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What's a cryptocurrency?

Updated: Jun 21, 2019



While most people have at least heard of cryptocurrencies by now, not many can give a clear definition of what they are. It's understandable given that they've only been around for 10 years. As a comparison, debit cards were introduced in 1966 but didn't go mainstream until the '80s. And in 1990, debit cards were used in about 300 million transactions. In 2009, prepaid and debit cards were used in 37.6 billion transactions!


Now, if you think of it, debit cards were invented because banks were trying to find out new ways of charging you for using your own money. So when the financial crisis struck in 2008, people got angry - and rightfully so. People pay financial institutions to keep their assets safe. When they collapsed, literally locking thousands out of their bank accounts and putting people out of their homes, a handful of passionates decided they'd had enough.


Some created challenger banks. Some went a different route.


A developer named Satoshi Nakamoto decided to take on the world with a digital asset named Bitcoin. Backed only by a nine-page white paper and a few enthusiasts he contacted through forums, he set on to solve what we call Byzantine's general problem: a situation where all financial parties must agree on a single strategy to avoid complete failure but where some of the involved parties are corrupt and disseminating false, unreliable information.


If you're unfamiliar with the events from 2008, we recommend watching "The Big Short".

Bitcoin entered the market on October 31 (on Halloween!) of that year as an alternative to the financial system that had just failed. Bitcoin was intended to be a decentralized currency relying on mathematical proof - as opposed to regular currencies under central banks and based on trust. In a general atmosphere of anger and disillusionment, people were enthusiastic about Bitcoin being a possible solution.


In December 2017, its market capitalization swelled to a record high of $549 billion, surpassing that of Visa, whose market cap was then at... $254.74 billion.


Not bad for a 10-year-old, open source, crowd steered digital currency.



The technology behind it: blockchain


The underlying technology behind Bitcoin (and all cryptocurrencies) is called “blockchain”. In very short: crypto transactions are essentially blocks of data (i.e. block) being secured and bound together using cryptographic principles (i.e. chain). It’s a simple, decentralized way of passing information from A to B - and each block is verified by a net of millions of computers. The data doesn’t sit in one place: it’s confirmed and stored across the net, and each block is stored across the entire network - making it impossible to falsify a single record.


While Bitcoin and other cryptocurrencies such as Ripple use the technology for financial transactions, it can be deployed in many other ways. If you want to buy a plane ticket, you now only need two parties: the passenger and the airline. No more credit card company in the middle taking a cut in the form of processing fees. Your ticket is a block - and the airline’s entire ticketing system can be moved to the blockchain. It’d be a revolution.


And the key is this: it’s free. There are no transaction costs.


Blockchain technology has the potential to make companies like Uber and Spotify completely irrelevant. Why would you pay for a subscription or a service if you could buy music or rent a place by transacting directly with creators and landlords? When it comes to the financial world, it’s even more relevant. Sending money abroad is a lengthy and costly process. With blockchain, the process is instant and “almost” free: you’d only pay for infrastructure costs.



The world of crypto assets today


As of today, there are about 1,600 cryptocurrencies available for investment with a total market capitalization that's been stagnating around $70 billion for the past few months. In other news, the Bitcoin model isn't the only way to do things anymore. Other crypto assets have created their own, unique paths - either serving different functions (such as electricity grid management) or using private blockchains (for more control and security).


The most prominent example is Ethereum. Unlike Bitcoin that is used solely for financial services, Ethereum aims to distribute and enable the collaborative creation of open-source softwares. A user can create a smart contract and push the data so that it executes the desired command. If you're in real estate, for example, there's a great use case for ownership transfer from one person to the other - without any middlemen.


The Ethereum blockchain, much like Bitcoin's, is completely public. Anyone can assess the technology and start building platforms. Use cases are only limited by your imagination. But not all crypto assets are like that. Monero and Zcash, for example, both use private blockchains: it means you need special permission to access it. Financial services generally favor private blockchains because they combine efficiency and privacy.



Should you invest in cryptocurrencies?


Now that you know a bit more about cryptocurrencies, let's talk about investment. Putting money in the stock market is scary - because it's not easy to predict what will happen. So why would you invest in crypto assets, which are relatively young and volatile? In many ways, cryptocurrencies - and the blockchain technology they're supported by - are already transforming the financial world. Let’s think about it.


Just like emails made traditional, slow mail completely outdated, blockchain technology has the potential to transform centralized banking systems. If you missed the dot-com boom of the late nineties because you were too young and didn't invest in eBay or Google when they were still in their infancy, cryptocurrencies might be your mulligan. As assets, Bitcoin and Ethereum are still very young - but their volatility is decreasing.


You probably won't become a crypto millionaire if you invest in Bitcoin now. And that's exactly what makes the biggest cryptocurrencies an investment to consider. With rising popularity and usability, demand will rise - and so will the worth. Cryptocurrencies also react to the market differently. Stocks and bonds react to economic events in opposite ways. If the economy is doing well, stock prices rise and bond prices drop - because bonds are too secure and investors want to then put their money on the stock market.


Diversifying your assets is one of the biggest rules of investments. In short: never put all your eggs in the same basket. If you already have a stocks-and-bonds portfolio, increase your diversification by adding crypto assets. It's potentially a win-win situation. If the market fails, there’s the possibility that it will have a positive impact on cryptocurrencies - because people will get frustrated with traditional financial institutions stocks and invest in crypto.


Invest because you know your fundamentals, not because you'e afraid of missing out.

Before you start though, research. Get a sense of the strength of the currency you want to buy. You can do so by looking at the crypto assets pair diversity, which is measured by how many regular and cryptocurrencies can be used to purchase it. The more pairs, the more robust and reliable it is. To see which crypto assets are paired with which regular and/or cryptocurrencies, check out the website CryptoCompare and start listing the interesting ones.


But if you are truly serious about investing, you have to do more than that. Consider a crypto asset's use case. Start by reading its white paper: that's the document that explains what it does. It should explain what problems it solves, and in details. Look at the website. Make sure you understand everything. Be wary of vagueness, spelling errors, lack of transparency... A trustworthy crypto asset should always be backed by a strong community.



Conclusion? Invest… responsibly


Cryptocurrencies have the potential to be huge investment opportunities - the kind that's not often available to young investors. But before you do anything, make sure to make yourself comfortable with the technology, the market and the different models of crypto assets. Pay attention to white papers and decentralization. There’s always a risk to lose money. But if you do your research, cryptocurrencies have the potential to be a great investment.




Nothing in this article should be construed as constitute or form a recommendation, financial advice, or an offer, invitation or solicitation from BigPay to buy any crypto assets. The content and materials made available are for informational purposes only and should not be relied on without obtaining the necessary independent financial or other advice in connection therewith before making an investment or other decision as may be appropriate.