Cryptocurrency 101

03 Jun 2021

What is cryptocurrency?

It is easy to take the concept of money for granted. We just accept that if you give the right person some pieces of paper and some shiny coins they will give you a delicious pizza! Before the economic revolution of currency, people had to directly trade goods or services for whatever good or service they needed. This gets tricky when trying to convert the number of chickens into how long it will take you to build the road for them to cross. Developing a standard unit for trade simplified how we interact with each other. What if we are on the verge on another innovative leap in how we handle trade with each other?

Digital coins seemed to have popped up out of nowhere around 2015, but what exactly is cryptocurrency and why did they suddenly gain popularity? The foundation of cryptocurrency is security and decentralization (no single entity controls it). These are based on a technology called the blockchain that crowdsources the security and verification of each coin's transaction.

In addition to cryptocurrency's financial exchange capabilities, they can also provide smart contract services. These smart contracts allow for an action to automatically happen as part of the transaction (think about how a vending machine works for example). Smart contracts open up many niche possibilities for cryptocurrencies to fulfill. To identify these niches, each cryptocurrency publishes what is called a white paper to provide information on the philosophy ("why" this coin was created) and a high-level view of how it works. If a cryptocurrency does not have this document or if it is poorly constructed, this is a good sign that the cryptocurrency is of poor quality and should be avoided.

What is the goal of cryptocurrency?

Cryptocurrency coins like Bitcoin and Ethereum were built with different goals in mind. The common goal, however, is decentralization. This means that no one person, company, or government controls how these coins are created, used, or distributed. Since these are built off of code and math, they are not influenced by outside factors aside from supply and demand. While the discussion that cryptocurrency will replace gold become more and more common, it is better to view it as another tool instead of a direct competitor.

Digital currencies also have a unique ability to be moved anywhere in the world within minutes to seconds. Anywhere you have an internet connection, you also have access to your assets. Some cryptocurrencies provide an easy alternative to managing exchange rates between classic fiat currencies.

Cryptocurrency popularity

There are hundreds of cryptocurrencies available now. Many of these coins are highly speculative however due to lack of adoption. You can browser what cryptocurrencies are trading here. Many of these are built on top of the Ethereum network and leverage smart contracts to provide unique service in the decentralized finance economy.

When Bitcoin was first introduced to the world, many people thought it might be a scam. It was trading under $10 and was a completely intangible currency. Investors had to trust that more people would be interested in this technology in the future and that the creators were not going to cash out and run. Fast forward a few years and cryptocurrencies have over a trillion-dollar market capitalization. For comparison, gold has a market cap of ~10 trillion.