Even if you’ve been living in a shed with no access to the Internet these past two months, we imagine you still won’t have escaped the ‘bitcoin explosion’ and all the hype that surrounded it; even if you have no idea what a bitcoin is and why everyone lost their heads about it.
If you're feeling a little lost, you'll be happy to know that we've answered a few of the questions everyone wanted to ask but were too worried they’d be cut down with withering stare if they did. We’re here for you, to help you sound like the next cryptocurrency expert(ish).
What even is a cryptocurrency?
We’ve all grasped the concept that a cryptocurrency has no physical manifestation. I.e. You can’t hold a unit of cryptocurrency in your hand or lose it down the back of the sofa, because it only exists online; that magical place where all and nothing is real. Great.
A cryptocurrency is, in essence, digital money. It’s designed to be secure and anonymous. It’s called ‘cryptocurrency’ because it uses cryptography to create an uncrackable code that is your ‘currency’ or ‘coin’. This code is all generated by a network. This means that there is no central banking system keeping everything in check, like how the Bank of England keeps everything in check for the pound by controlling currency flow etc. Nobody is in charge because nobody has to be. These huge lines of uncrackable code regulate themselves, and all transactions are recorded in a ‘blockchain’ (wait for it. We’re covering blockchain in a bit).
Most cryptocurrencies are designed to have a ‘cap’ on the amount of that currency that can ever be mined (we’ll come back to ‘mining’ later), so there will only ever be a finite amount of that money created. This is unlike the traditional form of currency, where central banks can print more money or take it out of the system depending on what’s needed. According to Wiki, there were over 1000 different cryptocurrencies as of September 2017.
Bitcoin, of course, is the most famous of all these.
OK, this is actually pretty simple. A blockchain is essentially just an old school ledger. Every transaction made with bitcoin is recorded (in huge, long, uncrackable code) in a block, which is then added to a blockchain, which is a database shared across a network.
It’s the main part of the reason that cryptocurrency doesn’t need a centralised bank to keep it all in check, because once a transaction is added to a blockchain it is very difficult to change. Take a look here at a more indepth look about how blockchains are created and why they work.
A few years ago the economist wrote a great in-depth piece on how bitcoin mining works that explains it very clearly.
If we use bitcoin as the example currency here then, essentially, bitcoin miners validate all bitcoin transactions and add them to the Blockchain. They (obviously) do this through very complicated mathematical Cryptography. Once they’ve done this they let all the other miners on the network know, the other miners then verify their work, and once it’s approved the transactions are added to the blockchain.
It’s basically just high-level book keeping. Once they add a new ‘block’ of verified transactions to the block chain they get a reward, paid in the currency itself. i.e. for every block added bitcoin miners get a 25 bitcoin reward.
Why did bitcoin explode so fast?
Some of the reasons people invested in bitcoin were due to its decentralised system, it’s cryptographic security, and the absence of government control, among many others.
However, the reason it was bitcoin in particular that exploded so fast was because, as with anything that sees a super fast boom, people suddenly became interested in it. Simple as that.
The way our market is set up, a commodity becomes precious once more people want it. The more some people had it, the more others wanted it. They invested. Their investment added ‘value’ to the coin. Done.
What are cryptocurrencies ‘backed up against’?
This is where it gets a little hairy. Essentially, it’s nothing.
What’s hairer still is that actually the same can be said for all our traditional currencies too; the dollar, the pound, the euro, you name it. All these currencies were traditionally backed by a commodity (namely gold), however, since the 70’s, that’s no longer true either. They’re backed only by their economies. Similarly, bitcoin is backed up only by investment interest.
Money has value because we believe it has value.
Explain how you spend them
Because they’re famously secure and anonymous, all cryptocurrencies carry the stigma of being associated with underhanded dealing and nefarious deeds. However, that’s no longer true. Since this very recent surge in cryptocurrency value, it’s come out of the dark and into the everyday public consciousness.
Places like Expedia, Microsoft, and Gyft all accept bitcoin as legitimate currency now.
Now there's a growing movement to diversify your savings and begin to invest portions of them in successful cryptocurrencies. Once you have your savings from Oval squirreled away and are ready to begin investing, have a long hard think about the possibilities of cryptocurrencies and what they mean for you.