What is a cryptocurrency?

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06:06 minutes
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06:06 minutes

How do cryptocurrencies differ from other currencies?

Cryptocurrencies are digital currencies that don't rely on central banks or authorities to control their supply. There are thousands of different cryptocurrencies that all exist online. Bitcoin was the first cryptocurrency and is used to store and transfer value, but now there are many cryptocurrencies that operate in different ways for different purposes.

Most cryptocurrencies use blockchains to continuously verify their supply. Blockchains are distributed, secure public ledgers that record every transaction. Blockchains allow all cryptocurrency users to trace the origins of their money and verify its authenticity.  

Why do some people consider cryptocurrencies to be superior to fiat currencies?

Cryptocurrencies are considered by many to be an improvement over traditional fiat money, like the US dollar, Japanese Yen, or Chinese Yuan because cryptocurrencies are divisible down to tiny fractions, decentralized, and easy to transfer. Cryptocurrencies have gained a great deal of respect and recognition from the general public since Bitcoin launched in 2009. With widespread adoption and education of cryptocurrencies, it's entirely possible that they may become the preferred form of currency by the majority of people.

Cryptocurrencies can also be made to be either anonymous or pseudonymous, meaning that even though there is often a public ledger which notes every transaction, it is hard to identify the individuals behind transactions that get sent over the internet. This aspect of cryptocurrencies gives users confidentiality and privacy that other currencies cannot.

At their core, cryptocurrencies represent next-generation private money which cannot be controlled by anyone, even powerful governments.

Why cryptocurrencies?

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03:09 minutes
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03:09 minutes

Why are people using cryptocurrencies?

After learning about what cryptocurrencies are, you may be starting to understand why they're used, as well. But let's break it down even further.

Due to their decentralized nature and advanced technology, cryptocurrencies are faster and cheaper than traditional methods of transferring money from one party to another across the world. They remove the need for trusted third parties. By using cryptocurrencies, two people can transact across borders without needing to know any information about each other. By cutting out the middlemen, people can transact more efficiently and with more privacy than ever before.

Do vendors and merchants accept cryptocurrencies?

Because cryptocurrencies are also easier to authenticate than traditional currencies, many vendors now actually prefer cryptocurrencies to other forms of money. As a merchant, it is essential to know that the payment you are receiving from a customer is authentic. Especially in international markets, it is risky for merchants to accept traditional foreign currencies because they are hard to authenticate. Cryptocurrencies make authentication easy and automatic. With cryptocurrencies, any vendor can accept any coin a customer wants to pay with.

Transaction finality, which is the moment in time where a transaction cannot be reversed or changed, also happens faster with cryptocurrencies. While traditional methods of payment (like checks) can often take longer than twenty-four hours for transaction finality, cryptocurrencies often take a few minutes. With technology continually advancing, this time should keep shrinking, too. This makes commerce more efficient because vendors don't need to use extensive background checks to ensure their customers are honest and legitimate.

How do cryptocurrencies work?

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02:23 minutes
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02:23 minutes

How do cryptocurrencies stay accurate?

All cryptocurrencies use some type of consensus mechanism in order to maintain an accurate ledger that describes where all of their coins are. The first consensus mechanism used (by Bitcoin) was a Proof of Work algorithm called SHA-256. Since then, new cryptocurrencies have used other algorithms - many are Proof of Work, some are Proof of Stake, and some are entirely new, like Tangle.

Regardless of the specific consensus mechanism used, all cryptocurrencies rely on some type of algorithm that is distributed amongst users across the globe. By distributing their ledgers across many machines and many users rather than one central authority, cryptocurrencies are decentralized.

How do cryptocurrency transactions occur?

If Alice wants to buy something from Bob using cryptocurrency, Alice needs two things to complete payment. First, Alice needs a balance of coins that will cover the cost of the transaction and any fee that comes with the transaction. Second, Alice needs the address of Bob’s wallet so she knows where to send the coins for the transaction.

When Alice and Bob come to an agreement, Alice sends coins to Bob’s address. Then, the transaction is submitted to the cryptocurrency’s network to be confirmed. Different cryptocurrencies have different methods of confirming transactions, but as we discussed earlier, they all use consensus mechanisms to verify that there is no double-spend and that Alice has enough coins to cover the transaction.

Cryptocurrency use cases

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04:08 minutes
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04:08 minutes

What are the specific uses of cryptocurrencies?

By now, you should understand that the first cryptocurrency, Bitcoin, was created to give people a more secure, efficient way to store and transfer wealth. Since Bitcoin's launch, though, the underlying technology that made Bitcoin possible has been adapted for many different purposes.

What are dApps?

One reason that people are so excited about Ethereum, another cryptocurrency, is its ability to host Decentralized Apps, or dApps. Decentralized apps provide alternatives to traditional apps like Facebook and Twitter. However, instead of being controlled by centralized authorities with single points of failure, decentralized apps are distributed amongst their users. This distribution amongst users means that much like blockchains, decentralized apps host all of their information on the machines of every user that runs their software.

What are Smart Contracts?

Smart contracts are another function made possible by Ethereum. Smart contracts remove the need for trust between individuals that want to do business with each other. For example, let’s say Bob wants to buy a car from Sally. Before smart contracts, Bob would give Sally some money, then hope that Sally gives him the car instead of running off with his money, but what if Sally runs?

With smart contracts, such a violation of trust would be impossible. Smart contracts only execute once their terms are met. Using Bob and Sally as an example, if Sally failed to hand over the car to Bob, Bob’s money would automatically be returned. Smart contracts are self-executing according to the code that is agreed upon by both parties.

Why do some people buy cryptocurrencies without using them?

It's important to note that a huge proportion of people that own many coins hold them solely for investment and speculative purposes. Most people have heard about the incredible profits that have been made by others investing in cryptocurrencies, and it's becoming more and more popular for people to try their hand at investing, as well. Read on to the next section for a deeper look at cryptocurrency investments.

Investing in Cryptocurrencies

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05:40 minutes
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05:40 minutes

Why do people invest in cryptocurrencies?

As we mentioned in the last section, investing in cryptocurrencies has become very popular for a number of reasons. The first reason is that cryptocurrencies have gained a reputation for being a volatile yet highly lucrative investment. In fact, many cryptocurrencies have seen their prices rise 1,000%, 10,000%, or even 100,000% in a very short period of time. Of course, many coins do not skyrocket in price. However, people are drawn to the possibility of making quick and easy money. Investing in cryptocurrencies is inherently risky, but many people cannot resist the temptation of huge potential profits.

How risky is it to invest in cryptocurrencies?

While there are huge potential profits to be made, it's important to understand and consider risk, as well. One of the most commonly repeated axioms in the investment world is, "You shouldn't invest any money that you're not willing to lose." The truth is that although the future of cryptocurrency appears very bright, nobody can know for sure what direction prices will go. Seeing cryptocurrencies as investments with guaranteed profits is simply wrong and dangerous.

What distinguishes cryptocurrencies from other types of investments?

One aspect of cryptocurrencies that is helpful to understand is that they are considered "uncorrelated assets" because they don't follow the trends of other, more traditional investments. For example, if a huge disaster takes place, it's almost certain that the stock market would crash. It's unclear, however, what effect this type of scenario would have on cryptocurrency prices. Because cryptocurrencies are uncorrelated assets, they add diversification to any portfolio.

How do people invest in cryptocurrencies?

In order to invest in cryptocurrencies, individuals need to register on at least one online coin exchange. The next steps are verifying the account with identification and adding a payment method. From there, buying established cryptocurrencies like Bitcoin and Ethereum is simple. If, however, the individual wishes to purchase less established "altcoins," that may not be listed on all exchanges, it's often necessary to buy an established coin (like Bitcoin or Ethereum ) first and then trade it for the altcoin.

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