Three Principles for Understanding Cryptocurrency
Cryptocurrency is an often-misunderstood field, owing to its relative infancy and steep learning curve. However, it represents a totemic shift in the way individuals can manage their assets, and a revolutionary way to bring large-scale transactions into a secure and independent future. Understanding the following three facets of cryptocurrency will go some way to lowering that barrier to entry, and enable you to interact with the future of finance as an individual.
Cryptocurrency as a Casino Chip
One of the simplest analogies with which to understand the importance of cryptocurrency to the wider financial market, and the interrelationship of blockchain technology with the function of cryptocurrency, is to think of them in gambling terms. A cryptocurrency token can be likened to a casino chip, or more accurately the digital wallet of an online casino. The token does not have an intrinsic value, and generally cannot be used outside of the ‘casino’.
However, it holds value, and can be used within the casino to enable access to its games and services. Much in the same way that a live casino allows users to access a range of games from a single online account, blockchain technology is responsible for your access to cryptocurrency transaction, exchange and engagement. In short, blockchain is the mechanism by which cryptocurrency holds value and is utilized.
Cryptocurrency as Decentralized Finance
So why is this a good thing? In order for a cryptocurrency to continue to hold value, the element of ‘trust’ needs to be introduced – and herein lies the real benefit for many cryptocurrency owners and users. Cryptocurrencies, and the blockchain platforms on which they are built, are known as ‘decentralized’; they are not linked to centralized systems, whether mainstream banks or sanctioned enterprises.
The value of the bitcoin is not decided by the dollar, or even the price of gold. It is decided by those that mine it, and those that transact it. As a currency, it operates separately from centralized financial solutions, and is hence immune to the volatility of those solutions. If the dollar falls, the Bitcoin will simply be worth a larger amount of dollars. Ultimately, your assets are safe in the blockchain.
Cryptocurrency as a Finite Resource
The last thing to address is the use of the term ‘mining’. Another helpful way to envision cryptocurrencies, especially where transacting in a digital space can feel immaterial, is in terms of gold. Cryptocurrencies are not intrinsically linked to standards like gold or silver, but as a currency they act like them. This is because cryptocurrencies are a finite resource. ‘Proof-of-work’ currencies such as Bitcoin and Litecoin are ‘mined’ via computer processing, essentially completing complicated equations to solve blocks and hence ‘mint’ them into existence. Bitcoin, as an example, was designed with 21 million possible coins, and its price volatility can be attributed in part to the availability of new coins over time. The number of new coins minted decreases exponentially over time, as with finite earth resources like gold. This enables PoW currencies to act like gold in decentralized systems.
With these basic approaches to understanding the crypto world under your belt, you can begin to interact with it in earnest and with confidence. Knowing is half the battle, and with a shrewd investor’s mindset you can be sure to turn your foray into cryptocurrencies into a profitable and secure long-term venture.
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