What Exactly are Cryptocurrencies?

You can’t help but notice the new digital financial entity that has taken the world by storm over the past decade or so.

Of course, I am referring to cryptocurrencies.

In simple terms, cryptocurrencies are a brand new type of digital money. While you can certainly transfer your traditional money digitally – like the United States dollar – but that’s not the same thing.

What Exactly are cryptocurrencies

A digital financial future

This currency is created in digital form and will never be printed on paper. Many experts genuinely believe that cryptocurrencies will eventually become the primary form of world currency. And when that day arrives, you’ll be able to pay for anything electronically using a cryptocurrency.

This includes making significant purchases like cars, boats, and even houses. No longer will you need a bank to complete these types of transactions.

High tech finance

The fuel behind the legitimacy of the cryptocurrency market lies in its technology. Many people tend to shrug their shoulders at this concept because they are more concerned with real cash – the kind that exists in their wallets and bank accounts.

However, what’s forgotten with this carefree attitude are the problems caused by the current system. Take a look back at the 2007-2008 meltdown of the global banks.

Ordinary working people everywhere suffered. Yet, those people running the banks and the government felt very little pain – other than receiving scorn from those they are supposed to serve. They didn’t care because they know it will all be forgotten in a few years – as always.

Let’s look at just a few common problems with today’s banking markets:

  • Current payment systems like wire transfers and credit cards are incredibly outdated.
  • Middlemen like brokers and banks take a healthy cut out of every financial process while significantly slowing its progress.
  • Financial inequality continues to grow at an increasing rate around the globe – despite protests.
  • Some 3 billion people have no access to any financial service – which is almost half the world’s population.

Cryptocurrencies have a good chance of solving most of these problems, if not more. More and more applications are created routinely as this new financial vision unfolds.

The basics of Cryptocurrencies

When it comes to our money, we are usually at the mercy of our bankers. Until the recent creation of ATMs and debit cards, we used to wait until Monday through Friday during business hours to get our own money. While we could write checks, this required trust between two parties – who often didn’t even know each other.

A world that uses cryptocurrencies wouldn’t have any need for banks or financial intermediaries. Thus, the central authority is removed from the process, making it cheaper, quicker, and less corrupt.

What makes a cryptocurrency so trustworthy and reliable is the technology it uses. The data structure on which these currencies are created is called a blockchain. Rather than having a central authority that approves a transaction, it is approved by computers residing in the network. This makes the process more transparent and permanent – as transactions are impossible to change after being recorded in the blockchain’s ledger.

History of cryptocurrency

You probably don’t have to guess too hard as to what the first-ever cryptocurrency was.

Yep …. it was Bitcoin!

Bitcoin represents the first blockchain ever created, and this was done by an anonymous entity that answered to the name of Satoshi Nakamoto. Satoshi came up with Bitcoin’s idea in 2008 and considered it a “peer-to-peer” version of digital money.

Even though Bitcoin was the initial cryptocurrency, several attempts were made to create a digital currency before that.

Cryptocurrencies are created using a process known as mining. This is nothing like mining rocks and minerals from the Earth; it involves using powerful computers to solve complex problems. But we will discuss more about mining cryptocurrencies in a future article.

Until 2011, Bitcoin was the only cryptocurrency in existence. But then Bitcoin enthusiasts began discovering flaws in the technology. So they started creating alternative coins, sometimes called “altcoins,” to improve the original design of Bitcoin.

Specifically, they were looking to improve items like security, speed, anonymity, and several more. One of these very first altcoins was Litecoin. As of now, there are over a thousand different cryptocurrencies offered today, and many more are expected in the future.

Key benefits of cryptocurrency

For those of you who are not yet convinced of the viability of cryptocurrency, let’s take a look at some prevailing problems with our current financial system. These are problems that could be solved by using these digital currencies.

Reduce corruption. Remember in 2008 when the US Congress provided a “stimulus package” of almost a trillion dollars to energize America’s economy? And then wealthy CEOs and elite bankers used the stimulus money to pay themselves six and seven-figure bonuses? One investment firm paid out six-figure bonuses to over 400 employees!

The famous 19th-century British politician Lord Acton once said: “Power tends to corrupt, and absolute power corrupts absolutely.” This is more than accurate, and we’ve seen it with our own eyes. Cryptocurrencies could go a long way to diminish absolute power in the financial markets by distributing power among many people or network members. This is the primary key idea behind blockchain.

Eliminate the extreme printing of money. All national governments have a central bank, and these central banks can always print money to solve serious economic problems. This method is known as quantitative easing, and it’s nothing but a band-aid for a more severe problem.

When they print more money, the government can bail out their debt or devalue its currency. The practice does not solve the underlying problem and only soothe voters long enough to get their vote once again. It’s a despicable practice that needs to stop.

When a country like Venezuela prints too much money (which they have), its currency devalues so quickly that inflation skyrockets, and then the cost of everyday goods increases tenfold. Then a loaf of bread costs $100.

As a rule, cryptocurrencies issue a set amount of coins. After those coins circulate, no one in the blockchain community has the means to create more coins.

Give people power over their own money. With your cash in a traditional banking system, you give your control to central banks and the national government. Do you trust the government? While you think about your answer, keep in mind that they can freeze your bank account at any time for any reason and prevent you from getting your own money. And their very own laws say they can.

If you own a business and die without leaving a will, the US government has the legal right to all of those business assets. In 2016, the government of India simply abolished all banknotes – how’s that for governmental control?

With a cryptocurrency, you are the only one who can access your funds.

Cut out the expensive middleman. Under the traditional banking system, the bank gets a piece of every transfer you make. If you buy a house, they get closing costs and hold up the entire process. If you buy a car, then do the same thing, but call it something different. Even when you make a digital payment or withdraw your own money from an ATM, they charge a small fee.

With cryptocurrencies, most of these fees are eliminated. And the process is completed almost instantly.

Serving the unbanked. As we mentioned earlier, almost half of the world’s population has little or no access to financial services of any kind. Whenever they need to make an urgent transaction, they are entirely at the mercy of a greedy banker or financial broker.

This is another huge problem that cryptocurrencies could quickly resolve. If you have a mobile phone, then you’ll have access to a banking system. More people in the world have mobile phones than have toilets.

Think about that for a moment.