What is Cryptocurrency?

Everything a beginner needs to know about crypto in under 5 minutes

Cryptocurrency. A word that either has you dreaming of possibility, or that feels so vague and mysterious, you simply tune it out. Whether you’re a beginner enraptured by the promise of crypto, or one completely perplexed by the concept, we’re going to break down the basics today so you can start participating (or at least understanding) this new form of currency.

To understand crypto, we must first understand money

You’re probably thinking, “That’s silly, of course I understand money!” But do you really?

At its very simplest, cryptocurrency (or “crypto”) is digital cash. Just as our paper money is a mere representation of value, so too is cryptocurrency. But how does anything - be it paper money or coins or digital currency - become valuable? Well, according to dummies (yes, those infamous yellow books), it must have a few key characteristics:

  1. Enough people must have it

  2. Merchants must accept it as form of payment

  3. Society must trust that it’s valuable and will remain valuable

You’ll notice that there’s nothing about regulation in that list. That’s because, while most of us may think of money as a thing that’s government-controlled, it’s not actually a requirement for a currency to become valuable. In fact, that’s one of the defining points of cryptocurrency.

How is cryptocurrency regulated?

While this is a moving target, cryptocurrency largely remains unregulated. Unlike other forms of currency that are controlled by a state or government authority, cryptocurrency has no central regulatory body. To some, this is seen as an awesome opportunity to have a truly international form of monetary value, while to others it means there is no one to turn to if things go wrong.

Instead, there are a bunch of volunteers (typically referred to as “miners”) who keep track of transactions. They’re aided by complex software systems to do this work (they do get rewarded for it). In this way, cryptocurrencies are completely decentralized, relying on networks of people to keep it going instead of a bank or government. Let’s take a closer look at how all of this actually works.

How cryptocurrency works

Like we said before, cryptocurrency is essentially digital cash. It’s a form of payment that you can use online in exchange for goods and services.

In 2008, Satoshi Nakamoto outlined the concept of cryptocurrency in a paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Today, that concept has become a reality. All cryptocurrencies, Bitcoin being the first and arguably most popular, operate through a peer-to-peer network, enabled by a technology called blockchain.

If your eyes just glazed over (like mine did the first ten times someone described crypto to me), stay with us. Below are two descriptions of blockchain: one technical, and one more metaphorical.

Blockchain (the technical version): Blockchain is an open, decentralized digital ledger. There’s an account - shared openly with the peer-to-peer network and recorded by ‘miners’ - of every transaction that occurs. Thanks to cryptography, there are mathematical guarantees that keep transactions secure (i.e. ensuring that an account that’s sending cryptocurrency is actually legitimate). These guarantees are called “keys,” and each user with a crypto account has their own private and public keys.

Blockchain (the simple version): Blockchain is sort of like a checkbook, but one that’s distributed across computers all over the world. With a checkbook, you’d record your transactions in your checkbook ledger; with crypto, software is recording each transaction into one big ‘ledger’ known as a blockchain. Everyone who uses crypto has their own copy of this ‘ledger’ and as each new transaction is added, everyone’s copy gets updated automatically.

There are many more technical details about how cryptocurrency works, but for the purposes of this first explainer post, we just want you to walk away with this point: crypto is a form of decentralized digital cash enabled by a technology called blockchain.

How to buy cryptocurrency

Buying crypto is a whole story on its own, so we’ll be covering it in some upcoming posts here on the blog. For starters, you’ll need to determine which cryptocurrency you want to invest in, and then get an online app called a “wallet” to hold your currency. If you can’t wait for our next post to get started, you can learn more from the crypto reviews on Nerdwallet.

Otherwise, let this all sink in and come back next week for more on buying crypto!

what is cryptocurrency