Cryptocurrency has boomed in recent years but is still a relatively new concept in the history of currency. Today we rarely use physical money (paper and coins), and during the covid pandemic we’ve realised that we probably don’t ever need to. Think of everything you have ever bought in your lifetime: house, car, clothes, food, cinema tickets, cup of coffee. It’s mostly bought with digital currency in the form of credit or debit cards or money transfers from your bank account to another account. Even the salary you are paid is digital. Of the estimated $100 trillion of total money in the world today, less than 10% is thought to be in the form of physical money.

Unlike all other currencies which are available in physical form, cryptocurrency is 100% digital. You can’t see it, feel it, smell it or even swim in it (I’m looking at you Scrooge McDuck). It is essentially computer code, binary numbers, that represent a certain amount of value. It began in 2008 as a 9-page document called a white paper written by Satoshi Nakamoto. It described an alternative source of currency, Bitcoin, that did not need any bank, financial institution or government to manage or regulate it. It would be a currency without borders, that anyone could buy into and trade with anyone else all around the world. It would be a decentralised, peer-to-peer, secure money exchange, providing financial parity and independence for all, freeing every man, woman and child from the clutches of tyrannical financial institutions...or so was the hope.

So, how do you acquire crypto?

Well, you either have to mine for it (no, not like people digging underground with pickaxes) or buy it with fiat money (a fancy term for cold hard cash). The first Bitcoins were given as rewards to people (miners) who solved incredibly complex mathematical problems using nodes (imagine a super powerful computer that only has one task – solving this math problems). These coins could then be traded or sold. Since there is no physical coin and no bank to oversee the transfer, people simply traded the coins directly from one to another. This had to be done safely, transparently, and a record of the transfer kept (like a ledger). This is all done using the Blockchain.

What is Blockchain? The Blockchain is a permanent record of every transaction ever made and is open for everyone to look at. Try visualising a massive vault with millions of safety deposit boxes. Each box represents a single transaction and is transparent, so you can see how many coins are inside and when the box was locked, but you can’t open the box unless you have a key. The keys are just an insanely long, convoluted password and form part of the encryption process, called cryptography, that makes cryptocurrency safe and secure. Only the owner of the key can unlock the box and it is the only way to prove ownership. No key, no coin. That means if you lose your key or it gets stolen, you’re out of luck and out of pocket.

The Blockchain is extremely difficult to hack, partly due to the in-built cryptography and the enormous computing power needed to overcome this. However, it is possible for criminals to steal your keys. Keys are stored in hot or cold wallets. A hot wallet is an online account. A cold wallet is offline storage (external hard drive, USB stick, or piece of paper). Hot wallets are more vulnerable to phishing or malware attacks, whereas cold wallets are more at risk of being physically lost or damaged. The amount of crypto in circulation today is valued in the trillions, with some individuals each holding millions of pounds worth. The need for security is so great that some people will go to very elaborate lengths to protect their keys. There are several secret cold wallet storage locations around the world, including one in Switzerland where keys are stored on hard drives (disconnected from the internet), that are kept in vaults, deep inside a former military bunker, underneath a mountain and protected by armed guards who would rather shoot you than let you steal a key!

The potential for Bitcoin and the Blockchain quickly gained traction, and before long alternative crypto coins emerged (known collectively as alt-coins) which used different Blockchains but were essentially created on the same basic principles. There are now thousands of altcoins available each with varying degrees of value. However, Bitcoin is still the most well-known of all cryptocurrencies in the world today with the price of one Bitcoin (BTC) valued at more than £30,000.00!

Can you spend crypto to buy everyday goods?  

Yes and no. Cryptocurrency has become popular and more widespread with several retail giants including Lush, Whole Foods, and Microsoft accepting it as payment with the use of an app. Whilst several others, such as Apple, Amazon, Pizza Express, Wagamama and Café Nero, allow you to purchase store gift cards using crypto. Although Bitcoin was originally envisioned to be an alternate source of currency for a means of exchange, the volatility of its value (meaning sharp fluctuations of highs and lows) has resulted in most buyers investing in it as an asset, akin to shares on the stock exchange, rather than using it to buy their weekly groceries. This is known as “to HODL crypto” (the origin of this term was a middle-of-the-night, drunken typo of the word “HOLD”).

Cryptocurrency has come a long way from its early years - which was shrouded in fear and warnings of Ponzi schemes or fraudsters looking to steal your credit card details - to becoming a legitimate source of currency and asset. It is still a very young currency and the Blockchain technology is immature, but analysts are predicting huge growth and an expansion of the Blockchain technology into a diverse spectrum of alternative uses. There is still a very long way to go before it becomes a mainstream method for payment and commerce, and still remains to be seen whether Nakomoto’s vision becomes a reality.

By: Alvin Michael

The views and opinions expressed herein are the author’s and are not intended to be used as advice to trade on the crypto markets.