Let’s explain crypto in under 3 minutes.
Cryptocurrency is a digital form of money or currency that can be sent, exchanged, and transferred without going through a bank or central system, through a network known as a blockchain.
This means that crypto is decentralized, meaning that it doesn’t have a central controlling entity that governs it. But what are blockchains? Essentially they’re a list or a database. Transactions of cryptocurrencies are stored on this list. These transactions are stored in chronological groups, known as blocks, hence the name, blockchain.
Blockchains are also decentralized, meaning that they are managed by a plethora of computers across the world, and the code is all open source, meaning publically accessible. But how does this make it secure? Well, since so many computers have access to the same information, it can be quickly and easily verified that the information is accurate by checking with the other copies, in simple terms. Blockchains can also only be added to, so there’s no going back and deleting transactions from the past - giving everyone a secure ledger of all transactions of a given cryptocurrency or set of cryptocurrencies.
But why is it called cryptocurrency?
Well, the blocks, stored on the blockchain, are all secured by cryptography, hence the crypto in the name. This is essentially complicated computer speak for math puzzles. Transactions are signed and verified by miners, solving complex math problems to verify the blockchain, the ledger of transactions.
But what are miners? Miners are essentially just computers solving problems. Computers contribute to blockchains by doing this work, and in return, get a reward. Miners typically focus on a specific cryptocurrency, say Bitcoin, doing work for the Bitcoin blockchain. These computers, and by proxy the people that run them, get paid in Bitcoin rewards when they solve problems. It’s this system that keeps cryptocurrency working.
Where crypto gets its price
Cryptocurrencies get their price from either utility, scarcity, or interest. In the case of Bitcoin, the largest and oldest crypto, the max number of bitcoins that can ever be made is 21 million. Not only this, but as new bitcoins get mined - the blocks on the blockchain, mined by miners, and rewarded in new bitcoin - the amount of bitcoin rewarded for each block decreases over time. So, unlike the US Dollar, which has infinite supply theoretically, as more and more people transact in bitcoin, the value goes up and up because theres limited supply.
On the other hand, cryptos can get value from their utility or market interest. Dogecoin is a great example of this. We saw massive gains in Dogecoin, originally created as a meme, purely because there was a lot of interest. When the interest outpaces the growth of supply, we see the price go up - supply and demand. Ethereum, one of the other major cryptos, has significant utility in the way it’s blockchain can be set up. This means that for payments and transactions, many prefer to use Ethereum, increasing demand, again, with a limited supply, driving the price.
Some cryptos are just scams though, so it’s important to understand the basic concepts of cryptocurrency so you can know what to watch out for.
But that’s that, crypto is just digital money, where transactions are stored on digital lists, protected by cryptography and stored on a network of computers, the blockchain.