of blocks in the chain is simultaneously distributed worldwide spread among thousands, or in Ethereum and Bitcoin’s case, millions of computers.
Suppose someone wanted to forge a single block of data on the chain. In that case, they need to manipulate all the blocks from a point in history forward AND update all the computers holding copies of the blockchain ledger.
This is theoretically possible, but the amount of power and money needed to do it successfully makes an attempt virtually impossible.
Cryptocurrency Transactions Are (Mostly) Confidential
With traditional currencies issued by governments, you can privately transact or pay for something in person using physical cash.
Paper, metal, cloth, and plastic currencies make up a tiny fraction of the total amount of most fiat money in circulation. Large withdrawals of physical cash are quickly flagged and reviewed by a central authority like governments and financial system regulators.
Cryptocurrency is different. It depends on well-designed math to track the exchange between two people or companies. This occurs mostly anonymously. While the ledger or list of transactions is publicly viewable worldwide, the parties exchanging cryptocurrency are more private. By definition, cryptocurrencies are held electronically in digital wallets. The owner is the holder of the private key to the wallet. The currency is exchanged digitally from mostly anonymous wallets owned by the users.
Final Thoughts
Cryptocurrency is a way for us to make electronic peer-to-peer transfers without the risk of a single entity gaining too much power over the monetary system.
The merits of cryptocurrencies are still in its early days. Early adopters and enthusiasts will continue to sing cryptocurrency’s praises. Pundits will continue to measure this new financial tool against established currencies and real money. The average consumer must decide when’s the right time to test how cryptocurrency fits into their lives.
As blockchain technology continues to mature, and the useful blockchains surface into the mainstream, the point of cryptocurrency and its place in your financial toolbox will inevitably become apparent.