In the simplest of terms cryptocurrency is a digital currency used to make transactions. It is currently not being used to make transactions but can be potentially used to do so. Before jumping to cryptocurrency let’s clear our basics.
Think of cryptocurrency as any other currency, we use currency to fulfil our needs and we exchange currency because we are aware that we will be provided with goods and services in return. Now, this currency is not limited to just notes or coins but can be anything. Like in olden times barter system existed where people would exchange goods and services for other goods and services in return but this concept had a lot of limitations so currency started evolving. We moved to commodity money i.e., gold, silver then to metal money then paper money then plastic money(cards) and now we are moving towards crypto. These currencies evolved because the previous methods of transaction had their own drawbacks.
Like any other method, the method of transaction that the world operates on now also has drawbacks like centralisation, elasticity, the ease with which it can be issued to name a few.
Need for Crypto
Now, this is where cryptocurrency comes into play. It is a virtual form of currency that uses blockchain technology. Blockchain technology is a virtual decentralised ledger that keeps a record of transactions. Cryptocurrency is secured by cryptography which is a secure communication technique.
Now, keep in mind that it does not physically exist, one can’t hold up a bitcoin because it is based on a network distributed across computers. So you don’t have to carry it around, kind of like net banking or online transactions but online transactions are made through banks and can be monitored by any authority. Now, imagine you want to transfer your friends 5 bitcoins. You can do it without a bank or an intermediary interfering. It can be done anonymously with your privacy being protected. And since no authority controls it, that currency cannot be altered either.
With paper currency, the government can print as much money as they want because they control it and printing a lot of money causes inflation but that is not the case with cryptocurrency because only a limited number exists.
For example, only 21 million bitcoins exist on the web. Bitcoin is a form of cryptocurrency created allegedly by a Japanese fellow Satoshi Nakamoto. Now , this could be a pseudonym or perhaps more than one person was involved in the development of said currency. However, for the most part that person’s identity still remains anonymous.
Now, this number of 21 million cannot be changed, it is constant. There will always exist 21 million bitcoins and can be found out through miing. This is done by solving puzzles. The more puzzles you solve, the more bitcoin you get. As more and more bitcoins are mined, the puzzles get tougher. These bitcoins are not easy to find and it is definitely not easy to solve the puzzles. Perhaps, that is why Bitcoin is so valuable.
It is possible that somewhere in the not so far future we would not be using paper currency but crypto. For now, cryptocurrency is highly volatile and is used only for investing money.