Most people are skeptical of cryptocurrency and cryptocurrency technology for a large number of reasons.
If you don’t know a whole lot about digital currency, it can be pretty intimidating. Especially since it doesn’t seem to be backed by anything.
First off, cryptocurrencies aren’t backed by any kind of central banking system. Because of this, many people question their intrinsic value.
But most people don’t know that the fact that most digital coins aren’t backed by a central banking system is actually what gives them most of their value.
It makes them different from traditional forms of money.
The decentralization of cryptocurrencies means that the possibilities for their use and value are truly limitless where centralized fiat currencies face regulation.
But what is the true value of cryptocurrency technology, simply put? Find out with this breakdown that any regular joe can understand.
First things first: what exactly are cryptocurrencies, anyway?
If you take away all of the fancy terms surrounding cryptocurrencies and reduce everything down to one simple definition, you’ll find that they’re really just entries in databases.
These entries represent different values.
The entries that create coins can’t be changed to any other type of value amount unless users fulfill certain requirements.
This might seem like an oversimplified explanation of a very difficult to understand form of digital money, but all other currencies can be defined in a similar way.
Just think about the money that’s in your bank account right now. All that the figures really are is entries in a database that can only be changed once certain requirements are fulfilled.
Physical money works in the same way.
It’s entries in a physical database that are changed based on the coins or notes you own and acquire or give away in exchange for goods or services.
Even dollar bills have no actual value.
“Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything…The notes have no value for themselves, but for what they will buy.”
Put simply, a dollar bill isn’t really lawful money. It’s legal tender.
This means that our current monetary system isn’t as different as cryptocurrencies as you probably think.
There are more payment options today than there ever have been.
Mobile payments, for example, which are expected to hit $142 billion by 2019, feature peer-to-peer transactions, in-person transactions, and remote transactions.
Here’s a breakdown of how most cryptocurrency works:
As you can see, Bitcoin doesn’t actually have any direct intrinsic value. It’s not redeemable for any other type of commodity, like gold.
It also has to physical form and exists only in the network. It doesn’t have to be physically printed like the U.S. dollar. Or minted like regular coins.
The network of cryptocurrencies are all 100% decentralized.
Cryptocurrency miners confirm transactions and create the coins.
Each cryptocurrency consists of a network of peers. Each peer has a record of all transactions, meaning that they have a recording of the balance of every account.
A transaction is really just a file that says “Tom gives X Bitcoin to Sally” and is signed by Tom’s private key.
Then, once signed, a transaction is broadcasted within the network.
All of this is done with the help of blockchain technology, which is what allows cryptocurrencies like Bitcoin to be possible.
Blockchain is incredibly valuable because it has huge potential to become the norm of the future…in even more areas than just currency.
Blockchain technology is not only useful when it comes to transactions, but it is also a useful tool for a variety of industries as a means to provide more security and transparency to users.
Blockchain has the potential to advance the human race toward a world where third party regulation isn’t needed for the circulation of money or system operations.
That’s why it’s no surprise that there will be an estimated $400 million spent on blockchain technology in 2019.
The blockchain is just the ledger in which the cryptocurrency transactions are recorded in chronological order.
It’s also resistant to fraud, making it one of the most secure technologies to exist.
It’s also public, but allows each user to remain anonymous. Each time a Bitcoin is bought or sold, a block is added onto the blockchain.
As blockchain technology becomes more accessible and widely used, more and more industries like manufacturing or consumer goods will begin to use them.
Blockchain technology can also be useful for securing and improving messaging apps, voting, education, car sales, cloud storage, and much more.
This will cause demand for blockchain technology to increase, which drives value in big ways.
The number of online cryptocurrency exchanges has skyrocketed in the last few years, which has driven up the market cap of several coins.
As cryptocurrencies become more and more popular and more governments try to implement them, prices will be driven even higher.
Just take a look at this trajectory of Bitcoin inflation over time:
Supply and demand are the driving force behind the value of anything that is tradeable, including digital currency.
If more and more people try to buy Bitcoin while other people are willing to sell the Bitcoin they currently own, prices will be driven straight up.
On the other hand, if a coin faces tons of hacking attacks or gains a negative reputation, demand for the coin will plummet quickly.
Once demand plummets, so do prices. And the decline of one cryptocurrency usually means that the rest of the cryptocurrency market will mirror the same trend.
For example, if Bitcoin demand and prices take a dip, so will the demand and price of Litecoin and every other cryptocurrency on the market.
The energy put into creating and securing cryptocurrency is extensive, which also adds value to the technology. Here’s an overview of how mining works.
Electricity usage that is required for creating blockchains can be huge.
When it comes to Bitcoin, the blockchain uses just as much energy to secure coins as a small country might use.
In fact, one Bitcoin transaction uses as much energy to power your house for one week.
This energy usage affects the price, since a certain amount of power is required to mine one Bitcoin, on average. As difficulty increases, so does price.
Since electricity prices differ from country to country, the price is costs to mine Bitcoin depends on where you live.
As the blockchain becomes more secure and the mining difficulty grows ever higher, the prices reflect the difficulty.
If you didn’t know, the mining process works by first having servers generate complex math problems.
Then, miners solve them in order to release bitcoins and update/secure the blockchain.
The inflation of fiat currencies can also affect the price of cryptocurrency.
If the price of a particular fiat currency, like the U.S. dollar, falls, the price of Bitcoin will usually rise in relation to that currency.
This is because people can they buy more of that type of currency with Bitcoins or any other type of altcoin.
Central banks print more and more money to keep interest rates low at an artificial level, and the price of altcoins reacts as rates change.
Although cryptocurrency is affected by fiat currency and other valuable materials, like silver or gold, Bitcoin is unlike any other form of money.
Bitcoin is highly divisible, globally transferable, durable, secure from counterfeiting, scarce, and government issued, decentralized, and programmable.
The same things can’t all be said for traditional currency.
That’s part of the reason why just one Bitcoin currently equals thousands of U.S. dollars.
Most currencies are controlled by a central government so that the creation of the funds can be regulated by a third party.
But the creation of cryptocurrency is open source, controlled by code, and entirely based on peer-to-peer interactions.
No single centralized entity has any control over the currency.
The price of Bitcoin affects all other cryptocurrencies, since it’s the most popular type of coin.
Bitcoin is typically referred to as the “reserve currency” of the entire cryptocurrency market.
Increases and decreases that apply to the price of Bitcoin affect other cryptocurrencies and alt coins, like Litecoin, for example.
Bitcoin was the very first mainstream form of cryptocurrency and is the most supported, so it makes total sense that the price of Bitcoin can affect the rest of the crypto market.
However, some governmental bans on cryptocurrencies can affect prices, too.
There are only a few countries in the world where residents would be able to live on solely on Bitcoin without needing to own any portion of fiat money.
Legal issues can affect the overall price of a type of coin.
For example, if a government becomes very aggressive when it comes to tax laws, people may wish to hide their assets within some kind of cryptocurrency.
This can make prices jump as people rush to buy.
If a country bans cryptocurrency altogether, prices can drop dramatically as people sell their coins as fast as they can.
On the other hand, some countries accept cryptocurrencies as official forms of currency, which can have a positive effect on price.
However, some governments are very weary since cryptocurrencies can be used against the will of a government and its economy.
Most people are skeptical about cryptocurrencies because they aren’t regulated like regular money.
Cryptocurrencies aren’t backed by a central banking system, so most people question their value and legitimacy.
But the fact that they aren’t backed is actually what makes them so valuable.
The deregulation means that cryptocurrencies are controlled by the people, not a government or a third party entity.
The blockchain technology also adds to the value and security of each different type of coin.
Blockchain technology is not only valuable to digital currency; it’s also valuable for adding an extra level of security to many different industries.
The supply and demand of each kind of coin drives the value, which is directly affected by fiat currencies.
The inflation of fiat currencies drives prices up. And the price of Bitcoin affects all other cryptocurrencies.
Governmental bans also change the value of digital coins. If a country recognizes Bitcoin as legitimate, prices might surge as people make purchases.
If a country bans the coins, prices will be driven down due to people selling their coins. In turn, more people will buy because they want to take advantage of low prices.
Now that you know just how valuable cryptocurrency technology is, you can feel peace of mind investing in it.