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What is Cryptocurrency? An amazing new asset class which exploded into prominence in 2017. A new type of currency, which will succeed in disrupting the global monetary system and ending cash as we know it, say its admirers, who say it is a store of value superior to precious metals. A passing fad which governments and central banks will soon destroy or subvert, say its detractors.
In this introductory lesson, we explain how cryptocurrency is a new class of currency, created and managed by computer software using blockchain technology, beyond the control of governments and central banks. As a new and highly controversial, little understood asset class, it is both extremely risky, and extremely potentially profitable.
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“Cryptocurrency” is the common name for digital currency created by and stored within computer software. It has no physical existence: there are no notes or coins that you can hold in your hand. Cryptocurrencies are not under the control of any country’s government or central bank. There are dozens of cryptocurrencies, but any list of the top ten cryptocurrencies would start with Bitcoin (arguably the “best” cryptocurrency), Ethereum, Ripple, Bitcoin Cash, and Litecoin.
Many people find cryptocurrency hard to understand. Is it real money, or not? Well, the answer is neither “yes” nor “no”. Firstly, to be real “money”, a currency must be acceptable as a means of exchange – something you can always pay with, or be willing to accept payment in. Cryptocurrencies are not there yet, because very few stores or online businesses accept them as payment. If you ask yourself “what can I buy with Bitcoin”, the answer is “not much”. You would also find it extremely difficult to pay your monthly bills in Bitcoin or any other cryptocurrency!
Cryptocurrencies are all based upon a new type of computer technology, called “blockchain technology”. Blockchain technology is an encrypted, decentralized, peer-to-peer database. This technology keeps a shared ledger of all the units of a cryptocurrency, its ownership and transaction history, broken down between the servers of all its administrators into tiny pieces. It works like peer to peer file sharing programs, and it is argued that this makes the technology more secure by making hacking very difficult to achieve. However, it should be noted that security has been a problem with some cryptocurrencies in the past.
The result of blockchain technology is that it is now becoming possible for anyone with access to a computer and an internet connection to make financial transactions within minutes, and is also free from manipulation by governments or banks.
At the time of this writing, and for at least some time into the future, cryptocurrencies are going to be much, much more important as investments or instruments for cryptocurrency trading than they will be as an exchangeable currency for buying and selling things. This means that one of the most important things you need to understand is that cryptocurrencies are EXTREMELY RISKY RIGHT NOW. They are very new, and it is a true challenge to the powers of national governments and central banks to control the money supply. They are subject to enormous fluctuations in price, as speculation increases. A cryptocurrency could be subject to legal attack by a government, be hacked, or split into two different currencies, at almost any time. It would not be a great surprise if the value of a major cryptocurrency either doubled or fell by 90% within a week or two! So, while there are immense potential gains to be had, there is a risk of big losses too.
By now it is probably obvious that the odds of success in a long-term investment in a cryptocurrency is directly related to how successful the currency will be, so if you can take an intelligent view on whether it will fail or succeed, you have the basis for an investment, either long or short. For example, if you think most of the world will be using Bitcoin in five years to pay their bills, it is probably a good buy. If you think it is just a passing fad, it is probably a good sell.
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