Have you ever traveled in a different country? One of the first things you probably did was visit a bank and exchange your money for the local currency. A Benjamin can buy you a nice dinner in the States, but if you want to enjoy fine dining in Italy, then you’ll need some euros!
Investing in cryptocurrency is similar to exchanging your money in a new country. Bitcoin, Litecoin, and Ether are a few examples of “foreign currencies” that work in a very specific context within certain online communities.
Exchanging any type of currency is built upon shared trust. We value dollars and Euros because we know that we can purchase goods or services with them.
The question is, can you trust cryptocurrencies? And should you jump into the world of crypto investing?
What is Cryptocurrency?
Cryptocurrencies are digital assets people use as investments and for purchases online. You exchange real currency, like dollars, to purchase “coins” or “tokens” of a given cryptocurrency. There are many kinds of cryptocurrencies. Bitcoin is the most famous, but Ether, Bitcoin Cash, Litecoin, and Ripple are a few others. All sorts of Big Tech and finance companies want a slice of the crypto pie.
The word cryptography means the art of writing or solving codes. (Sounds like the setup of an Indiana Jones movie, doesn’t it?) Each “coin” is a unique line of code. Cryptocurrencies cannot be duplicated, which makes them easy to track and identify as they’re traded.
You’ve probably heard of people making (or losing!) hundreds of thousands of dollars by investing in cryptocurrencies. It feels like a modern-day gold rush. But cryptocurrencies have actually been around for about 10 years. The earliest cryptocurrency was Bitcoin, created in 2009 by an unknown person who goes by the name Satoshi Nakamoto.
How Does Cryptocurrency Work?
Cryptocurrencies are exchanged from person to person on the web without a middleman, like a bank or government. It’s like the wild, wild west of the digital world. There’s no marshal to uphold the law.
Here’s what we mean: Have you ever hired a kid in your neighborhood to mow your lawn or watch your dog while you were out of town? Chances are, you paid them in cash. You didn’t need to go to the bank to make a formal transaction. That’s what it’s like to exchange cryptocurrencies. They are decentralized: No government or bank controls how they’re produced, what their value is, or how they’re exchanged.
As a result, cryptocurrencies are worth whatever people are willing to pay or exchange for them.
Now hang with us, people. We’re about to get techy! You store your cryptocurrency in a digital wallet—usually in an app or through the vendor where you purchase your coins. Your wallet gives you a private key—a unique code that you enter in order to digitally “sign off” on purchases. It’s mathematical proof that the exchange was legit.
Cryptocurrencies operate on what is called blockchain technology. A blockchain is like a really long receipt that keeps growing with each exchange. It’s a public record of all of the transactions that have ever happened in a given cryptocurrency.
What Can You Buy With Cryptocurrency?
At this point, most people still see cryptocurrencies as an investment. But cryptocurrency spending could become popular as these currencies gain trust. There are online retailers, such as overstock.com, who accept cryptocurrencies. And of course, any two individuals who value the tokens can exchange them for goods or services.
Some major retailers, such as Whole Foods and Nordstrom, are experimenting with accepting Bitcoin as a valid source of payment.1 But for the most part, cryptocurrencies are still on the fringe.