Cryptocurrency 101

21 Sep 2021

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Since early 2021, many people have been introduced to cryptocurrency through social media or even the daily news. Since then, many people have invested in crypto, but not many people understand the basics of cryptocurrencies. So in this article, I will break down all of the details you need to know to understand crypto in general.

 

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First, we need to know how a cryptocurrency works. In short, cryptocurrency is a digital medium of exchange that uses cryptography to ensure the data is safe and decentralized. Some of you may not know what decentralized here means. Decentralized here means that, unlike the Indonesia Rupiah or U.S.Dollar, no central bank defines the value nor has the power to control that cryptocurrency. This decentralized system can be achieved because they have a technology called blockchain that is different from a traditional bank. In regular banks, only the bank has data on all transactions from all of their clients, and the clients can not see transactions other than their own. But in cryptocurrency, all of everyone’s transaction data is saved in every computer. Every computer should confirm that this transaction is legit before updating the database when somebody wants to do a trade. So, because you have the same copy of this database in millions of computers, it would be easy to see when someone is trying to do something fishy. Also, one more fun fact about cryptocurrencies is that every transaction made in the space is purely opened to the public. Still, no one knows who is sending to whom because everything has been encrypted using cryptography which makes it safe.

 

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Now that we have the basic idea of how cryptocurrency works, you must be curious about the functionality of a cryptocurrency. Well, in general, there are 3 useful functionality which is,

 

1. As an investment instrument

In the economy, we have something that is called the supply and demand theory. This theory says that when the supply is way lower than the demand, the price skyrockets and vice versa. So since cryptocurrency has attracted many people in the past few years and some coins such as bitcoin have a limited supply of 21 million coins, it can be categorized as an investment instrument just like gold. Some other cryptocurrency is more like stock (buying a percentage of a company), but rather than buying their share of the company; we buy the token that is issued from that company. This investment instrument is high risk but also high gain since the volatility is high because the market cap of cryptocurrencies, in general, is still lower than Apple stocks in 2021.

 

2. Used as a typical currency

Since the beginning of 2021, big companies such as Tesla, Coca-Cola, and PayPal have accumulated bitcoin. They see that this cryptocurrency space is still new and has a lot of room to grow in the future. So, a company like them has started to accept bitcoin as a payment choice for their product to grow their investment even more. This news means that major companies like them are starting to value bitcoin/cryptocurrencies better than regular currencies such as Euro or even the U.S. Dollars. Since not many companies accept cryptocurrency as payment, this is a good start before crypto becomes more globally accepted. Even El Salvador accepted bitcoin as one of their legal currencies in that country a few months ago.

 

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Francis Alexander