Cryptocurrency 101: What You Need To Know
If you’ve paid any attention to financial news over the past several years, you’ve probably heard the term cryptocurrency thrown about. Despite the buzz around digital money in recent years, many people may still not fully understand what cryptocurrency is or how it has the potential to impact our economy, banking system, and other industries. What’s more, many people are blindly getting into investing in cryptocurrencies without even fully understanding what they are.
With all the excitement and interest, we thought it’d be a good idea to put together some basic information for our readers and clients. Please note that there is a lot more, highly detailed information out there that one should read before jumping into any investment, but particularly cryptocurrencies.
What Is A Cryptocurrency?
At its core, a cryptocurrency is a digital asset represented by unalterable entries in a distributed, shared database. What does that mean? Think of it like an old-school ledger, where every line is a separate transaction that is signed by the participants. But, because it’s digital, the ledger (i.e. database) is spread out over a network of computers. Each computer has a complete history of all transactions, and whenever a new transaction occurs, it is added to the ledger on every computer (called “blocks” in cryptocurrency lingo). Each computer is considered a node in the network, and every transaction must be confirmed on each node. The “crypto” part comes in because each transaction is cryptographically encoded, meaning that they are mathematically encrypted. Single units of a cryptocurrency are often referred to as coins or tokens.
Here’s how it works:
What Is Blockchain?
The “block” is the portion of a digital ledger that contains a set number of transactions. Thus, the blockchain describes the technology that links all of the blocks together.
What Is Bitcoin?
The first cryptocurrency, Bitcoin was introduced in a whitepaper in 2008 in part as a response to the financial crisis. The original idea was to build a system that did not require any 3rd party intermediaries to conduct transactions (i.e. banks). Among Bitcoin and cryptocurrency fans, fiat currency—money created by governments—is unstable and subject to government manipulation and politics. However, Bitcoin (and other cryptocurrencies) are not as easily manipulated in that there is a finite number of coins in existence and they grow at a relatively expected pace through a process called “mining.” That said, some experts have observed that the value of Bitcoin is indeed susceptible to manipulation.
How Are Cryptocurrencies Made?
Units of Bitcoin, and other cryptocurrencies, are created through a process called “mining.” This process involves a computer completing a complex mathematical problem and adding it to the “blockchain,” i.e. the public ledger. In Bitcoin, the difficulty of the problems increases, which works to limit the amount of coins created over a period of time. Other coins such as Litecoin and Dogecoin are also mineable, but some coins are “issued” when a company conducts an “Initial Coin Offering.”
How Many Cryptocurrencies Are There?
There are currently more than 1,500 cryptocurrencies, and that list is constantly growing as more and more companies start offering their own coins. Wikipedia keeps a fairly up-to-date list of top coins.
What Is An Initial Coin Offering?
When a company develops and issues its own cryptocurrency, it usually does so through an Initial Coin Offering (ICO). Similar to an Initial Public Offering where a company offers stocks, an ICO is the first time a company’s coin is available for purchase. Most recently, ICOs have been used to crowdfund new startups working with blockchain technology.
Are Cryptocurrencies Legal?
This varies from country to country and currency to currency. In the United States, for example, it is legal to use Bitcoin for transactions, but because of SEC regulations on investment, U.S. citizens are not permitted to participate in ICOs.
These are some of the top questions we’ve received about cryptocurrencies, but by no means is this definitive. If you’re interested in learning more, there are a wide number of resources out there to help you understand cryptocurrencies, their use, their limitations, etc. If you need help understand this or other investments, contact us. We’re happy to put investment opportunities into perspective so you can make the most informed decisions.