Some things in life have nice, clear labels that make understanding what they’re about refreshingly easy. For example, if a company sells “vinyl wraps for cars,” then it doesn’t take Sherlock Holmes (or even Dr. Watson) to unravel this product offering. There is no mystery here. Case closed.
But when the spotlights shifts to cryptocurrencies, things can get very confusing — especially since a lot of people have a fuzzy, hazy understanding of the idea, but don’t really have a firm grasp of the fundamentals (no, you aren’t the only one).
Obviously, it’s beyond the scope of this article to provide a comprehensive end-to-end look at all things cryptocurrency. But that doesn’t mean we can’t pull the curtain to reveal some of the basics that, if nothing else, will give you something fun to do at your next dinner party when that annoying relative of yours (yeah, that one) starts spewing all kinds of flawed information on cryptocurrency. Good times.
What is a Cryptocurrency?
Essentially, a cryptocurrency is a virtual or digital currency that functions as a medium of exchange.
How Does a Cryptocurrency Work?
Just like a cash, check or payment card transaction, a cryptocurrency transaction has a sender (such as a seller) and a recipient (such as a buyer). When a transaction is initiated, the sender authorizes the transfer with a unique private key that is also available to the intended recipient. Once the transaction is confirmed, it is publicly broadcast on a decentralized network.
Here is where things get really different — and potentially confusing. In a conventional transaction, a central server functions as a governing authority to make sure that things work properly. But the defining characteristic of cryptocurrencies like Bitcoin and others, is that they deliberately don’t rely on a central server. Instead, they rely on the blockchain, which is a public ledger of all transactions. And for the blockchain to maintain its integrity, it must be public and accessible by all participants, regardless of whether they are a party to the transaction.
The Role of Miners
Another fascinating aspect of cryptocurrencies is the role of miners. These are people and companies that confirm transactions and mark them as legitimate by solving a cryptographic puzzle. Once that is done, they push the transaction out to every node on the network, which updates their respective database. Miners receive a fee for their services (which is why they offer them). What’s more, confirmed transactions are permanent and irreversible. This is why cyber criminals who deploy ransomware demand that their victims pay in Bitcoin (or other cryptocurrency). It is also one of the biggest reasons why governments, law enforcement agencies, and financial institutions want cryptocurrencies banned.
To Cryptocurrency or Not to Cryptocurrency?
So, in light of the above, should you (or someone you care about) cash in your life insurance equity, take out a second mortgage on your house, sell your beloved rare Beanie Babies on e-Bay, and put everything into cryptocurrencies so that you can retire on the beach while you enjoy pina coladas and getting caught in the rain?
Um…we’re thinking no on that one. Of course, you can try. But it’s probably going to end badly; especially since cryptocurrency values fluctuate wildly, and recent trends have been down instead of up. For example, a property developer in the U.K. recently lost his life savings — a whopping $120,000 US — when his Bitcoin investment plunged 20%.
Our advice? There is probably a future for cryptocurrencies in some shape or form — simply because there are some advantages to the blockchain that cannot be denied (or suppressed). But at the moment, it really does seem like a Wild Wild West landscape vs. something safe and structured.
And yes, while “safe and structured” may seem painfully boring — no risk, no reward and that kind of thing — there is something to be said for reliability, predictability, and not waking up tomorrow morning to find that your life savings has been flushed down the virtual toilet. Ouch!
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