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What is Cryptocurrency?
Cryptocurrencies such as Bitcoin are a new type of currency, digital asset and payment network – designed to be used as a medium of exchange for sending, storing, and receiving value over the internet; without the need for a bank, state, or central organisation.
Bitcoin and The Birth of Cryptocurrency
Bitcoin (BTC) is an open-source, decentralized, peer-to-peer currency and payment system introduced in 2009 by a developer who goes by the alias Satoshi Nakamoto. Launched in the wake of the global financial crisis of 2008, it shall forever hold the title of the very first cryptocurrency.
The day Bitcoin was released, a monumental milestone was quietly achieved. The successful creation of a universal digital currency that can be used by anyone, anywhere to securely store and transfer wealth over the internet without the need for a bank, government, or central authority to approve and validate transactions.
In the years since, Bitcoin has risen to become the 26th largest currency on the planet, has served 100 million users and counting, and has become a popular investment asset, consequently increasing in price tremendously. Bitcoin was the best performing asset of the 2010’s, and in 2021 it has already conceived a price increase of over 26.6%, as displayed in the price chart below.
Bitcoin (BTC) Price in NZD - 2014 to 2021
A New Type of investment
It’s no secret that Bitcoin has skyrocketed in price over it’s short history. This is credited to a multitude of reasons, with the most prominent being that there is a pre-set limit to how much BTC can ever enter circulation. A fixed supply of units set at 21 million BTC, hardwired into Bitcoin’s software that will likely never change.
All around the world, cryptocurrencies are being used for a range of reasons. Including as a hedge against inflation, an alternative cheap and fast currency for transactions, as a means for self-banking, as well as a safe place to store wealth.
Cryptocurrencies are stored in cryptocurrency wallets – secure digital accounts which you set up yourself, without having to go through a bank or government agency. This provides crypto users with an enhanced level of anonymity, autonomy and ownership over their finances, allowing them to store and transact value regardless of their nationality, socio-economic status or geo-location.
The idea of self banking is one of the most liberating benefits of cryptocurrencies, as it puts all users on a level playing field regardless of how much they own and what country they are born into – a revolutionary solution to the approximate 1.6 billion individuals on earth who presently do not have access to a bank account.
Here in New Zealand, we are lucky to have world class access to financial services, so most Kiwis who buy cryptocurrency are doing so as a long term investment or as a hedge against inflation, to hold onto long term while global cryptocurrency adoption becomes more prevalent
The creator of Bitcoin, Satoshi Nakamoto, has become somewhat of a legendary figure because he created Bitcoin, but also because he devised the first blockchain network.
Blockchain technology is the key technology that underpins Bitcoin and almost all cryptocurrencies – a digital record-keeping system which tracks and records all transactions and balances on the Bitcoin network. The Bitcoin blockchain is the foundational glue that binds the Bitcoin network together, in addition to being the system that makes it possible for the Bitcoin network to operate and function.
The Bitcoin blockchain is a public blockchain, meaning it is possible to view every transaction and wallet balance dating all the way back to the first BTC transaction ever made – which can viewed on the BTC blockchain here:
The video below will provide a rundown on blockchain technology. Keep in mind that you’d be doing a great job to even understand 20% of it, and most people who use cryptocurrency only have a basic understanding of how blockchain technology works.
If the Bitcoin blockchain stores and records all transactions and balances on the BTC network – who is in charge of making sure every Bitcoin transaction is lodged and authenticated on the blockchain? This is the role of the Bitcoin miners.
A Bitcoin miner is a computer or collection of computers that run special mining software to help power the Bitcoin network, in exchange for the reward they receive for each transaction they help authenticate. This is the reason each Bitcoin transaction has a small transaction fee.
Individual miners lease out their computational power to the Bitcoin network and record and authenticate transactions in real time. Now picture this on a mass scale, with tens of thousands of individuals leasing out their computer/s to run the Bitcoin network, in exchange for the reward they receive for their input. This is called mass collaboration powered by collective self interest.
Because the powerhouse behind Bitcoin’s blockchain is decentralized and is spread across tens of thousands of miners across the world, there is no central location or weak point that can be targeted in an attempt to shutdown the network. As long as the Bitcoin network has miners authenticating and validating transactions, Bitcoin users can still send, receive, store, and spend BTC.
This, in combination with all mining nodes having a complete copy of the blockchain, means that shutting down the Bitcoin network would require an international effort spanning across every nation on earth where Bitcoin miners reside, costing billions of dollars in manpower and resources. And even then, if a single miner with a copy of the blockchain survives, so does the Bitcoin network.
Bitcoin and other cryptocurrencies are legal in almost every jurisdiction of importance including New Zealand, however there have beento ban Bitcoin by countries such as China, Russia, Vietnam, and Cambodia. Meanwhile countries like Japan, Estonia, Canada, South Korea, and New Zealand have generally welcomed Bitcoin and other cryptocurrencies with open arms.
In June 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender. Their congress legislatively approving a proposal to embrace the cryptocurrency marks a dramatic step forward for wider adoption and utilisation .
Where is Cryptocurrency Legal?
The Rise Of Cryptocurrency & Altcoins
As you are now aware, Bitcoin is not the only cryptocurrency in existence. All other currencies which are not Bitcoin are referred to as ‘alternate currencies’, hence the term ‘altcoin’. The first of these was created in 2011 (namecoin) and since then the number of altcoins available has soared. In fact, at the time of writing there are over 10,500 different cryptocurrencies available and counting.
For example, Litecoin, one of the earliest altcoins, was originally a copy of Bitcoin. Because Bitcoin is open-source, all of the programming code used to create it is publicly available, so anyone with a bit of programming knowledge can easily create their own cryptocurrency.
This isn’t to say that all cryptocurrencies apart from Bitcoin are mere clones with no real world utility or innovative features. There is a plethora of extremely promising coins and projects in the cryptocurrency markets, with most niching towards their own unique use cases and value propositions – with excellent examples being Bitcoin, Ethereum, Monero, Tether and XRP.
When getting started in crypto, we usually would recommend focusing your research and investments on the coins with the highest market caps, shown in the list above on CoinMarketCap. A coin’s market cap (MC) is essentially the number of coins in circulation multiplied by the dollar price per coin.
As an example, at the time of writing, Ripple (XRP) is ranked #7 on CoinMarketCap but only costs NZD$0.88c per coin. Litecoin (LTC) is #12 but costs NZD$176 per coin. Although LTC is more expensive per coin than XRP, the difference is the amount of coins in circulation: over 45 billion for XRP and ~66 million for LTC.
Although price volatility can be attractive to some crypto users, historically it has proven to be a large barrier to entry for many new users to the cryptocurrency market.
Stable coins are effectively Cryptocurrencies that peg their market value to an external reference in order to maintain stability, with the most notable being pegged to USD.
Stable coins enable users to utilize many of the benefits crypto usage brings, without the volatility risks that typical cryptocurrencies bear. Some of these benefits include sending, storing, and receiving value over the internet, as well as the aspects of accessibility, anonymity, security, among many others.
Stable coins are a perfect example of the variety of crypto usage scenarios, they demonstrate the boundless array of ways cryptocurrencies can be utilized and the concept itself pricks the imagination in regards to what could be to come in the crypto space.