The basics of cryptocurrencies

What you need to know to cut through the blockchain hype

Cryptocurrencies have been around for over a decade now and have recently made multiple news headlines as Bitcoin and other digital currencies are at an all-time high.

This sudden surge in currency has grabbed people worldwide, including celebrities Elon Musk, Kanye West, Mike Tyson, and many more.

While some people are very familiar with cryptocurrencies, many still have learning to do with this complicated topic. Basic questions like what cryptocurrencies are, why it is so popular, who created Bitcoin, and many more are still difficult areas to tackle and gain an understanding of.

As Bitcoin and other cryptocurrencies continue to grow, grasping basic knowledge of this topic might help as digital currencies start making their way into our everyday lives.

What is cryptocurrency?

Cryptocurrency is a virtual or digital currency that can be exchanged online for different goods and services. Many kinds of cryptocurrency that are popular today include Bitcoin, Dogecoin, Ethereum, and other crypto coins/tokens that companies issue for trading goods and services that the company provides.

What makes this different form of currency so appealing is that it is decentralized, or free from any centralized party control/manipulation, such as a government.

It also allows for an easy and safe transaction as it is encrypted and backed with a special database called blockchain.

“The root problem with conventional currency is all the trust that’s required to make it work,” Satoshi Nakamoto, founder of Bitcoin, wrote in a blog on p2pfoundation.com. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”

Prior to Bitcoin, many companies have attempted to create a digital form of money. However, all of these projects were either never completed or failed. This caused a lot of speculation on whether this new craze in cryptocurrency is worth it or just another trend that will die out in years.

“A lot of people automatically dismiss ecurrency as a lost cause because of all the companies that failed since the 1990s,” said Nakamoto. “I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them.”

How is it obtained?

With there being around twenty-one million Bitcoins that exist, over two million are yet to be discovered. While the interest rate in Bitcoin and other digital currencies in-
creases, people around the world are trying to get their hands on some.

But how exactly can people do that? Some basic ways to obtain Bitcoin consist of buying them on an exchange, accepting them for goods and services, and mining new ones.

“Mining” is a common term used when talking cryptocurrency and means to discover new Bitcoins. When miners mine for Bitcoin they run mining software on a computer
that finds verified transactions of a Bitcoin. Once the computer finds this, the miner is issued a certain amount of Bitcoin in exchange.

When creating a new currency a dilemma faced is how to fairly distribute the coins. This reward given to miners was an effective way to solve this problem.

“As computers get faster and the total computing power applied to creating Bitcoins increases, the difficulty increases proportionally to keep the total new production constant,” said Nakamoto. “Thus, it is known in advance how many new Bitcoins will be created every year in the future. Coins have to get initially distributed somehow, and a constant rate seems like the best formula.”

Why is it so popular?

The value of cryptocurrencies has been touching new heights every day. Bitcoin has suffered many crashes along with many times where it bounced back. But what makes this
controversial digital currency so popular and appealing?

A big factor in the recent uprising was the pandemic. In the past year, COVID-19 troubled economics around the world as it forced strict lockdowns everywhere and had devastating consequences on the economy and all kinds of mainstream investments.

A growing fear in traditional assets among investors created a perfect environment for Bitcoin to revive and come back stronger. A currency that completely crashed had benefited from the pandemic as brand investors and companies stockpiled the currency.

Bitcoin investment even grabbed the attention of Elon Musk, the chief executive of Tesla who in March bought $1.5 billion of Bitcoin.

“What legitimizes Bitcoin in many people’s eyes is that you have people like Elon Musk endorsing it,” said Rob Bakke, a Minnehaha alumnus (‘84) and parent, and senior vice president at Bell Bank.

With companies using and accepting Bitcoins, customers and individuals are starting to use cryptocurrencies as well because of the high convenience, ease, and ultimate security of the blockchain technology. Through this, trade has become a lot easier and influences consumers to choose real estate companies, businesses, and shops that accept Bitcoin payments.

“As the number of users grows, the value per coin increases,” said Nakamoto. “It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.”

What’s to come?

Over the past five years, cryptocurrencies have had a constant battle of staying relevant.

As Bitcoin started gaining popularity in 2017, it had reached an all-time high of trading for $19,783.06 in December of 2017. But this sudden surge in cryptocurrency fell apart as Bitcoin fell to around $3,000 along with the falling crypto market.

In 2018 Bitcoin and other cryptocurrencies remained quiet after the dramatic fall in interest. But in 2019-2020 the crypto market seemed to be recovering with Bitcoin strengthening to above $15,000.

Right now Bitcoin is valued at over $56,000 with other currencies like Ethereum and Dogecoin seeing a drastic rise in popularity. Based on the current value and trends of Bitcoin, speculation from crypto analysts suggests that Bitcoin’s long-term value could range from $100,000 to as much as one million dollars per Bitcoin by 2025.

It is also suggested that governments and regulators will continue to grapple with how to best control and regulate digital tokens. Taking advantage of the uprising in digital currency is China, which has already started trials for digital yuan in many cities, including Shenzhen, Chengdu, and Suzhou.

Testing and usage of this digital yuan is an effective way for the central bank to digitize banknotes and coins in circulation. The Chinese market is already very advanced in cashless payments however the digital yuan would be a way to speed that process up.

As cryptocurrencies grow, so will the need for a basic understanding of this topic. Although digital currencies have had various waves of value, the recent spike in interest shows signs of further development and improvement of this type of currency. The appealing concept of Bitcoin and other digital currencies is the reason behind this sudden surge.

And with big celebrities and companies making large amounts of investments with Bitcoin, it doesn’t look like cryptocurrencies will be going away any time soon.

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About John Misa

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