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What is Cryptocurrency?

Cryptocurrencies like 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. 

Recommended watch (90 seconds)

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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 going by Satoshi Nakamoto, launched in the wake of the great financial crisis of 2008. It shall forever have the title as the first cryptocurrency. 

Cryptocurrencies are digital assets which use cryptography and decentralised technology to secure transactions and control the creation of additional units of currency, making them nearly impossible to counterfeit, double-spend or censor.

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 or verify transactions.

In the years since, Bitcoin has risen to become the 5th largest currency on the planet, has served ~50+ million users and counting, has become a popular investment asset and has increased tremendously in price. Bitcoin was the best performing asset of the 2010’s, and now in 2021 it has already increased in price by over 20%, as displayed in the price chart below.

Bitcoin (BTC) Price in NZD - 2014 to 2021

Bitcoin price from 2014 to 2021 NZ
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A New Type of investment

It’s no secret Bitcoin has skyrocketed in price over it’s short history. This is thanks to a multitude of reasons, with the most important being that there’s 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.

Having a fixed supply of currency that can ever enter circulation is key feature of almost all cryptocurrencies, and it's a distinct difference between crypto and government issued currencies like the NZD and USD. Government issued currencies (fiat currency) are printed from thin air on a regular basis, which debases and reduces the purchasing power of all pre-existing currency in circulation.

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, a safe place to store wealth, and as a means for self-banking.

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 control and ownership over their finances, allowing them to transact and store value regardless of their nationality, socio-economic status or geo-location. 

The idea of self banking is one of the most liberating benefits of cryptocurrency, as it puts all it’s users on a level playing field regardless of how much they own and what country their born into – a revolutionary solution to the approximate 1.6 billion individuals on earth who still don’t have access to a bank account.

Here in New Zealand we’re 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 takes off. 

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The Blockchain

The creator of Bitcoin, Satoshi Nakamoto, has become a legendary figure because he created Bitcoin, but also because he created the first blockchain as well.

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, and it’s also the system that makes it possible for the Bitcoin network to operate and function.

The Bitcoin blockchain is a public blockchain, meaning its possible to view every transaction and wallet balance dating all the way back to the first BTC transaction ever made – which you can view on the BTC blockchain here:

https://www.blockchain.com/btc/tx/f4184fc596403b9d638783cf57adfe4c75c605f6356fbc91338530e9831e9e16

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.

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Bitcoin Mining

If the Bitcoin blockchain stores and records all transactions and balances on the BTC network – who’s 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 our 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.

Censorship Resistant

Because the powerhouse behind Bitcoin’s blockchain is decentralized and spread across tens of thousands of miners across the world, there’s 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 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.

Source: PBRG

Bitcoin and other cryptocurrencies are legal in almost every jurisdiction of importance including New Zealand, however there has been multiple failed attempts to 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.

Where is Cryptocurrency Legal?

Where is Bitcoin Legal map
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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 and since then their number has soared. In fact, at the time of writing there are over 7,500 different cryptocurrencies available and counting.

Although there are over 7,500 cryptocurrencies in existence, there's a decent chance that 95% of them will not be in active development and usage in 15 years time. The majority of the cryptocurrencies in existence are clones of a handful of other coins, with a few differences in code added in.

 

For example, Litecoin, 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 experience can easily create their own crypto.

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.

CoinMarketCap top 10 Cryptocurrencies

When getting started in crypto, we’d usually 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. 

The MC can be used to rank the total value of a cryptocurrency and also as an indicator of public opinion towards a coin (more popular = more market cap). We cannot just use the price of a coin to do this, because one coin could be very expensive but only have a handful coins in circulation, and another could be dirt cheap but have millions of coins in circulation.

As an example, at the time of writing Ripple (XRP) is ranked #4 on CoinMarketCap but only costs NZD$0.43c per coin. Litecoin (LTC) is #6 but costs NZD$106 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 ~65 million for LTC.

Guide under development – more information coming soon.  🙂