What is Cryptocurrency and Blockchain Tech?
Welcome to our 3-part Cryptocurrency articles series where we break down 1) what cryptocurrency (we’ll call it crypto for short) is like you’re 10 years old, 2) how to analyze crypto, and, more importantly, 3) what you need to think about come tax time if you invest in crypto. This is part 1 of the series, giving you all the information you need to know about crypto and blockchain tech. Get ready to read-up on the new investment wave!
What is Cryptocurrency?
Want to know about Cryptocurrency? I’ll give you a scenario. Let’s say you’re hanging out with your cousin and she asks you for five dollars to buy something at the corner store. You give her five dollars and walk on your merry way to the store.
Whether you know it or not, a transaction just took place. Your cousin now has five dollars and you have zero dollars. You physically reached into your pocket, grasped the five dollars in-hand, extended your hand and saw your cousin take the money. No third person (or party) was there to transfer the money from your hands to hers, or verified that you handed five dollars to her and she accepted it. See, easy right? Let’s take it a step further.
Let’s say you gave your cousin five digital dollars. You pull out your phone, login to the digital money transfer app and send the money to your cousin. Ping! She’s received the money and accepts. But did she actually receive it? I mean you heard the ‘ping’, but what happens if she didn’t actually receive the money? What do you do? Do you send another five? Now you’ve sent $10 instead of five because you don’t know if the first amount went through. Or maybe someone hacked the exchange to “show” you sent the money, but in all actuality it didn’t work. In a nutshell, a digital exchange has a different feel than a physical one. Which could present unique problems compared to physical exchanges.
Here’s the solution…..
One of the tried and true ways that has always been used to counteract this problem is a ledger. A good ole’ accounting tool used to track transactions over a period of time. But, you don’t want to carry a ledger around all day so you decide to create a digital ledger and teach your friends how to make one. Yay! Problem solved! Here’s a dilemma. What happens if one of your friends was able to “game” the digital ledger and increased the amount of digital dollars they have in the exchange?
Or what happens if several of your friends decide to give each other money all at once? Now you would have to bring someone in to verify all of the transactions. You and your cousin was one exchange, but several parties?! Is there a way to give money digitally and feel the same way you did when you gave money to your cousin? We’ll come back to this question later and take your handy dandy digital ledger to the next level.
If the digital ledger was made available to everyone instead of you and your friends, the ledger would be on everyone’s computer. You see where I’m going with this? Your one friend that was able to game the system can no longer “cheat the system” since it’s controlled by everyone. The code and rules of the digital ledger would be an open source system. Since the system is open source, anyone can contribute, maintain, and update the system. You could even make some digital currency as a reward for contributing. This is what’s called mining. It’s the only way to create more digital currency.
“Great! Know we just need to create this system!”
No you don’t. The good thing is a system like this already exists and it’s called Blockchain, a public ledger that is constantly updated. Every transaction has it’s own unique code which makes it un-hackable! That’s what makes blockchain technology so revolutionary! If you want to learn more about blockchain technology check out it here. Now let’s do a quick summary of what we just went through.
- Cryptocurrency is run on a blockchain, or a digital ledger, which is open sourced and constantly maintained and updated by millions of individuals throughout around the world.
- From our example, when you made that five dollar exchange you now know the digital amount left your hand (or in this case, account) and is now your cousins. The exchange will be updated and verified within the blockchain (digital ledger).
- Since the digital ledger is public, you didn’t need a third party to make sure you actually gave your cousin the $5, and not a fake one.
From our example, this is how cyptocurrency behaves giving you assurance that 1) your exchange went through, 2) it’s safely secured, and 3) hack proof. Now what do you do with all this new knowledge? Get in the game! Here’s the value of Bitcoin, right now. It’s going to continue to rise and there are several other alternative coins you can look at as well, but before you decide to turn your hard earned cash into digital coins check out the 2nd part of our article series on how to analyze cryptocurrency. You’re going to love it!
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