Cryptocurrency Explained In Layman’s Terms

Obviously, by now you have heard about the buzz of cryptocurrencies. Stories of gains and anguish surrounding Cryptocurrency continue to pop up every day. Becoming an overnight millionaire to losing all your hard-earned cash are separated by a very thin line. The price movement of most digital currencies is highly volatile hence making it a very risky venture to put your money in. 

But let's be honest many of us truly don't understand cryptocurrency, and every time you try to understand, it's explained with more and more jargon. In this article, we are going to explain Cryptocurrency in Layman's terms, Very easy to understand, and we will cover a wide range of topics like Blockchain and even Dogecoin.

What is Cryptocurrency?

Any digital currency that only exists electronically or virtually can be referred to as a cryptocurrency. Cryptos are used as a medium of exchange and the transaction is recorded in an online ledger built on blockchain technology. The online ledger uses complex hashes (basically encrypted binary of 0s and 1s) to optimize the security of the held digital coins.

Bitcoin (BTC) has played a major role in the cryptocurrency world. Since its inception in 2009, the digital currency has continually improved and led to the innovation of better and other altcoins (introducing a lot of scam coins as well). As of 2021, there are over 10,000 variances of cryptocurrencies, with this list, making some of the popular ones; Ethereum, Dogecoin, Litecoin, Tether, Cardano, and Dogecoin, among many others.

As of November 2021, Ether (ETH), which is a cryptocurrency of the Ethereum blockchain platform, has the second-highest value after Bitcoin. Ethereum distinguishes itself from Bitcoin in the fact that it is a programmable blockchain with much more flexibility. The platform offers a marketplace for developers and other merchants to conduct business theoretically fraud-free. It is important to note that the supply of Ether is limited to how much can be made a year. As for Bitcoin, there is a limit on how much can be created in total in its entire lifespan (hence why Bitcoin is often compared to Gold due to its total limited scarcity). 



Another popular altcoin is Dogecoin (DOGE). The creators of the digital currency were initially creating a fun coin that would appeal to more people than Bitcoin, as its theme was adopted from a dog meme. When Tesla CEO Elon Musk tweeted that Dogecoin was his favorite coin, it gained popularity and has since become an actively traded crypto. The coin’s value was initially worth fractions of a penny, before skyrocketing to nearly $1. Keep in mind its creators only made it as a joke, which was never to be taken seriously. In comparison to Ethereum and Bitcoin, there is no limit on how many Dogecoins can be created.

Note that these altcoins are mostly built on the original idea of blockchain technology. Every coin has been altered and improved with enhanced features to make it function better than Bitcoin.

Unfourtatetly there have been a lot of fake coins as well created, that show up magically overnight, where naive investors pour their hard-earned money only for the creators to dump everything and run! It's important to do your due diligence and not play this market like a lottery!

Cryptocurrency Vocabulary Explained 

All the digital currencies have similar themes and features, here are the main ones:

Blockchain – Simply put, this technology allows digital transactions to be recorded and distributed but cannot be edited. The transactions are recorded in an electronic public ledger; the information is stored in blocks that are chained together in a continuous form. There is no one central blockchain, but rather a distributed set of nodes, that can process transactions for you. Just think of it as, many banks sprawled across the land versus just one bank where you have to wait in line for your transaction to be computed.

Decentralized – Most cryptocurrencies are not controlled by any financial regulation board or country. This is because digital coins exist virtually and are distributed around the globe in the blockchain system. Hence, your blockchain is decentralized, where you can go to many nodes to process your transaction. It's important to note, currently, this results in cryptocurrencies being high risk as they are not controlled or regulated (since it's everywhere!). 

Crypto Wallet – There are two ways of storing your digital currencies to enable you to conduct transactions. These are; Hot wallet and Cold storage with the difference being connectivity to the internet. Hot wallets are connected to the internet while cold storages are not. Cold storage has been deemed safer as they are immune from online hackers. I'm sure you've read countless stories of how people lost their digital wallets which contained millions of dollars worth of digital coins. Crypto wallets have some pros and many cons such as a high rate of hacking, and the ease with which people can lose their coins by misplacing their wallets!

Mining – Most cryptos are brought into existence through mining. Mining is the use of high-performing computers to generate units of digital currencies (basically 0s and 1s generated by complex math equations called hashes). The mining process is tedious, expensive, and time-consuming and recently it is only done by large corporations with large cold mining rooms (mostly located in China). In Bitcoin’s early years solving mathematical equations was easy and anyone could mine, but the equations have become more complex and demanding, as more and more Bitcoins are created (remember there is a total limit).

As a result of the difficulties of mining, you will hear a shortage of computer graphics chips (GPUs) being hard to come by, mostly because miners have been taking them as they yield the best performance in the mining coins. Where often the biggest cost of creating coins is the electric bill.

So, is cryptocurrency a safe investment?

At the current moment, cryptocurrency is in shambles as it's basically showing up to be a Ponzi scheme. With the latest news (late 2020_ Crypto exchanges have been going up in flames (such as FTX and BlockFi, and LUNA), and exchanges are likely to follow. With the demise of these exchanges, it is currently more of a gamble rather than an investment. 

Aside from the Ponzi scheme-like failures, here are a few of the challenges Cryptocurrency currently faces that need to be solved for it to be increasingly adopted by the world:

• Uncertainty about the future – Since digital currencies are virtual and not backed by any physical value, their existence in the near future is always uncertain. A new and better version of a digital currency pops up every day making some of those in existence obsolete. E.g. Ethereum and Ethereum 2.0. 

• Limited usage – To use your cryptos as a medium of exchange, you have to check with the merchant if they accept that form of payment. This can create inconveniences as not all have embraced the concept. Some countries have also imposed bans and regulations such as China recently. Lately, Tesla ($TSLA) has removed the ability to purchase their cars by Bitcoins. However, AMC Movie Theatres currently accept it as a form of payment (trying to cash into the meme stock craze)

• Pyramid Schemes- If you go through the history of Bitcoin, you’ll be in a position to point out major scams that led to huge losses. Lately as described above, FTX is probably the biggest exchange to go bust, as well as the Luna coin creator is still on the run from authorities!

• High volatility – Unexpected dips and breakouts make cryptocurrencies highly risky. The value can move from $6000 to $500 in a split second.

• Security concerns – As I have pointed out earlier, hackers and online fraudsters can wipe out a hot wallet in a matter of seconds. A cold wallet can easily be lost and never recovered if you lose the address or password, in this case, it will never be recovered and will be lost forever. With money when an issue arises it's often recovered via Federal Insurance or by your Bank. This is made worse by the latest hacks in FTX, where employees just stole whatever remaining money was left over from people's wallets!
  
  

Cons of Cryptocurrency

I rather my readers be well-informed and know the risks of trading Cryptocurrency, so they can make better decisions. In this section, I will list a few concerns that involve cryptocurrency. Since after all, it's still the wild wild west.

• A coin's Market Cap and trading volume can be faked and manipulated. Don't feel FOMO when you see a new coin rocketing to the moon, with a huge volume and insane Market Cap! All of this can be faked and manipulated. Take a look at this Reddit Post, where the poster showed step-by-step how he faked everything!
  
  
• Environmental Concerns- Cryptocurrency requires the computation of complex math, which requires a ton of power. As it stands the majority of power drawn from the grid is not "clean energy", this applies to almost every nation in the world. Ethereum 2.0 seems to have solved this issue.
  
  
• Regulation is coming, like stocks, and online poker eventually felt the wrath of government intervention. Cryptocurrency will as well, and this will have a huge impact on price, but when it does happen it will likely be for the best, as it will be harder to profit from pyramid schemes, as well as funneling money for illegal activity.
  
  
• The majority of coins will eventually disappear and only a few will remain. Most of the prices are based on pure enthusiasm and speculation, that these coins will eventually be used practically. But unfortunately, only a few will win long term, be careful what you invest in.
  
  
• The majority of coins are traded like a pyramid scheme, where the investing strategy is simply to just buy a coin, then tell everyone else to buy so the price goes up. BEWARE!
  
  
• Stay away from NFTs, as they currently stand are nonsensical scams. Perhaps in the future, they will have value, but at the current moment, it seems crypto whales pump up prices. If you see NFTs selling for millions, you will see that no one else is bothering to purchase them after the initial purchase (NFTs have the ability to be bought out at any moment). For example, you will see an NFT sell for one million, and displayed on an auction site you will see offers ranging from $5000 to $500 (ouch!).  Here is a breakdown that shows how 97% of NFTs prices are manipulated and artificial.

Conclusion

Hopefully, in this article, you came up with a better understanding of what Cryptocurrency is, and the challenges that it faces. I know many people are looking forward to Cryptocurrency becoming the norm, in order for that to happen it's imperative that as many people as possible understand the basics of it and the challenges faced. When more people have a grasp of cryptocurrency the adoption rate will be much greater.

If you would like to read similar articles to this, check out Explaining A Gamma Squeeze In Layman’s Terms.