Demystifying Cryptocurrency: A Dive into the Digital Age of Money

4-5 min read  • 

Cryptocurrency has been one of the most revolutionizing inventions in the field of finance, furthering the advancements of the digital age of money and helping everything from small money transfers between friends to large-scale management of funds for businesses. But how does it work, and what differentiates cryptocurrency from the traditional finance system that we typically use? In this post, I'll be going into detail on what exactly cryptocurrency is, how it works, and why it could be the new future of currency, potentially undermining the effectiveness of the money that we typically use now.

What is Cryptocurrency?

To understand what cryptocurrency is, let's look at our money system hundreds of years ago. 

Back then, to buy anything, you wouldn't use bills, card, or any form of modern payment. Instead, you would take some bronze, silver, or gold and use that as payment. This was effective because silver and gold are valuable and rare resources, so its value was expressly given in the quality and weight of the payment material, and not because any human placed a value on it.

Fast forward to modern times, before cryptocurrency was invented. The previous currency model has been replaced with bills, cheaper coins, and online records representing our wealth. While this has contributed to efficiency and modernization, there remains a problem: The power of money is being controlled by government entities. 

Think about it— all of our bills are essentially a combination of cheap cotton, paper, and plastic (depending on the currency). If it weren't for the government telling us that $100 bills are worth many times more than $1 bills, having stacks upon stacks of $100 bills would serve no purpose other than visual appeal. 

The same principle applies to online wealth as well— having $10,000 in your bank account is nothing but a number in the bank's large database of people and their monies. We only believe it to have value because the government tells us that it has value, and the government has the largest influence on our currency.

Now, let's look at cryptocurrency. While banks have their own centralized transaction records as to who gave how much money to what entity, crypto has a decentralized record of the same, meaning that it's not just one person or one company that keeps record of your transactions. It's over half a million computers across the world.

Essentially, cryptocurrency is a safe method to transfer funds that doesn't belong to any person, company, or government. Everyone in the world who owns cryptocurrency of any amount works to establish it in the financial and technological space.

How does Cryptocurrency work, and why should we use it?

I mentioned earlier that over half a million computers across the globe work to keep record of our transactions. How does this work, and who runs those computers that do the heavy work of encrypting and decrypting our process? 

To answer the second question, the people that run the complex task of keeping records safe in our crypto transactions are none other than common people. That's right, after reading this post, you too can join in on this process with a powerful enough computer, and get paid for the same. This is a process known as "Crypto Mining," and that's a little outside the scope of this blog, so I won't be going into it much. For the curious, I might post about this later on. If not, then Google is your best friend.

As for understanding how our cryptocurrency transactions are decentralized, let's look at the example of a bank. If I want to transfer $50 to my friend, then I'll go to the bank, make the transaction, and in their records, $50 will be deducted from my account, while $50 will be added to my friend's account.

However, this is easily manipulatable. If a hacker found their way into the bank database, then they could alter the numbers to add more money to their account, all the while taking more from mine. As the bank solely relies on their database, it would be hard to prove that the transaction was fraudulent.

Enter Cryptocurrency. At any given point in time, many computers across the globe would actively be crypto mining, that is, encrypting and decrypting transactions using complicated math equations that tax the computer's processing power. With this, let's say I wanted to transfer 0.0012 Bitcoin (approx. $50 with today's price) to my friend. Now, instead of the transaction being present in a single source, it pops up in all of the computers that are mining that take care of the grainy math to validate the transaction. 

Each computer that mines has its own copy of all of the transactions that currently take place (known as a ledger), so if a hacker decides to alter the records in one computer, when validating that transaction, the changed record won't be in all of the other computers in the network. This way, the computers know that over 99% of other computers have one record, while some others have a different (altered) record, invalidating the hacker's attempt at siphoning our money.

Theoretically, to beat the system, the hacker would have to alter the ledgers in over half of the currently mining computers in the entire world, from every nook and cranny of the planet, and have it all be the exact same data. That's probably not going to happen.

The Dark Side of Crypto

As revolutionizing as cryptocurrency is, it's not all sunshine and rainbows. Cryptocurrency is a great method of safe financial transactions; however, it is extremely volatile. Because cryptocurrencies are digital, no one can truly assign a value to it, as opposed to gold or silver that can be measured in worth. As a result, cryptocurrencies tend to rapidly change in value, being swayed by large corporations' crypto usages and the posts of influential figures. For instance, Elon Musk could post a tweet saying that Bitcoin is not a viable investment, and soon, the value of Bitcoin will plummet. 

Another major concern regarding cryptocurrencies are that because machines have to verify transactions many times over, a lot of processing power is used, and as a result, an excessive amount of energy is used. This causes environmental concerns, as most of our energy comes from non-renewable sources, most of it being fossil fuels. The rise of crypto mining is sure to cause problems in this area if taken too far.

While cryptocurrency has taken the world by storm through its security and public availability, there are many downsides to consider with this advancement in our technology, such as market volatility and environmental concerns. Whether or not we let crypto entirely replace our currency system as it is now or have it cease to exist entirely can only be told by our actions across the course of time, potentially for the years to come.