Understanding Cryptocurrency

 

I may not really know you but I can tell you probably have a friend who has a nickname with a crypto ring attached to it. There is probably someone you call "Ola BTC" or "Ugo Solana" (personally, I know an Ugo Solana though...haha), or a friend on Twitter who has added ".eth" to their username.

What are cryptocurrencies, how do they work, why do we need them and why are they so volatile?

Allow me to quench the fire of your curiosity, dive in with me. As always we will keep it simple.

Cryptocurrency (Crypto) is a digital form of cash. Okay you're wondering, "I make financial transactions from my phone through my bank. Is that cryptocurrency too?" Not really, it's way better than that. I will explain further.

Cryptocurrency is coined from two words "cryptography" and "currency", it is a digital currency that uses cryptography to secure and verify transactions. Cryptography protects data by solving complex math and codes.

Cryptocurrency is different from your normal fiat currency (naira or dollars) as they are not issued and controlled by any financial institution, this is because they run via blockchain technology. They are decentralised baby!

How does cryptocurrency work?

As I said, cryptocurrencies function without the backing of a financial institution, they are built on decentralised technology… the blockchain.

Also, they are virtual tokens. Crypto coins are not physical coins or currency notes. Cryptocurrencies remain on the internet. Their value is determined by standard economic principles; demand and supply.

Why do we need cryptocurrency?

The fact that crypto transactions run via blockchain technology makes them more secure. Transactions are recorded on a distributed ledger, the blockchain. You don't have to worry about 

Through blockchain technology, cryptocurrencies are permissionless. You don't need the permission of a financial institution to carry out transactions, you don't have to worry about your bank account being frozen or going to the bank to answer questions when you receive a large amount of money.

Cryptocurrency transactions are also quite fast though speed may vary depending on the blockchain network a certain cryptocurrency may be operating on.

Why are they volatile?

"Do Your Own Research" (DYOR), you might have heard this before from someone who was giving you advice on the next cryptocurrency to invest in. This is because things quickly change in the crypto industry. The value of a cryptocurrency may fall drastically overnight.

The volatility in the crypto space is as a result of some few reasons, one is the newness of the industry. The first and greatest cryptocurrency, bitcoin, was only introduced in 2009. 

As a result of this, many investors are still experimenting with this industry and this accounts for some of its volatility. The number of people utilizing a particular cryptocurrency at a particular point in time also has an impact on its value.

The more scarce a cryptocurrency is, the higher its value. Standard economic principle. For instance, the maximum amount of bitcoins that can be mined is set around 21 million. The more people enter the bitcoin crypto space, the higher its value.

Thank you for shallow diving with me into the world of cryptocurrencies. In my subsequent articles, we would dive deeper into cryptocurrencies, so watch this space. 

What's your favourite cryptocurrency? I would like to hear your answer in the comments.

If you are looking to buy your first cryptographically secured digital currency, I can only tell you "Do Your Own Research".

Cheers.

Be kind.