One thing that has been in the news constantly in the recent times is the COVID-19, however, you might have noticed the terms like ‘Bitcoin’, ‘Crypto’, ‘Dogecoin’ pop up on the news briefly or as you scanned the newspaper. If you have ever wondered as to why Elon Musk’s tweets have been going viral in the economic world, this article is for you. If you are someone who is totally unaware of what cryptocurrencies are, this article is for you.
What exactly is cryptocurrency ?
The word cryptocurrency is made up of 2 smaller words. Crypto(Encryption) and Currency. Let’s talk about currency. Over time, the currencies have changed a lot. From simple barter systems, nickels, gold, paper. We as humans have assigned some value to these objects, which become our currency. The paper money which we hold has a certain value agreed upon by the entire nation. It is the government’s duty to make sure that the value of these notes is maintained. If the government wishes, it could print more money. Due to this unlimited amount, the value of the money could decrease over time since there will be more of it in circulation. This concept is known as inflation.
Here we can identify 2 problems with paper money. It is unlimited and centralised. In order to solve these 2 problems, we have cryptocurrency. Cryptocurrency is basically digital money, that can be stored on your computer, and transferred to one another without the intervention of banks or any other intermediaries.
Advantages of Cryptocurrency
- Decentralised: Nobody controls the currency
- No transaction restrictions: Available to everyone of every nationality
- Secure: It has an unalterable record of every transaction
- Privacy: You can make anonymous transactions
- Limited: Finite amount
How it functions:
Since there is only a limited amount of a particular cryptocurrency, there are 2 ways to obtain some of it.
Mining for crypto currencies is an entirely different process from traditional mining. One has to solve complex mathematical equations and problems to get hold of cryptocurrency. The more the number of people trying to solve these problems, the more complex these equations get. Hence, it also increases the price of the currency.
For those who do not have the resources, skill set or means to earn cryptocurrency, they can buy some from ‘Hodlers’(crypto holders).
Since the number of people who are trying to get cryptocurrencies such as bitcoin are increasing, the value of the currency increases. This is because the currency becomes scarce. When some big companies like Tesla started to accept payments in bitcoin, the this asset was considered to be very valuable by the people. This explains why the tweets of Elon Musk are affecting the prices of Bitcoin.
I strongly believe that cryptocurrencies are going to be the currencies of the future, however it is very important to gain substantial knowledge before formulating your opinion. There are many celebrities and entrepreneurs who have invested in cryptocurrency, and at the same time, there are many who haven’t. One such notable example would be Warren Buffet, who thinks that cryptocurrency is ‘contrary to the interests of civilisation’.
Some famous crypto currencies: Bitcoin, Ethereum, Dogecoin, Tether, XRP.