If you have been around your crypto friends recently, you might’ve noticed they’ve been more excited than usual. Bitcoin value has skyrocketed this week, reaching all-time highs in value. But what exactly is a cryptocurrency? Let’s go back to basics.
By definition, cryptocurrency is a virtual or digital currency that hardly exists in physical form. It’s decentralised and distributed, which means no single person, government, or company controls it.
It’s important to note that all cryptocurrencies are different, and are set up in different ways. We’ll mostly be referring to Bitcoin in this explainer. Let’s start with ‘the blockchain’ and the role it plays.
What is a blockchain?
It’s a ledger (which is like a collection of financial records) of the cryptocurrency transaction records. These records are available publicly to anyone using the cryptocurrency. That said, you can’t actually see any personal identification attached to the transaction, that specific information is private.
The purpose of the blockchain is to remove any need for centralised record-keeping (which is what a bank or credit card company would do). Furthermore, blockchain technology makes it practically impossible to change any records of transactions, tackling any fraud issues. This means no government or central banks can manipulate or change the blockchain.
So can you use cryptocurrencies to buy things?
Yes. Some companies accept cryptocurrencies like Bitcoin straight up. But a lot of places that accept Bitcoin actually convert it to fiat currency (like USD or AUD) at the purchase. So they’re not actually accepting Bitcoin, but the buyer is using Bitcoin to purchase it.
Why would anyone have cryptocurrency in the first place?
A complicated and great question. Speculation and protection. Speculators hope the price of cryptocurrency will go up so they make money. Those that use cryptocurrencies also tend to do so because they want to attempt to protect their purchasing power from central banks printing money and devaluing the currency with inflation.
The separation from governments means that even if there’s turmoil within a country, cryptocurrencies have the potential to retain value. Having more private and secure money without the risk of governments and central banks is appealing to people.
Additionally, cryptocurrencies pride themselves on the seamless ability to make transactions and transfers between two parties, as there is no need for a third party, like a bank.
