Bitcoin, Dogecoin, magic internet money (what we call it), these are all common names for what actually is technically known as cryptocurrency. Cryptocurrency has been around for several years now—with Bitcoin, the most famous one, closing in on a decade of existence—but there’s still a lot of misinformation and confusion over what it is exactly. Is it like Paypal? Or more like a checking account? Who runs it? What the hell is a blockchain? These are all questions you may have been thinking about after your brain swelled from reading a complex explainer on reddit. Fear not though, let us be your guide to what many super-smart people are calling the new frontier of money.
WTF is cryptocurrency?
Without getting too hyper-technical, it’s essentially an encrypted, peer-to-peer virtual currency made up of code. It’s just like any other medium of exchange, like US dollars, but in this case, the exchange uses encrypted information. It’s assigned currency values at markets known as exchanges where users can buy and sell using their local currency of choice. It can also be transferred instantly and securely around the world through a variety of means.
The Origin Story
Cryptocurrency first came into existence when shadowy figure known Satoshi Nakamoto (who is still unknown to the public and likely an alias or even a group of people), published a paper about virtual currency in 2008. The following year, Nakamoto launched the software for Bitcoin which became both the first and most widely-known type of cryptocurrency.
How It Works
Cryptocurrency is created when powerful computers or “miners” are awarded currency after solving massively complex mathematical equations using single or groups of incredibly powerful supercomputers. There’s obviously no central bank issuing the currency—so there’s no Federal Reserve-like entity—which means no government can manipulate the value by creating more of it and it can also move between countries without the worry of exchange rates. Cryptocurrency is impossible to counterfeit since all transactions must use the specific currency’s protocol in order to initiate or engage in any transaction, and any effort to halt the transaction’s protocol requires participation by more than 50% of all users. So, effectively every transaction is approved via group consent which protects both sides from shady business.
Each coin or unit has its own code, as do the transactions. Because of the encryption, transactions are anonymous and utilize a complex ledger system that keeps a record called a “blockchain". As we mentioned, the blockchain and transactions are evaluated by the community at large to ensure validity. Though highly unlikely as glitches and thefts are, users have no insurance and any hacked funds disappear forever. The most notable example is the notorious Mt. Gox hack, where nearly $460 million (value at the time of the hack) of Bitcoin was stolen from the Mt. Gox exchange, one of the first Bitcoin exchanges in existence. Despite disasters like this, exchanges have come a long way from the incompetently-run Mt. Gox. Modern exchanges are securitized to much higher levels and with more decentralization and fragmentation, the elements that aid in cryptocurrency's security and ethos.
It's Not Just Bitcoin
At present, there are hundreds of virtual currencies, and the underlying technology is constantly evolving. However, only about a handful of them have really gained any traction with people interested in cryptocurrency. Bitcoin is by far the most valuable and widely known, but popular alternatives include Litecoin, called “the silver to Bitcoin’s gold” and Dogecoin, which features an image of a Shiba Inu, a dog breed that became a viral meme. There is also Peercoin, Mastercoin, and Namecoin. They’re all pretty much roughly based on Bitcoin’s system, though, so they’re mostly alternatives in name only. Other new varieties with enhanced technological and security aspects, like Ethereum, are also gaining in popularity, trading, and value.
It Has Varying Levels Of Legality
Vietnam, Iceland, Bolivia, China, and Ecuador have outright banned Bitcoin, and Russia is working on a bill to do the same. Canada, Australia, and several European Union countries are “Bitcoin-friendly.” The United States is too, with the government being cautiously optimistic about the system. In 2013, the Treasury Department began issuing guidance for Bitcoin users, and the IRS has categorized the currency as property for tax purposes. That doesn’t mean the Feds aren’t worried about how they might be used for nefarious purposes, like money laundering or to fund terrorist activities, but these are massive steps in the right direction for future stability and value. Bitcoin also became infamous as the currency-of-choice on The Silk Road, the digital black market for drugs, weapons, and other illegal vices that was shut down by the Feds in 2013. Despite its initial fringe status, cryptocurrency as a whole is on a very fast track for widespread acceptance and eventual regulation.
Anyone Can Buy Cryptocurrency
Cryptocurrency of all types can be bought on exchanges internet-wide, but you need to get a “wallet” first. There are wallets for mobile, desktop and those that work directly with your bank account. Before you buy, we highly recommend a lot of research on many of the web’s sources. Redding communities like r/cryptocurrency and r/bitcoin are great ways to begin to wade into the very large ocean that is cryptocurrency. Once you're ready to go, you can then research the variety of exchanges available like Coinbase, GDAX, and Kraken. Bitcoint.org is also an extremely useful source of basic information.
It's Already Accepted Lots Of Places
In most major cities acceptance is gaining steam, particularly with Bitcoin. From coffee shops to car dealerships like Tesla, changes are happening. Additionally, you may have noticed Bitcoin “ATMs” popping up as well. Obviously, you can buy things from other people with cryptocurrency too and major e-commerce companies like Overstock, Target, Paypal, and Amazon have adopted bitcoin payment systems.
The bottom line? A new frontier is upon us. Virtual currency offers the type of freedom that doesn’t exist with our present currency systems. Imagine a world with no bank transaction fees, instantaneous currency transfers, and no crazy exchange rates. It may be a long way off, but you can see why the traditional financial systems are everything from wary to downright frightened of this potentially game-changing shift in how we obtain, save, and use money.