Today’s post is all about crypto!
Now we’re pretty sure you’ve heard of cryptocurrency in the news, social media, or just talking with friends and family.
But, do you understand it?
Well if you’ve done any research on it, you may have found yourself even more confused.
It’s not exactly an easy topic to understand.
But don’t worry, we’ve done all of the research for you.
And this post will help you understand what is cryptocurrency, how it works, the future of crypto, and even if it’s a good investment or not.
So let’s dive in!
What is Cryptocurrency?
Simply put, cryptocurrency or crypto is a digital currency.
Digital currencies are only available in electronic form. Opposed to physical currency, like the dollar bill.
Digital currencies work like physical currencies in the sense that you can use them to buy goods and services from vendors who accept digital currencies.
But how does cryptocurrency really work?
What makes it valuable?
To understand this, you need to understand what money is.
Money is a medium of exchange.
Instead of trading bread for butter, money is used to represent the value of goods and services.
In the past, gold and tobacco were used as a medium of exchange for goods and services.
But since that wasn’t the most efficient way to exchange goods and services, the government adopted a new form of money which we know today as the US dollar.
Prior to 1971, the US dollar was backed by gold. Where each dollar had a value directly linked to the asset gold.
Today, the US dollar is backed by the government. Meaning by “full faith and credit”, it ACTS as legal tender for goods and services.
The term “full faith and credit” were the exact words used in the 1971 bill that did away with the US dollar being backed by gold.
Hmm, full faith and credit? Isn’t credit debt?
Yes. It is.
Notice on the top of any bill, it says “Federal Reserve Note”. A note is a promise to pay a debt.
When you accept a dollar bill, the US government is in debt to you in actually having something of value to back that dollar bill or justify its value of one dollar.
Through the centralized banking system, the dollar bills going around only represent legal tender.
Not actual lawful money. Lawful money is money backed by gold, gold itself, silver, treasury notes, and bonds.
So in actuality, the US dollar is not backed by anything besides all of our trust and faith that we put in the US government.
Difference Between Cryptocurrency and USD
Cryptocurrency operates in a decentralized system. It is not backed by the bank or the government.
There is not a banking system that supplies, transfers, or holds the money.
In this way, no entity regulates or controls cryptocurrency.
Instead, it is a currency in which transactions are verified and records maintained by a decentralized system using cryptography or digital code, rather than by a centralized authority.
Cryptography is a method of protecting information through the use of codes.
This is so that only those for whom the information is intended can read and process it.
How Cryptocurrency Works
Let us illustrate this for you.
Let’s say you go to lunch with your friend, Lee.
Lee pays for lunch but since Lee always pays, you insist on sending him your share using cryptocurrency.
Using Bitcoin, for example, you initiate a transaction by sending Lee 3 bitcoins.
In your transaction, you make sure to send the bitcoins to Lee’s wallet address.
Every bitcoin user has a public wallet address or public key. You can think of the wallet address as an email address.
The transaction then goes through a hashing encryption algorithm.
The encryption algorithm includes all of the transaction details, including who the sender and receiver are and the amount being sent.
Also, included in the encryption algorithm is your unique private key. Only you know your private key.
Your private key acts as your signature to the transaction as the sender.
The transaction is now transmitted to the rest of the bitcoin network using Lee’s public key.
However, the transaction can only be decrypted using Lee’s private key, which only he has knowledge of. This ensures that only Lee can receive your bitcoins.
These transactions are validated and are being added block by block to a blockchain.
A block can be thought of as a single transaction, like the 3 bitcoins you sent to Lee represents a block.
Blocks or transactions are validated by “miners”.
As you saw, your transaction is transmitted to the rest of the bitcoin network as public information.
Miners see this and validate it by solving a complicated mathematical problem. The miner to solve this first is rewarded with a certain amount of bitcoins.
The process of solving this mathematical problem is called ‘proof of work’, and is how the currency is created since miners are rewarded with bitcoins.
Once validated, your and other transactions are validated and added to the blockchain where they cannot be changed or removed.
With this mining process, your and Lee’s wallet is updated. With yours showing 3 less bitcoin and Lee’s showing 3 additional bitcoins.
Types of Cryptocurrencies
There are other types of cryptocurrencies besides Bitcoin, such as:
They each may have slightly different features with how their currencies are exchanged.
But the general process remains the same. They all use blockchain technology to exchange currency.
Advantages of Cryptocurrency
Some of the advantages of cryptocurrencies are:
- There isn’t a third-party intermediary involved, like a bank or the government
- Zero banking fees
- More confidential as each transaction is a unique exchange between 2 parties which protects users from identity theft.
- Easier international transactions
- It’s quick. Transactions happen in a matter of minutes, compared to bank transactions which oftentimes take several hours or days.
Disadvantages of Cryptocurrency
Some disadvantages of cryptocurrencies are:
- It is volatile because there is a lack of the inherent value of cryptocurrency which also explains the highs and lows of its market value.
- It is difficult to understand. Cryptocurrency is based on blockchain technology which was only introduced in recent years. It is understood by very few.
- Lack of regulation, which makes it difficult for the government to track down users which can be ok but can also be a breeding ground for money laundering and criminal activity.
- No refunds. If you accidentally pay someone, there is no guarantee you’d get your money back.
What Does the Future for Cryptocurrencies Look Like?
Crypto is a very new concept and if you feel left behind… don’t.
Only about 15% of Americans own some form of cryptocurrency.
Though that is expected to increase.
Companies like PayPal, have started to allow their users to buy and make transactions with cryptocurrencies like Bitcoin.
Visa and Mastercard have also joined the crypto wave by publicly endorsing the use of Bitcoin.
Overall, cryptocurrency is not only attracting individual investors…
…but also financial institutions and large corporations that are looking to profit from the emerging trend of digital assets.
With its rising popularity, it’s fair to say that it is only a matter of time more laws and regulations are imposed on the use of cryptocurrency.
Just recently, the White House announced new tax reporting requirements for cryptocurrencies and crypto asset exchange accounts or businesses that receive crypto assets of $10,000 or more.
There’s even a question on individual tax returns now that asks about virtual currency transactions, which relates to cryptocurrency taxes.
Furthermore, the Federal Reserve is conducting studies that explore a move to a central bank digital currency. Results from the studies are expected to be released in the summer of 2021.
This comes shortly after China bans financial institutions from the cryptocurrency business.
Is Cryptocurrency a Good Investment?
Now, the verdict is still out whether or not investing in cryptocurrency is wise or not.
Investor, Warren Buffett, has said, “Cryptocurrencies basically have no value and they don’t produce anything… In terms of value: zero.”
Whereas fellow billionaire investor Elon Musk has said, “I do at this point think bitcoin is a good thing, and I am a supporter of bitcoin.”
And also, “I think bitcoin is really on the verge of getting broad acceptance by conventional finance people.”
Ultimately, it comes down to you.
And if you want to invest more wisely, then don’t hesitate to get in touch with one of our investment advisors today to help you out.
Contact us at 470-240-1437.