This post was originally published on this site.
Cryptocurrency.
It’s a fancy word, and in a very very simple way, it’s just a method to send money around to pay off debts, buy things, or hold money.
The difference here is that it’s done electronically, and not in a bank or credit union.
Here’s how it works – in a very very very very basic way:
A group of people put regular currency into a pot. Let’s say everyone puts in $100. That gets everyone $100 worth of the cryptocurrency. For this explanation, lets use a made-up cryptocurrency called TestCoin.
When someone in the group of TestCoin holders buys something from someone else, the TestCoins move from one person’s wallet to the other. So if Al buys a burger from Jo for 10 TestCoins, those Coins go from Al’s digital wallet to Jo’s. That gets marked in both of their ledgers, as well as into everyone else’s ledgers.
That is the strength of this kind of Coin. Everyone who is in the TestCoin network has a ledger that shows all of the transactions for everyone else in the network. That way, if something gets messed up with one person’s ledger, there are thousands of copies of the correct ledger, and the messed up one can be corrected.
There is an extra wrinkle here – the ledgers are all security protected through encryption. So they are encoded so that you can’t just go in and change your wallet from 100 coins to 10,000 coins. It is this encryption that is a part of what is called ‘mining’ for cryptocurrency. Mining is basically getting a computer to do complex math to allow more encryption to happen. Sometimes, that results in a reward, but every time it results in a pretty hefty electric bill to run the computer that hard for that long.
For some people, the other reason to use currencies like TestCoin is that it is not controlled or tied to any one government. They see it as a completely free and democratic currency that allows money to flow freely.
The thing to watch out for with the ‘regular’ cryptocurrency is that its value can move, sometimes by quite a lot, through the course of a day, week, or whenever. The factors that cause it to move are hard to see sometimes. This change in value stems, at least in part, from the fact that there is not any actual value to the currency itself aside from what someone else is willing to pay for it. You might buy TestCoin for $1 per coin, but if someone offers to buy them at $5 per coin, the value can go up, but also come back down if the offer to buy coins is only 25 cents per coin.
The other version of cryptocurrency is called stablecoin. This works the same way as far as the ledger and exchange of value, but in this case, it is tied directly to something that has a more stable, static value, like the US dollar. So, if the folks at TestCoin wanted to issue a stablecoin, they would need to hold the same number of dollars in reserve as they want to issue StableTestCoin.
This is a lot to take in. It looks like it’s pretty safe, right? The records of transactions are spread all over the place, and are encrypted.
There is reason to be cautious when dealing with this sort of currency.
First is that the value can change drastically and quickly, so for those who are looking for an investment, it is very risky. There is little guidance for how the value of these currencies can change.
Second is that there is a very rich history of cryptocurrencies actually being crafted as a scam. Millions of dollars are lost regularly by people who don’t research and understand what they are buying into. The scammers create a very real looking coin system, take people’s money, and then shut down and walk away with all of the invested money, never to be seen again. Only a few years ago, there were over 4,000 fake cryptocurrencies that vanished with people’s money.
Third is that, at present, many requests for payment in cryptocurrency is tied to transactions that are less than legal. Scammers and Bad Actors prefer coins like TestCoin because once they have been sent, they are gone. There is no way to pull back a payment done with cryptocurrency.
One of the supposed strengths of cryptocurrency – its independence from the banking system – is also its biggest vulnerability. A financial institution, like a credit union or bank, have guardrails and protections set up to help keep your money away from scammers. Part of that is the two day waiting period to make sure money is really there, for example. Cryptocurrency doesn’t have that wait period, doesn’t have the people watching your back. Payment is swift, and very final. [Very much “no take-backsies”.]
There are lots more details to cryptocurrency. There are a lot of people who are huge fans of it, who have made some money investing in it, and who see this as the Next Big Thing. The folks who don’t talk as much are those who lost out. Be careful, ask questions, and if you’re being rushed to do a cryptocurrency transaction, best bet is to slow down and think it through first. Ask a service rep at your financial institution if you want an outside brain that is working in your best interest.