What Are Cryptocurrencies?
A cryptocurrency is a digital currency. You can think of it in terms of digital and virtual money. No physical coins or paper bills exist for any cryptocurrencies. Cryptocurrencies exist only in a digital format. Some people say that cryptocurrencies are stored "in the blockchain," but a blockchain is a digital file, not a physical object. You can think of your money as existing either online or in a computer. The concept of non-physical currency may seem confusing, but today, the majority of money in currencies we are familiar with is already digital. When people refer to cash, they refer to the physical form of a currency, including coins and banknotes. In the United States, barely ten percent of all US dollars (USD) exist in the physical form of bills and coins. Almost ninety percent exists only in computers, in chequing accounts and in investment accounts and things like that.
A common criticism faced by cryptocurrencies is based on the fact that they are not backed by any physical asset. Of course, this can be argued to be true for most currencies around the world today. Again, using the United States as an example, that country dropped the gold standard in 1971, which means that the federal reserve no longer guarantees that US dollars are backed by that particular financial asset.
Some people argue that even though a national (fiat) currency is not backed by physical assets, it is backed by a government and by the rule of law. This is true, but by the same argument, cryptocurrencies are backed by the rule of code. Computers aren't emotional, so the computer code acts as both a security mechanism and a court of law, whereby decisions (computations) are rendered consistently, and almost instantly. When it comes to value, it is fair to argue that the only true "value" of a currency is based upon what people, as individuals, believe it is worth. You can say that value is the ratio of exchange between any two goods, and money measures that value. But money by itself isn't worth anything unless people decide to agree that it is worth something.
The same applies to cryptocurrencies. If people decide that a single unit of a particular type of cryptocurrency is worth four chickens, and is willing to give up their cryptocurrency in return for four chickens, or sell their four chickens for that one unit of cryptocurrency, then two individuals have come to an agreement about the value of that cryptocurrency. This value fluctuates almost constantly, as people around the world buy and sell their cryptocurrencies, trading them for different types of fiat (traditional) currencies, or for other cryptocurrencies. Cryptocurrency exchanges help facilitate this trade, and websites such as www.livecoinwatch.com or www.coinmarketcap.com provide the current comparative value of different cryptocurrencies based upon what people are willing to buy and sell them for. Thankfully, most users and traders of cryptocurrencies think of their value in relation to other cryptocurrencies and fiat currencies, not in relation to chickens.
When early adopters of cryptocurrencies talk about their various projects, they often refer to things like "blockchains" and "mining" and "hash algorithms." If you're a member of the general public, you probably have no idea what some of these terms mean. In fact, your eyes may be glazing over just reading them. Don't panic. You don't necessarily need to understand any of these terms in great detail, any more than you need to understand how the U.S. Mint in Philadelphia makes sure that every quarter produced has a heads side and a tails side. We will try to give you an overview of what everything means, and you can take from it what you will. If you're thinking simply about investing a few hundred dollars into Bitcoin and holding on to it for a few years, you may be fine just reading through all of sections of this website quite quickly, to get a superficial overview. If you're curious about the exact technologies underpinning various alternative cryptocurrencies to Bitcoin, we'll give you a general overview and give you some guidelines for the many hundreds of hours of additional research that you'll need to carry out in order to get a comprehensive understanding of the various technologies used by different projects.
Unfortunately, there is a lot of confusion surrounding cryptocurrencies. Hopefully, this website and our book will help alleviate some of that confusion. Many members of the general public have a fundamental lack of understanding about the basic workings of cryptocurrencies, because these cryptocurrencies have not yet achieved mainstream adoption. Not even close! Above and beyond that, there is some semantic confusion relating to the term "cryptocurrency." The term has been adopted and used to refer to thousands of digital projects, most of which are not even intended to function as currencies. We'll try to address that confusion, and give you more of a fundamental understanding of different cryptocurrencies and other projects that are mislabelled as cryptocurrencies.
Cryptoassets, Confusing Terminology
Let's try to use more accurate terminology right from the start. We may be swimming against the stream by attempting to correct terminology that is already entrenched around the globe, but it can't hurt to try. Rather than describing all digital cryptology-related and blockchain-related projects as cryptocurrencies, let's call them cryptoassets. That's a broad, generic term that can encompass all such projects, because not everything that is commonly referred to as a cryptocurrency is intended to be used as a currency.
Within the broad category of cryptoassets, we will focus on three main sub-categories: cryptocurrencies, platforms, and utility projects. There are certainly several other sub-categories, although we'll stick with these basic categories for now. A lot of people tend to use the slang term "crypto" to refer to all cryptography-related and blockchain-related projects. Since cryptoasset can be shortened to crypto, we think this is a good word to use. However, remember that a lot of people will continue to use the term "cryptocurrency" to refer to all types of cryptoassets, including those projects that don't function specifically as digital currencies. That's fine, we won't judge anyone for this semantic error.
Cryptocurrencies
Pure cryptocurrencies are digital blockchain-based projects, whose basic trading units (usually called coins) are solely intended to be used as a form of online currency. They aren't used for smart contracts, they aren't utility tokens, and they aren't platforms. They're intended to function specifically as digital money, as an alternative to traditional fiat (national) currencies. Bitcoin is the most well-known of the digital cryptocurrencies and accounts for more than half of the total overall market capitalization of all of the thousands of different cryptoasset projects combined (as of the Summer of 2019). Other examples of pure cryptocurrencies include Litecoin, Vertcoin, Monero, Dash, Ripple, all the various members of the Bitcoin family, and more. If you're trying to think of a simple way to describe pure cryptocurrencies, think of them as being "just" digital money, and nothing else.
Platforms
Crypto platforms are digital and blockchain-based. These projects invariably allow various types of "smart contracts" and other blockchain-based utility projects to be built upon their framework. Crypto platforms aren't exactly a computer language, and they aren't exactly like a computer, but a good analogy is that they're very similar to being a blockchain-based "virtual computer." Developers are able to use them as the framework or backbone upon which they are able to "write" or build/code other projects, without having to start their projects from scratch. Examples of crypto platforms include Ethereum, Ark, Neo, Lisk, and more. Many of the utility projects that we will discuss shortly are built upon these platforms. Each of these platforms has its own coin or platform token which is used as a unit of trade within the platform. These tokens trade on crypto exchanges in the same way that pure cryptocurrencies are traded. However, the purpose of the tokens varies depending on the platform. Sometimes it isn't even necessary to own any tokens to use those platforms. We'll get more into that later.
Utility Projects
A lot of blockchain projects are built upon existing platforms, rather than being built from scratch. Building a project on top of an existing platform (such as the Ethereum platform or the Neo platform) drastically reduces development time and costs. Imagine this as an analogy: You want to raise funds for a small project. In order to do this, you create a website through which you describe your project, advertise it, and collect money from funders. You have two options: First, you could build your website from scratch, you could talk to payment processors about integrating financial systems into the site to collect money, and you could spend money on advertising and promotion by talking to Google and Facebook and other giants. Of course, these are a lot of separate steps, each of which requires a lot of research and learning. These steps additionally rely on a lot of outside experts, some of which eat up some of the funds that you're trying to raise. However, as an alternative to the DIY approach, you could use an existing platform (such as Kickstarter), through which you can easily advertise and fund your project. In the world of cryptoassets, platforms such as Ethereum and Ark and Lisk and Neo give you a starting foundation. You can build your crypto project upon the framework of an existing project much more quickly than building it from scratch.
It's important to understand what a Dapp is. A Decentralized Application (Dapp) is any software or application that, instead of being contained on a single central computer(s), runs its backend code on a decentralized peer-to-peer network. The use of a peer-to-peer network eliminates a point-of-failure risk. Even if some "peers" in the network fail, many other peers are still able to provide the code necessary for the application to keep functioning. Think of all of these utility projects that we just talked about as being types of Dapps, running code that depends on a crypto platform.
What Does Blockchain Mean?
Let's try to explain blockchain in one paragraph. First of all, we should clarify that having a complete professional understanding of blockchain technology is not critical for gaining a basic understanding of how various cryptoassets work. However, it's helpful to acquire a general background as cryptocurrencies are almost always built on a blockchain framework. A blockchain is a public database. A blockchain acts as a ledger which contains all the transaction data from anyone who uses or has ever used the cryptocurrency in question. Each "block" in a blockchain is made up of data and computer code. Think of a block as one link in a chain, although in the case of a blockchain, it's a digital chain instead of one that is made out of metal.
Every transaction that ever takes place anywhere in the world gets added to a new "block" in the digital chain. Every few seconds or minutes, a new block is created on the chain, in order to keep storing additional transactions. These blocks (the entire chain of them) are stored permanently by tens of thousands of computers around the world, so there will always be a historical record of every transaction. Some blockchains (such as the one used by Bitcoin) already have millions of blocks, but that's ok. Blockchains are usually designed to allow an infinite number of blocks, so they can exist and grow forever. There is no effective way to hide, edit, or destroy these records, because they are on too many different computers, in too many countries, belonging to many different individuals. Even a nuclear conflict or an asteroid impact probably couldn't wipe out a widely distributed blockchain such as Bitcoin's, unless it destroyed basically every living person on Earth.
Why is Cryptography Important?
Cryptography refers to methods of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it. Cryptocurrencies are intended to have value, and if everyone was able to access any amount of cryptocurrency without passing any sort of security test, then there would be no way to figure out who owns everything. Therefore, whenever you buy or are given cryptocurrency, you should be given a "private key" to unlock it. Nobody else on Earth should have your key or keys (if you hold multiple cryptocurrencies), and you should never share your keys with anyone else, period. This is the first principle to owning cryptocurrency: You don't own the crypto if you don't own the private keys. You are your own bank, and you should leave these keys around anywhere that someone could find or use them. Be aware that private keys (and public keys) are not physical keys, they're just very long and complex passwords. Private keys for many cryptocurrencies are more than forty or fifty digits long, so they would be almost impossible to guess, even by a supercomputer making thousands or millions of guesses per second.
Challenges for Cryptocurrencies
There are a number of challenges that cryptocurrencies in general must overcome before they will be able to reach mainstream penetration and become useful for the majority of people on a global scale. Here is an outline of what we believe to be seven of the biggest challenges facing cryptocurrencies today.
Difficult to Purchase - It is difficult for many people to buy cryptocurrencies. The safest and most cost-effective place to purchase cryptocurrencies is on professional exchanges, and any time that crypto prices are in a sustained uptrend, many of those exchanges are overwhelmed with requests for new accounts thanks to a global demand which their server infrastructure is unable to handle. In addition, many global citizens face barriers due to age, geographic restrictions, and identity verification, which prohibit them from simply signing up for accounts on some of these exchanges. Alternative methods for purchasing exist, but often they entail extreme fees (ie. Bitcoin ATM's) or they turn out to be scams (buying on eBay or Craigslist). Although the advent of cryptocurrencies may eventually increase financial opportunities and freedom for billions of "unbanked" people around the world, their lack of direct access to buying cryptos is a significant barrier.
Ease of Use - At the present time, it is too difficult to use cryptocurrencies. Storing cryptoassets on exchanges is risky, as many have been hacked. It is possible to move assets from exchanges into various types of wallets: hardware, desktop, mobile, or paper. However, the process of moving assets from exchanges to various types of wallets often requires a level of technical competence which exceeds that of the general public. Many people have fallen victim to scams or hacks, or have made simple mistakes during transfers, leading to loss of funds.
Energy Consumption - Cryptocurrency mining is a very energy-intensive and wasteful process which is proving to be a growing environmental concern. Luckily, there are other low-energy consensus mechanisms which can replace mining.
Merchant Acceptance - Not enough merchants accept various cryptocurrencies as a means of exchange for their goods and services. What's the point of having a currency if you can't spend it?
Fees - Cryptocurrencies need to have extremely low fees in order to disrupt the existing financial system. This challenge has been dealt with by a fairly large number of cryptocurrencies, some of which have fees of less than a penny per transaction. A few are even feeless. However, this continues to be a challenge as some of the main cryptocurrencies require large fees. For example, depending on the global transaction rate at the time, a single Bitcoin transaction can sometimes cost several dollars, which is completely untenable and runs counter to one of the main points of using cryptocurrencies. Also, many people are forced to pay exorbitant fees when converting fiat to crypto.
Scalability - To be truly useful and to satisfy long-term global demand, cryptocurrencies will eventually have to be able to process many thousands of transactions per second. A few are currently capable of scaling to that level, but the majority cannot. Bitcoin is currently only able to process approximately seven transactions per second, which is completely insufficient for mainstream acceptance. Visa, the credit card company, averages many thousands of transactions per second. Ultimately, for a cryptocurrency to be truly useful for everyday purchases on a global scale, it would have to be able to execute tens of thousands of transactions per second (unless it was a niche cryptoasset used for a specific purpose, rather than intended as a general currency).
Security - As mentioned above, the world of cryptocurrencies and cryptoassets is full of scammers and hackers, who have individually and collectively discovered hundreds of ways to steal funds from unsuspecting users. The community needs to work together and move toward better education, self-regulation, and security protocols, in order to protect users and investors. Every time someone is defrauded or has money stolen, it potentially turns them away from ever using cryptocurrencies again, and decreases the likelihood that their circle of friends/family would feel comfortable using cryptocurrencies. This erosion of public trust is unquestionably one of the biggest risks to long-term adoption.
A Question of Privacy
One of the best parts of blockchain technology is that it is a permanent, immutable, public ledger. The information associated with all Bitcoin transactions throughout history is, and always will be, visible on the public blockchain available to anyone. The same applies for almost every other cryptoasset. This is important for accounting, auditing, and verification. However, this feature is considered to be a drawback for some people.
When we say "public," it is important to note that Bitcoin accounts (addresses) are just numbers, and don't have the owner's personal identification information stored in them. Unless you know who owns the keys to a specific wallet address, you can't easily tell who owns the assets in that address. In this sense, there is some inherent privacy to Bitcoin. However, remember that all transaction histories can be traced throughout the entire blockchain. If you interact with someone who sends you cryptoassets, you'll be able to see their wallet address, and they'll be able to see yours. This means that you can also see the balance in their wallet, and you can trace any other transactions that they've made in the past (and vice versa). Blockchain analysis companies have done a very good job of analyzing the entire global public ledger for many cryptocurrencies, and have managed to tie a lot of real-world identities to various addresses. The government knows this. Don't ever assume that your cryptocurrency transactions are completely private.
Several coins do exist which have certain technological features that partially or completely hide the information associated with all transactions, with varying degrees of success. These cryptos are commonly referred to as "Privacy Coins." Monero and Z-Cash are two great examples. You probably shouldn't assume that any transaction made with these coins will remain completely private in the future, simply because someone may someday figure out a way to decrypt and expose the blockchain records for those projects. However, this may be irrelevant to many people, unless you're a criminal and are trying to hide your funds. For most of these semi-private coins, partial privacy is adequate for almost all users. Most people are not engaged in nefarious activities. Instead, they just want some basic privacy, such as not wanting the pizza delivery person to know how much money is stored in their wallet. We think this is a legitimate concern. We'll go into more detail about this elsewhere on this website.
What is the Most Important Information to Learn?
If you're planning to invest in cryptoassets, you should make time to read this website (or our book), several times if necessary, until you understand it completely. After that, branch out and do a lot more research. Once you think you understand how everything works, pick the project or projects that you're interested in, and then spend thirty days watching their pricing moves, and the moves of similar projects. Don't invest before those thirty days are over. After that much time has passed, you'll probably have a sufficient basic understanding of the project, which will prevent you from making any uninformed "wrong" decisions as you start out. Many people make the mistake of becoming interested in a specific crypto project before gaining a true understanding of how it works, but then they are reluctant to admit that they made a mistake, so they hold on to an undesirable asset instead of getting out quickly and moving on to better projects. Don't continue holding assets of an undesirable project, in hopes that it will appreciate in value. Recognize your loss and move on to better opportunities. Don't double down on a bad bet.
Most importantly, a thorough understanding of all the information in the Security section of this website is vital before you begin investing. There is no government body to step in and reimburse you for losses when you make mistakes or fall victim to hackers or scammers. Cryptocurrencies are the wild, wild west of investing. You are your own bank, and nobody else is looking out for you.