Cryptocurrency has made millionaires, caused controversy, and grabbed the attention of popular media, but many people still struggle to understand what it truly is. Below we will answer a few of the most common questions asked by people new to cryptocurrency.
What is a cryptocurrency?
Currency is a term that most of us are familiar with. It is some form of the monetary unit in which people agree to conduct business. This is very much the same with cryptocurrencies. These digital currencies can be used to purchase vehicles, invest in Individual Retirement Accounts (IRAs), conduct secure business transactions using smart contracts, buy power-ups in your favorite video game, and so much more.
The prefix 'crypto' in cryptocurrency is a reference to the currency's use of cryptography. In general, cryptography is a way of encoding messages to make sure that only the intended recipient of a message can view it. This encoding of data helps make sure that transactions conducted in cryptocurrencies remain secure and safe from third-party tampering.
Although the concept of these encoded digital currencies was born in the 1990s, the idea as it existed then had serious flaws. Developers struggled with finding practical ways to ensure that transactions could be kept verifiable and secure. In 2008, Satoshi Nakamoto published a paper outlining a solution and introduced the world to Bitcoin. Satoshi introduced the use of the blockchain to make transactions secure and verifiable to increase public trust. Today, people can send, receive, and earn cryptocurrency from virtually anywhere in the world.
What gives cryptocurrency its value?
The value of a cryptocurrency is based on the same thing as most other currencies in the world today: supply and demand. Many countries untethered their money's value from precious metals during the Great Depression and began using fiat money that could not be converted into precious metals on demand. The value of this new money was based on the amount of money in circulation and enabled countries to better control the economic forces of inflation and deflation by controlling how much money the federal banks allowed into circulation.
Most cryptocurrencies have a limit on how many of each coin there will be. While there are many factors that go into how the market values a cryptocurrency, such as confidence in the development team, the coin's intended use (use case), traceability, and other factors, the overall supply of each cryptocurrency that will eventually be in circulation is an important factor in creating market demand and overall value.
What is a blockchain?
Essentially, the blockchain can be thought of as a digital ledger that keeps track of every transaction that occurs on the network. We can think of a 'block' in the blockchain as a group of transactions from a specific time period. The blockchain is a record of all of the data from those time periods listed together. Once a transaction is created on the blockchain ledger, it can never be edited or removed. This blockchain is even more secure because it is not kept in a single location. It is stored on various computers or 'nodes' all around the world. This means that power outages, government upheavals, or other factors are much less likely to disrupt the cryptocurrency system than other forms of money. In order to process a transaction, the nodes must agree that the transaction data is correct in the ledger that is the blockchain.
Can I exchange cryptocurrency for cash?
Cryptocurrencies can be exchanged for USD. However, it may take 3-5 business days to complete the transaction. The process of cashing out cryptocurrencies may look different depending on which type of cryptocurrency is being exchanged and which exchange the cryptocurrency was purchased on. Some exchanges have minimum or maximum withdrawal limits and may limit the number of withdrawal requests that a user can make in any 30-day period. However, as cryptocurrencies become more widely adopted, more exchanges are increasing the number of cryptocurrencies that can be sold to USD and simplifying this process by allowing you to transfer these funds from your digital wallet to your US Fiat Wallet where they can be sent directly to the banking account of your choice. Since cryptocurrencies are viewed as assets in the United States, expect to pay some tax on the money you withdraw. Cryptocurrency tax guidelines are subject to change as many governments consider how best to fit this new currency into existing tax law, so be sure to check the latest guidelines before you convert your cryptocurrencies to cash.
While many individuals, governments, and organizations are still learning about what cryptocurrencies mean for our changing world, one thing is for certain: they are here to stay. The secure, decentralized nature of cryptocurrency, its worldwide acceptance, and the ability to execute smart contracts, track supply chains, and perform various other functions mean that it offers a unique value to individuals and businesses alike and has the means to substantially change the face of global commerce.
Disclaimer: This article is for informational purposes only and is not intended to be a substitute for professional consultation or advice related to your health or finances. No reference to an identifiable individual or company is intended as an endorsement thereof. Some or all of this article may have been generated using artificial intelligence, and it may contain certain inaccuracies or unreliable information. Readers should not rely on this article for information and should consult with professionals for personal advice.