Cryptocurrencies are now a significant part of global finance; thus, having the requisite knowledge of what they are and how they function is critical for any investor or enthusiast.
Cryptocurrencies seem to be the rave of the moment. Not a day goes by that we aren’t bombarded with news regarding the industry. Having a basic understanding of what crypto is, ensures one is not left out of the conversation.
For newbies, understanding what crypto is and how it works is undoubtedly the first step in the long journey towards profiting from the sector. Further down the line, when you grasp DYOR (Do your own research), you would realise that you were already doing so all along.
The Evolution Of Money
To properly understand cryptocurrencies, one must know what money is and how money has evolved. At its basic, money is a medium of exchange for goods and services. People use it to get what they need to live.
Before money came into existence, the trade by barter system was used to exchange goods and services. It involved an agreement between two individuals, each of whom possessed items that the other desired. However, early forms of bartering proved inadequate and unfit for purpose, making it tiring and inefficient. This led to the emergence of commodity money.
Commodity money solved most of the issues the barter system had. It was divisible, transferable and had generally accepted values. They were also highly desired, portable, durable, and straightforward to store, which made them valuable to the public. Early Examples of commodity goods include furs, skins, salt, rice, wheat, utensils, and weapons.
Later on, commodity money evolved to precious metals such as gold. This became the standard means of exchange until the 1970s when fiat currency was introduced. Fiat currency or paper money is what we use traditionally today; it derives its value from people’s faith in it.
Fiat money arose due to the scarcity of gold, which meant that growing economies couldn’t always mine enough to meet their currency supply requirements. Today, money’s value is determined solely by its purchasing power, defined by inflation.
Consequently, the 21st century has given rise to new forms of money—Mobile payments and virtual currency. Mobile payments are made using a portable electronic device such as a cell phone, smartphone, or tablet to pay for a product or service.
On the other hand, virtual currency would require a whole section dedicated to it.
What Are Cryptocurrencies?
A cryptocurrency or virtual currency is a form of money secured by cryptography, making it nearly impossible to counterfeit or double-spend. At its basic, it is a form of digital money that you can use to carry out everyday transactions, just like money in your bank account. However, it is quite different and probably way more interesting.
Cryptocurrencies are unlike traditional payment gateways like banks and PayPal, owned by specific organisations that hold your money and make transactions on your behalf. Virtual currencies are entirely decentralised. They do not have a central body backing them; instead, they are built on blockchain technology— a distributed ledger enforced by a distributed network of computers.
Consequently, digital currencies do not require any middleman to run. They also do not need you to sign up using an email address and password on any website. All that is needed is to download an open-source wallet simply, and in no time, you are all set up to send and receive money. Aside from these advantages, cryptocurrencies offer other benefits that make them appealing.
Firstly, cryptocurrencies are permissionless. This means that no one has the power to prevent you from using them, not the government or banks. Anyone can also participate in the network and access it at any time with undergoing a KYC(Know your customer) verification. It favours the anonymity the transparency of its users’ transactions and favours open source development.
Secondly, digital assets are censorship-resistant. The design of the cryptocurrency network makes it almost impossible for hackers to shut it down or alter it. Using the system requires the participant to follow specific rules that guarantee the network’s security. Also, no government or third party has control over who can transact or store their wealth on the network.
Lastly, virtual assets offer a quick and cheap remittance. Transactions made are almost instant and take only a couple of seconds to execute and confirm. Sending money using cryptocurrency also costs less than a fraction of international money transfer costs.
In conclusion, since the first cryptocurrency, Bitcoin, was created in 2008, it has evolved so much and is now considered better than gold. This evolution has also seen the development of other sectors, including decentralised finance (DeFi), currently highly favoured, non-fungible tokens(NFTs) and the Metaverse—a $1 trillion opportunity. Not knowing and understanding this technology leaves one at a complete disadvantage, especially as it is intricately interwoven with global finances.
Do you think cryptocurrencies are better than traditional fiat currencies? Let us know your thoughts in the comments below.
Chris is a crypto enthusiast and a firm believer in the blockchain’s ability to create a new financial paradigm. Through writing, Chris hopes to expose the intricacies of this disruptive technology and how it is beneficial to Africans and developing countries. He aims to give readers a rational and unbiased outlook of the industry by equipping them with the necessary information to make enlightened investment decisions.
