To the uninitiated cryptocurrencies may seem almost impossible to understand. The reality of it is that anyone who takes a few minutes to investigate it can understand the basics and the value of cryptocurrencies. If you’re looking to have cryptocurrency explained you’re in the right place. Here at ARVR Focus we aim to clarify and keep you up to date on all the latest information related to cryptocurrencies: augmented reality; virtual reality; the metaverse; blockchain; Play-To-Earn; NFTs; and all related subjects. So here we have it — cryptocurrency explained….
Human beings have been using cash currencies for approximately 40 thousand years. Money or currency has been inexorably linked with societal development and has played a critical role throughout human history.
Traditionally there have been five forms of recognized currency, these are Commodity, Fiat, Representative, Fiduciary, and Commercial bank money. Then in 2008, a sixth currency appeared in the form of digital money or cryptocurrency.
What is Cryptocurrency?
There are many different definitions of cryptocurrency and here are some of the most commonly used.
“A cryptocurrency is an encrypted, digital asset that can be used as a medium of exchange and a storage of value.”
“A cryptocurrency, crypto-currency, is a collection of binary data which is designed to work as a medium of exchange.”
“A cryptocurrency is an encrypted data string that denotes a unit of currency.”
“A digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.”
The wording is slightly different in each definition but the key elements are the same.
The first element that is common to all definitions is that cryptocurrency is digital. It is not something that you can touch or feel. In traditional forms of currency such as Commodity and Fiat there is a physical item that serves as a representation of money however, with digital money there is no physical representation as it is composed merely of binary data.
The Value of Cryptocurrency
The second element that is present in all definitions is value. Cryptocurrency has value in the digital environment and the physical world. In the digital world, a currency’s value is measured by what other digital items it can be used to purchase or be traded for.
In the real world, a cryptocurrency’s value is measured in terms of the prevailing physical currency. For example, one Bitcoin currently has a value of around $50,000 USD, one Binance coin has an approximate value of $500 USD, and one Ethereum has a value of around $4,000 USD.
Centralized and Decentralized Currencies
The third important element is centralization. Currencies existing in the physical world are centralized which means they are issued, valued, and backed by governments or financial institutions. Crucial to the concept of a centralized currency is the idea of a third party, such as a bank, that acts as a middle man by handling or holding money and helps in the process of financial transactions.
In the physical world, centralized currency takes the form of fiat money. Fiat money is defined as a currency that is issued and backed by a government normally through a recognized financial institution such as the Central Bank. It is not backed by anything physical such as gold or silver. Fiat money is therefore the embodiment of a centralized currency. As an example, the US dollar is a Fiat currency.
Cryptocurrency on the other hand is by definition decentralized. Cryptocurrency is not issued or backed by a government or any centralized financial institution, and cryptocurrency transactions are bank-free transactions. Cryptocurrency transactions are conducted on a peer-to-peer basis without using any third party, or through an exchange such as Coinbase or Binance.
Lastly centralized and decentralized currencies are used in different marketplaces. Centralized currencies are used for conducting transactions in the real physical world marketplaces, whereas cryptocurrency is used primarily for conducting transactions on a peer-to-peer basis in the virtual marketplace. They can then be exchanged back into a Fiat currency for use in the real world as necessary.
Centralized Cryptocurrency Exchanges
Despite being decentralized a cryptocurrency can be traded using a centralized cryptocurrency exchange.
A centralized cryptocurrency exchange is an online cyber platform, used for purchasing and selling cryptocurrencies. Investors commonly use centralized cryptocurrency exchanges as a means to buy and sell cryptocurrency holdings.
Advantages of a Centralized Cryptocurrency Exchange
There are some important advantages of having centralized cryptocurrency exchanges, and some analysts see centralized exchanges as an essential facet if cryptocurrency is to survive in future years to come.
The term centralized denotes the use of a central third party that helps facilitate a financial transaction. The third-party acts as a type of middle man, who both transacting parties trust to hold and handle their assets.
Investors will use third party’s because they offer security, safety, and asset monitoring to a level beyond what an individual investor can supply. Centralized cryptocurrency exchanges offer a higher level of trust for both parties. Centralized exchanges are connected to a much larger user base and this larger user base makes it easier to find trading partners and facilitate trade transactions.
Cryptocurrencies are kept in what is known as digital wallets. Digital wallets are accessed through digital keys and it is easy to forget or lose the key. Forgetting or losing a key may result in the loss of substantial digital currency holdings. This scenario cannot happen when using an exchange as the exchange guarantees the safety of the investor’s funds.
Centralized cryptocurrency exchanges can be used as a means to conduct trades and transactions from fiat money to cryptocurrency and vice versa. This means that cryptocurrency can be converted into real-world physical currency and vice versa.
Centralized cryptocurrency exchanges can also be used to conduct individual or bulk trades between different cryptocurrencies.
The most common forms of trade are between different cryptocurrencies, however, as awareness and knowledge of cryptocurrency grows more crypto exchanges are offering exchanges between cryptocurrency and fiat currency.
Centralized cryptocurrency exchanges can engage in large volume transactions which means the trade can be completed more quickly which means the influence of currency fluctuation is limited and this, in turn, translates into a lesser level of volatility.
A centralized cryptocurrency offers two significant advantages. Firstly, it offers investors a greater level of security than an individual investment wallet and secondly it provides new investors easier access to the cryptocurrency market.
The History of Cryptocurrency
Digital cash was invented in 1980 by American cryptographer David Chaum. Digital cash took the form of digital coins and transactions were secured and verified using cryptography.
Initially, cyber currency was a fringe currency not used in the mainstream economy but this changed in 2008 with the introduction of Bitcoin and a name change to cryptocurrency.
Bitcoin was created by Satoshi Nakamoto, a pseudonym for an anonymous programmer or group of programmers. In 2008 Satoshi Nakamoto released a paper titled Bitcoin: A peer-to-peer Electronic Cash System. This paper outlined a system for the creation of a decentralized currency that would utilize open-source software and cryptographic protocols, making it the first truly decentralized digital currency.
The History and Launch of Bitcoin
In 2008 Bitcoin was launched as open-source software and the first Bitcoin transaction was conducted between Nakamoto and Hal Finney on January 12, 2009. Bitcoin when first launched had very low value, as was shown in 2010 when a customer paid 10,000 Bitcoins for two Papa John’s pizzas. That same transaction today would be worth millions of dollars.
Since 2009 Bitcoin has experienced rapidly growing popularity and increasing value and one Bitcoin is currently 628 USD. Initially, Bitcoin was the only cryptocurrency, and its value was just a few cents, then in 2010 several other cryptocurrencies developed, and with the increase in cryptocurrencies came an accompanying increase in value.
From 2010 through 2021 cryptocurrency was a volatile investment, and the entire crypto market experienced large swings in volume and value.
From 2013 through to October 2016 the total market cap ranged from 1,154.93 Billion USD to 1,311.59 Billion USD. From 2013 through 2016, the purchasing of cryptocurrencies was comparatively slow. In 2017 this changed as the cryptocurrency total market cap reached 13,062.15.
By January 2019 the cap was back down to 3,441.23 but by October 2021 it had reached an all-time high of 61,374.28 Billion USD.
The value of the cryptocurrency is directly influenced, by the entry of large companies making substantial investments into the crypto market. For example, in 2021 Tesla announced that the company had acquired 1.5 billion US dollars’ worth of digital currency.
The Advantages and Disadvantages of Investing in Cryptocurrency
There are many advantages and disadvantages associated with investing in cryptocurrency.
The first disadvantage is that it is a volatile investment. The history of cryptocurrency shows that it is subject to fast and significant swings. Cryptocurrency is still a comparatively new form of investment and this newness makes it relatively hard to predict the swings and hard to define what factors will cause the swings.
For example, in April 2021 there was speculation that the US government would try to regulate cryptocurrencies and the result was a noticeable drop in value. The speculation about government regulation was accompanied by an electricity blackout in Xinjiang, China which caused a decline in the number of Bitcoins being “mined”. China is the biggest “mining pool” so the decline in mining spooked investors and they responded by limiting investments in cryptocurrency.
Another disadvantage of cryptocurrency is that it is perceived as having less security than traditional forms of investment. Because it is decentralized, and there is no physical object that represents its value, cryptocurrency is perceived as an unsecured investment
Being a decentralized currency also offers some distinct advantages. Because it is decentralized, cryptocurrency is less regulated, and it is beyond restriction or confiscation. In short, cryptocurrency may be a good investment for those wishing not to disclose their wealth or for those wishing to minimize taxation. However, the space is becoming more and more regulated as time goes on and that can be a good thing as well.
Cryptocurrency is continually evolving, and new forms of investment are appearing. For example, people are creating a crypto room or world, and in that world, they are creating crypto products that can be traded for other crypto products or purchased with cryptocurrency. A perfect example of this is the creation of crypto art. Crypto art is 2D or 3D art, that is traded for other crypto items, or sold for cryptocurrency.
How to Invest in Cryptocurrency
With any investment, the investor needs to understand the market and the products they are investing in. This is especially true when the investor is a newcomer to the world of trading and investing.
It is important to realize that cryptocurrency is merely composed of binary data and is not backed by anything. There is no physical commodity or item to represent its value and the worth of any cryptocurrency asset is decided purely by how much investors are prepared to pay for it.
In the stock market environment, a company can increase its profits and in so doing, increase investment returns. This is not the case with cryptocurrency. With a cryptocurrency investment, the returns are purely dependent on market optimism.
The lack of backing means that cryptocurrency is a high-risk investment and it also means that higher returns are also possible.
There are thousands of available cryptocurrencies to invest in, and new ones are being created every day. Each cryptocurrency functions slightly differently, and this differing functionality necessitates investors to research, analyze, and thoroughly understand the market they are planning to invest in.
Once the investor has done their due diligence, the first step in the investment process is to sign up for a cryptocurrency exchange.
A cryptocurrency exchange is an online marketplace that investors use to buy, sell, and trade cryptocurrency.
A cryptocurrency exchange performs the same role as an online brokerage. A crypto exchange allows users to deposit fiat currency and use it to purchase cryptocurrency. Crypto exchanges are also used for trading between different cryptocurrencies.
There are many cryptocurrency exchanges to choose from, but some of the more popular ones include Coinbase, Binance, Kraken, and Gemini.
The second step is to submit your details for verification and create your cryptocurrency wallet. In simplistic terms, a crypto wallet is a place where investors store their digital currency. The crypto wallet contains two keys. The first key is a public key which is your wallet address, and the second key is a private key which is a code known only by you.
The public key is equivalent to a bank account number, and the private key is equivalent to a bank account number or the PIN of a debit card.
The wallet does not hold your crypto money but instead, it holds the information about your public and private keys that amount to your stake in a cryptocurrency. By sharing the public key enables you to send and receive crypto money.
The crypto wallet stores information about your crypto holdings and enables crypto transactions.
The final step is to transfer funds into your crypto wallet, and you are all set to start trading.
Cryptocurrency is volatile and considered a high-risk investment. However, as the old maxim says, the greater the risk – the greater the reward, and this willingness to run the risk is noticeably prevalent among cryptocurrency investors.
The cryptocurrency market is booming, and analysts predict this growth will continue in future years.
It would seem that cryptocurrency is here to stay and will be a significant proportion of our future monetary system.
Multinational companies such as Tesla have made substantial investments in it, and one country has even made cryptocurrency its national currency.