What are cryptocurrencies?
“Cryptocurrencies are digital means of payment, often decentralized and intended as an alternative to existing currencies such as the Euro (€) and Dollar ($). Cryptocurrencies have predetermined rules around the maximum number of coins within the specific currency. Security is guaranteed thanks to the use of cryptography.”
That’s the official definition. But is cryptocurrency the future, or is it just a bubble? Almost every major bank or technology company is investigating whether they should apply the technique behind cryptocurrency.
This article will explain what you need to know about cryptocurrency. But we also answer whether it is a good investment and how you can purchase them. We will explain it as simply as possible, and after reading the article, you will know more than 90% of your colleagues and friends.
How did it come about?
Before we explain exactly what it is and especially what you can do with it, it is important to explain how the entire market of different cryptocurrencies originated. This started with the introduction of Bitcoin. It was developed by Satoshi Nakamoto and was intended as a new currency for a new monetary system—a system outside the established banks. However, no one knows who Satoshi Nakamoto is as it is a fake name. Who is behind this alias?
So it all started with Bitcoin. We are now many years further, and there are several variants of Bitcoin, of which Bitcoin Cash (BCH) is the most famous. This variant was created after a so-called “hard fork”.
At an earlier stage, attempts have already been made to develop digital currencies (Digicash, Flooz). However, these projects have yet to become successful. One problem encountered was that of ‘double spending’:
Suppose I have five hundred euros. Of this, I buy a TV in cool blue worth 480 euros. I only have 20 euros left. If I want to order a surround set worth 300 euros, this is impossible because a central organization (in this case, the bank) can read from its database that I need more money.
With digital currencies, this was a problem; there needed to be an organization that could determine whether you had that money for a transaction. And since the whole idea of cryptocurrency was “decentralization,” there was no solution for a long time. That has now changed.
Blockchain technology opened the gates for cryptocurrency. Here’s how. Cryptocurrencies work on blockchain technology. There is a database where all information is stored, but a central person or company cannot adjust this. Changes in the database happen using the entire network. A network consisting of countless computers. Computers that all process and verify part of a piece of information.
Because this network consists of thousands of computers that all work independently of each other, information cannot be manipulated. This creates a decentralized body that works just as objectively (or actually even more objectively) than a central organization.
The image below shows in which industries blockchain and cryptocurrency can be used.
There are now more than a thousand digital currencies, also known as altcoins. Altcoins is the name for all existing cryptocurrencies except Bitcoin—some work on their network, and some on an existing blockchain network. The difference between all these cryptocurrencies lies in the fact that they have different ideas and applications. There are also large differences in how quickly transactions are processed. With some coins, this is within 8 seconds, while others take many minutes.
The most famous cryptocoins we know today are Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Ripple (XRP), Monero (XMR) and Stellar Lumens (XLM). Almost all of these forms of payment enable peer-to-peer payments. Ripple has specifically focused on the banking sector.
Multiple applications already exist or are in development. We will mention those below. Many more functions will emerge in the future. Currently, the technology is still in its proverbial infancy.
Applications that are currently being used or researched include identification, data storage, copyright, and ownership verification.
One of the most commonly used applications is making payments and transactions. Many people wonder what the added value of this is.
We already have banks and can make payments and transactions without cryptocurrency.
That’s right. But the current financial systems also have many disadvantages. One of these is that you need a bank account to make digital payments. In many countries, some people can open a bank account. However, a crypto wallet is created in no time. It also takes a relatively long time to transfer ‘normal money’ to someone with another bank or foreign transactions—however, some cryptocurrencies process transactions within 8 seconds, anywhere in the world.
For example, traditional ways of payments and transactions.
Rob has an account with Rabobank and wants to transfer money to Mark, who has a history with ABN Amro. For this transaction to proceed, ABN Amro must first check with Rabobank whether Rob has this money. Only after this has been confirmed will the transaction take place. And since the banks do not simply share each other’s database, transactions may only be processed the next day.
Example cryptocurrency transaction
Rob wants to transfer five cryptocoins to Mark. The log in this case is decentralized and therefore objective. Everyone can see if Rob has that number of coins. If that is the case, all separate computers will perform a part of the calculation to ensure that the new state of affairs (Rob -5. Mark +5) is in the database. Because every computer does a small piece of work, no one person or organization can sabotage the information and the transaction.
A few years ago, however, there were few shops where you could go with your cryptocurrency. That is already very different. Buying airline tickets, jewellery, clothes and even holidays is possible. The Apple store also accepts payments in 10 foreign currencies.
Some people are interested in cryptocurrency because they see it as a good investment. And that’s a very logical thought. The whole cryptocurrency thing is still at the beginning of its life cycle. The market is now worth billions but could become much larger as more large companies and investors enter. For the novice investor, there are several pitfalls. Currently, there are more than 1000 different cryptocoins and new ones are added weekly (ICOs / Initial Coin Offerings). Some of these are very suitable investments, some in the short term and others in the long time. But by far the largest part will not be a success.
How do you know which are suitable as investments and which are not? On which coins can you get a good return?
Well, it’s very important to read up on yourself. Ask yourself some critical questions, and don’t just listen to that friend who has been shouting for weeks that you should buy a certain coin. His intentions will probably be very good, but everyone is inclined to believe in what they are interested in.
Before you decide to invest, ask yourself what the function of the coin is. Does this already exist or is it revolutionary? Who are the founders? Do they already have a history in a certain technology industry or are they internet cowboys who want to piggyback on the trend?
Many coins work using mining. Mining is a process in which you make your computer available to help keep the network working. As a reward for this, you get paid out in cryptos. Not every coin can be mined, but most can. For example, you can mine Ethereum. You need to have a very good video card, or several. Bitcoin mining is also possible, but you need special equipment for this.
Do you want to mine as effectively as possible? Then it is best to use a computer with only one function; mining cryptocurrencies. Once you have set this up, you no longer have to worry about this and you will automatically be rewarded daily in digital coins.
Keep your cryptocurrency.
This is one of the most frequently asked questions we often receive. Because we’re talking about digital money here, you can’t keep it in your wallet. You need an online account suitable for storing specific cash to store your coins. Almost every coin has its own official “crypto wallet” where you can keep your currency. Read more about what a crypto wallet is and how they work here.