Know Your Crypto Part 1: What are cryptocurrencies?
Cryptocurrencies are a form of digital money that can be sent or received over the internet. People can buy or sell cryptocurrencies directly with each other, removing the need for a third-party or financial intermediary like a government or bank. This is known as a peer-to-peer electronic cash system.
Because cryptocurrencies are transferred using a peer-to-peer electronic cash system, their transaction fees are typically much lower compared to traditional financial instruments like credit and debit cards.
Cryptocurrencies use a transparent ledger of open and public transactions called the blockchain. The blockchain is an open accounting system connected by thousands of computers (also known as nodes) working together to track the ownership of the cryptocurrencies.
After the transactions have been verified, they are recorded in the public ledger in the form of a new block. As new blocks are added and tethered together to all the previously existing blocks on the ledger, the resulting chain of connected blocks creates the blockchain.
Unlike fiat currencies (money issued by national governments and central banks), blockchain functions without a centralized authority like a government, central bank, or financial institution.
Cryptocurrency is decentralized, meaning there is no one computer, person, or institution that holds the ledger. With cryptocurrencies, every computer in the network is also keeping a copy of the ledger (blockchain). Every cryptocurrency transaction is broadcast to everyone on the network, who then work together to identify and verify legitimate transactions from fraudulent transactions.
Cryptocurrencies are issued to users on the system who help process transactions on the network. This process is known as mining. In general, cryptocurrency miners are users on the system with highly specialized computers that verify and record transactions on the blockchain.
Miners earn cryptocurrency coins or tokens as a reward for their work, updating and maintaining the blockchain. This is how new cryptos are created and enter into circulation. The standard set of rules and procedures that goes along with tracking the transactions and keeping the ledger by all of the users in the mining process is known as the network's protocol.
Cryptocurrency also allows users to become anonymous. By encrypting the blockchain using cryptography, it is not possible to know who is involved with the transactions. Cryptography is also used to secure transactions and helps control the creation of new coins. No individual, group, or organization can control or manipulate cryptocurrencies because it is cryptographically secure.
Cryptocurrencies give users full control over their money. Governments and banks have no jurisdiction over holdings of cryptocurrencies, and as a result, no government or bank can shut down an account. When using cryptocurrency, there are no borders, bank holidays, and no imposed limits.
Cryptocurrency also has fewer risks for merchants. Transactions have a higher level of security, are irreversible, and do not contain customer-sensitive or personal information. This protects merchants from losses caused by fraudulent transactions, like someone making a fraudulent purchase online with a stolen credit card number.
Payments can be made without any personal information being disclosed during the transaction. This offers reliable protection against identity theft. Users can take additional steps to protect their cryptocurrencies with backups and encryption.
Because of the many benefits that cryptography has over traditional currencies, they have gotten a lot of media attention in recent years. This is particularly true of Bitcoin, the first cryptocurrency created by Satoshi Nakamoto in 2009.
The price of Bitcoin has soared to levels of over $20,000 (BTC to CAD) in Dec. 2017, compared to a price of $0.003 (BTC to CAD) in Mar. 2010. Due to a limited number of Bitcoin (and other cryptocurrencies) in circulation, some investors believe that they might be a better store of value moving forward compared to other investment options like bonds, equities, and gold. The price of Bitcoin at the time this blog was written was $12,350 (BTC to CAD).
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THIS BLOG AND WEBSITE ARE NOT INTENDED TO PROVIDE INVESTMENT, LEGAL, ACCOUNTING, TAX, OR ANY OTHER ADVICE AND SHOULD NOT BE RELIED ON IN THAT OR ANY OTHER REGARD. THE INFORMATION CONTAINED HEREIN IS FOR INFORMATION PURPOSES ONLY AND IS NOT TO BE CONSTRUED AS AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF CRYPTOCURRENCIES OR OTHERWISE.