So you’ve heard about cryptocurrency and are wondering what the hype is all about? Well, read on, as I will discuss some key features of cryptocurrency that should hopefully demystify it all for you.
Cryptocurrency derives its name from two sources: “crypto” and “currency”. “Crypto” refers to the encryption that goes into every transaction involving that currency, making it untamperable. That is to say, whatever you own remains yours until you decide to sell it or destroy it (known as “burning”). The “currency” bit refers to the value attached to tokens making them able to be used just like regular currency. Cryptocurrency is a digital or virtual asset that uses cryptography for security. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
But why is there a need for cryptocurrency? Well, the first cryptocurrency, Bitcoin was founded in 2008 as a response to the global financial crisis. The founder of Bitcoin, Satoshi Nakamoto (not his real name), saw that the global financial system was at risk, and put normal everyday citizens at risk by its very structure. National currency systems are centralised in national central banks, and currencies are either pegged to gold or to each other. Because of this, there is an interdependency between currencies where any shocks to a developed country’s national currency could easily send destructive ripples to other national currencies. Bitcoin was set in place to be resistant to these shocks. Bitcoin was not centralised in the national bank. It was decentralised, meaning that its economy and the ownership of each Bitcoin was distributed across the entire network of those who own Bitcoins. This means that the Bitcoin economy was self-sustaining and was not dependent on the movement of national currencies. With every transaction recorded across the entire network (called a “blockchain”), Bitcoin ownership too was immutable. If you own 1 BTC, for example, no one can hack into your digital wallet and steal that from you. Everyone else in the network will notice the theft and can trace the rightful ownership back to you.
This idea seemed very attractive to a lot of people at that time. They relished the thought of having an independent economy that the community of Bitcoin supporters could collectively control. These folks were ardent supporters of blockchain technology in general, and saw the merits of its application in many digital transactions. These folks are today referred to as “web3 supporters”. Web3 supporters who had online business too were quick to accept cryptocurrency payments for the goods and services they sold, further fuelling the development of the cryptocurrency economy.
To be clear, cryptocurrency was not the first digital currency to be used online. In the late 1990s, two companies. Flooz and Beenz were founded with the idea of using a digital currency for payments. Now, Flooz and Beenz weren’t based on blockchain technology, but the same idea of an economy was there. Consumers could accumulate Beenz based on their internet activity (such as buying from online retailers, or taking surveys) and these Beenz could then be used to buy goods and services from participating e-commerce sites. These two early ventures in digital currency failed simply because of the technological implementation of payment through credit card on e-commerce sites. Consumers saw no compelling reason to collect Flooz and Beenz when they could easily purchase whatever they wanted with their own credit cards. E-commerce retailers saw no reason to continue supporting Beenz when they could get quick and easy payments via credit card.
Well, today, there is still a huge interest in Bitcoin, as well as other coins, known collectively as “altcoins”. Many of those who are interested today aren’t as philosophically attracted to the web3 idea as they are to the potential of making money through cryptocurrency.
Web3 supporters themselves continue to support the development of cryptocurrency in many ways. They have created new coins on new blockchains. Some of these started as a mere joke such as Dogecoin, based off the popular meme “doge” and “cate”. Some of these turned out to be scams such as Squid Game Coin. Some of these have proved their staying power, such as Ethereum and Solana. Other developments include building additional layers in blockchains so that digital goods known as NFTs (non fungible tokens) can be bought, sold and transferred across blockchains. Yet other developments include the building of dApps (decentralised apps) that work in a similar way to other web apps and mobile apps except that they record transactions on blockchains. These include games such as Axie Infinity and Walken.
You may have noticed that the price of cryptocurrencies are quite volatile. While the price of Bitcoin, Ethereum and Solana have risen steadily over many years, day on day prices can swing quite wildly. Well, since cryptocurrency relies only on its community of supporters, their communities are the ones that fuel the price changes. Specifically, it is simply the law of supply and demand. Bitcoin was cheap when it first launched because there was an excess in the supply of tokens and not enough demand to soak up that supply. Now that everyone and their mother has heard of Bitcoin and wants in on the action, the demand has outstripped the supply.
Now imagine a situation where everyone who bought a BTC would just hold on to it and not be in a rush to sell it. (Yes, there are such investors. We call them HODLers, as in “hanging on for dear life”). What would happen is that the price of Bitcoin would remain very stable, neither rising nor falling very much.
But in reality, there are less HODLers today than there are “swingers” (those who buy and sell at the first opportunity to make a discernible profit). Swingers are the ones who cause price fluctuations in cryptocurrency. It’s worse when these swingers are “whales” (they hold a huge amount of cryptocurrency). Whenever whales sell their stock, prices will drop drastically.
If you do want to start investing in cryptocurrency, here are some tips
