Understanding Crypto: A Guide to Digital Currency and Blockchain Technology
Understanding Crypto: A Guide to Digital Currency and Blockchain Technology
October 24, 2024
Your crypto curiosity cured - everything you need to know about what cryptocurrency is
Cryptocurrency has become an increasingly popular investment class. For now, investors are primarily in it for the potential appreciation in value rather than for utility purposes.
Cryptocurrencies are digital currencies made up of digital code, traded as assets. The technology that creates and stores them is blockchain, a decentralised ledger technology.
Cryptocurrency is a divisive topic. Its supporters believe it to be a disruptive technology that will change the world for the better, whereas its critics have claimed many cryptocurrencies to be Ponzi schemes.
What Is Cryptocurrency?
Let’s start by breaking the word cryptocurrency into two parts:
Crypto = means secret/anonymous. It reflects how user identities are anonymous.
Currency = the purpose of cryptocurrency. To be used as a currency. However, unlike traditional currency, cryptocurrency comes in a purely digital format.
Cryptocurrencies are digital currencies made up of digital code, traded as assets across a peer-to-peer network.
The technology that creates and stores cryptocurrency is called blockchain. It is a type of Distributed Ledger Technology (DLT) that uses cryptography to make it difficult for malicious users to influence results in their favour.
What Is Cryptography?
Cryptography is the application of hiding information. It aims to keep information confidential and secure. Typical use cases include:
Bank cards - encryption makes it impossible to access bank card details without the corresponding encryption key required for merchants to conduct transactions. The methods used to encrypt bank cards include PIN numbers, magnetic strips and a CVV.
Computer passwords - encryption makes your passwords unreadable to hackers.
Internet shopping - encryption means that your personal data supplied when shopping over the internet is protected from unwanted individuals.
The blockchain is decentralised, meaning it has no central authority like a central bank or government. It displays an unchangeable, immutable record of transactions across a public or private peer-to-peer network, which is accessible to all at all times.
The features of the blockchain arguably create a system that gives users greater privacy than under centralised, traditional finance, as your data is not collected by intermediary services or ‘middlemen’, such as a bank. Users can also save time and money by not needing such intermediary services to facilitate transactions.
Additional Points
A cryptocurrency is usable as a medium of exchange (i.e. users can use it to facilitate the exchange of goods/services between parties).
Like traditional ‘fiat’ currencies (e.g. US Dollars, the Euro, the British Pound and Singapore Dollar), most cryptocurrencies are not backed by physical assets (e.g. gold). The valuation of cryptocurrencies mostly comes extrinsically, meaning a cryptocurrency is only worth as much as others perceive it.
Traditional currencies, such as the US Dollar, are still available in physical form (e.g. a note or coin - acknowledged that they are less popular nowadays). Cryptocurrency, on the other hand, has no physical form. You will never see anybody use a crypto note or coin as payment. Or rather, if you do, just know that it’s fake!
The decentralised nature of a cryptocurrency means that a real or de facto central bank (e.g. The Bank of England in the UK, the Federal Reserve System in the US, or the MAS in Singapore) does not control its supply, but rather, by majority rule (known as network consensus).
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