What is cryptocurrency? We have all heard the term. You have probably used the term yourself. But what, EXACTLY, is Cryptocurrency… And how does it work? We should start with the basic definition. Cryptocurrency is digital currency, or digital money. But there’s no physical manifestation of money, like a coin or paper. It is real money, for sure, but it exists only online.
Cryptocurrency, as the ‘crypto’ part implies, is encrypted money. That means that you access it via user codes, not names on a bank account. It is also not stored in a central bank. In fact, all cryptocurrencies are decentralized, meaning that they are not managed on, or by, a central server.
Let’s Compare Traditional Money and Cryptocurrency
I’m old enough to remember “the good old days”. That is when money was backed up by gold or some other commodity. The money you have in your wallet… Or in the bank… is really just paper and metal. All by itself, it’s not really worth much. How much is a $20 bill worth? In material, just a few pennies. It’s worth $20, because our government says it’s worth $20. Cash is no longer backed dollar for dollar by gold. Each government with its own currency, is operating in a system whereby people can trade their currency for goods and services.
But we don’t keep all of our currency in our wallets. We all have bank accounts. That is to say we centralize our money in a bank that is regulated by the government. We must have complete trust that the bank will safeguard our personal information. We know the money is there, but we can’t actually see it. The bank keeps track of account numbers, ledgers, and balances… And displays them for us to see, so that we can keep track of our money.
Today, most of us have online banking capabilities. It is very convenient to have access to our money via a platform hosted by our bank, and we use a computer or a mobile device to access the platform. We can perform a multitude of transactions including check balances, money transfers, and deposits. Cryptocurrency functions in a similar concept, but without a central bank. That is the big advantage, it is decentralized. The ledger in crypto is called a blockchain. There are also account numbers, called public addresses. And you can view balances just like with an online banking platform.
Using This Great Technology-Cryptocurrency
I have already mentioned one of the key differences between cryptocurrency and traditional money. Traditional money is centrally controlled by banks and governments. Cryptocurrency is not controlled by any centralized entity. The second difference is that traditional money is legal tender. That means it can be used to pay all debts, public and private. Cryptocurrency is not legal tender. Therefore, it cannot be used to pay public debts (debts owed to the government), such as taxes. At least not yet.
But cryptocurrency can be used to pay for anything else, provided the seller or service provider accepts cryptocurrency. As cryptocurrency becomes more and more popular, more and more individuals and business accept it. Cryptocurrency is perfectly legal in most of the world. However, you should remember two points. You cannot use it in any way that would be illegal to use traditional money. The other point to remember is you must pay taxes on the value of the cryptocurrency.
Understanding Wallets
Now, let’s talk about wallets. Just like traditional money, you must use a wallet to store crypto. This is a virtual wallet where you can view the balances associated with your accounts. For long term storage, you should consider a cold wallet. A Cold Wallet is where you store your passwords offline. And you can authorize outgoing transactions… That is, you can pay for goods or services… by using your password.
How about for short term use? There are a number of options. One way is to keep funds on an exchange. What is an exchange you ask? An exchange is an online platform where you can exchange one cryptocurrency for another. But for security reasons you will want to keep your transactions in exchanges brief. And once you’ve bought the cryptocurrency you want, move it into your own account. Visit here for more info on crypto wallets.
Securely Storing your Passwords
You already know that the decentralized nature of cryptocurrency makes it more secure than most places where you can store money. The main risk of any cryptocurrency lies not within the software and technology used. The main risk is with the steps the user takes or doesn’t take. You must put much thought into the secure storage of your passwords. If you forget/lose your password, you lose access to the balances associated with it.
Remember, there is no central bank where you can walk in, identify yourself, and gain access to your money. If someone gains access to your cryptocurrency, they can steal it. And it is almost impossible to get it back. The advantage of using an exchange now comes into play. Most often, an exchange will reimburse you. Be diligent. Choose reputable exchanges!
You should always store your passwords offline. Consider using phrases or sentences that are easy for you to remember. You must never forget or lose your passwords! You have to be careful to make sure you are using the real URL. Phishing schemes are famous for using fake URLs to trick users into entering their personal data into the fake URL… Where hackers capture it and can use it to steal your money. Misspelled words are a big clue that something is wrong.
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