Cryptocurrencies 101: Has the fad become the future?
Cryptocurrency is becoming so widely adopted that everyone from car manufacturers to universities are following suit
Cryptocurrencies have quickly moved beyond the point of just being a household phrase. They are now commonly discussed every day. Despite all the buzz, many still don’t understand how they work, where they came from, or how to use them. It is still a foreign concept to many people who have used fiat (fiat means government issued currency such as US Dollars or Euro) all of their lives.
This blog reviews the basics of cryptocurrencies to get a better understanding of their past, present, and future, including why so many people and businesses are adopting them.
The origins of crypto
Bitcoin was not the beginning of cryptocurrency. Far from it. It simply did not take form in a way that fueled adoption until 2008. Before this, the idea of developing encryption-secured online ledgers had been attempted with Bit Gold and B-Money, among others, none of which finished their development.
Bitcoin changed the course of crypto history in 2008 with Satoshi Nakamoto’s paper “Bitcoin – A Peer to Peer Electronic Cash System.” To this day, Nakamoto’s identity remains a mystery. Bitcoin mining and software first reached the public in 2009, and the first use of it (buying two Papa John’s pizzas with 10,000 BTC) was in 2010. Based on today’s Bitcoin price those two pizzas cost $470 million, the most expensive two pizzas ever sold.
More cryptocurrencies began appearing in 2011, including Litecoin. Ethereum started to grow a following in 2016, slowly developing its name as the second-biggest crypto in the space. Today, there are more than 6,500 cryptocurrencies that you can buy. Bitcoin hit the milestone of $10,000 in 2017. Despite ups and downs along the way, it is consistently making new all-time highs at the time of writing.
Cryptocurrency is digital currency that relies on the blockchain, an online ledger for transaction security.
That online ledger has very strong security. The blockchain is decentralized, which adds to its security and uptime. Simply put, ledgers are similar to databases but they are spread across various computers. These computers that support the ledger can be anywhere in the world, provided they have an internet connection.
So how does cryptocurrency work?
1. Creating cryptocurrency
New cryptocurrency is created as a type of code. Bitcoin, the most famous and popular, uses an operation called mining to generate new coins. Mining is an energy-consuming method that involves miners competing to solve a complex mathematical formula first, all 100% online. The one who does so verifies the blocks on the blockchain and receives cryptocurrency as a reward for doing so. While it was initially possible to make a profit mining Bitcoin, that is now quite challenging since you need expensive high-end equipment for mining, and such equipment consumes vast amounts of energy.
2. Managing cryptocurrency
Most cryptocurrencies are decentralized. This means no central authority manages them. Instead, they rely on one of several consensus systems to verify transactions.
The previously mentioned mining method is known as proof-of-work. It is responsible for not only generating new crypto, but also verifying transactions. There are also other methods, with proof-of-stake being a popular option.
With proof-of-stake, those who own the cryptocurrency get to verify the transactions. You have a better chance of verifying the transaction if you have more of the crypto or have held it for longer. There typically are restrictions to prevent a single person from gaining much control.
With so many thousands of cryptocurrencies, these are far from the only two methods of verifying or managing them. Still, they are the most common.
3. Using cryptocurrency
Using cryptocurrency requires you to have a cryptocurrency wallet. It will have a public address and a private address. You can share the public address if you want to receive crypto but should never share the private address, as it lets you send crypto.
To send cryptocurrency, you use your wallet and enter the destination address of the funds in one of two ways. You can enter it in the form of an alphanumeric string or scan a QR code.
One key point is that cryptocurrency transactions are irreversible. If you accidentally send crypto to the wrong wallet, you are out of luck and cannot get the funds back. So, check and double check!
4. Early adoption to mass usage
One of the best ways to measure the usage volume of a cryptocurrency is by the number of confirmed transactions per day. There were just 109 in January 2009, about 85,000 by 2015, 180,000 by early 2016, and close to 400,000 at the peak in December 2017. That dropped back down to about 180,000 by June 2018, but it has been steadily climbing since then. As of January 2021, there were between 300,000 and 350,000 daily Bitcoin transactions confirmed.
Many people see cryptocurrency as the future. This comes from its numerous advantages and the various problems it solves.
Because cryptocurrencies are decentralized, they are not dependent on any central authority nor tied to any government. This frees them from potential government influences and inflation from banks.
The lack of inflation associated with cryptocurrency is due to more than just its decentralization (instead of being government-run). It is also due to the limited supply of cryptocurrency. For example, the Fed could print more money, which would inflate the dollar. The same thing could happen with any other government-backed currency.
By contrast, Bitcoin will only ever have a maximum of 21 million coins. Not only is the supply of Bitcoin limited, but so is the release of those coins. Bitcoin mining releases a set number of Bitcoins, but that figure is halved at regular intervals. This coin release schedule means that all 21 million won’t be in circulation until 2140.
Another point in favor of cryptocurrencies is the security associated with their decentralized nature. This comes from the use of the blockchain, which also helps with security thanks to its immutability. The ledger cannot be changed, which helps prevent fraud or people manipulating the system.
It’s another benefit that comes directly from Crypto’s use of the blockchain. Anyone can view transactions on the blockchain, although you cannot tell who is involved in any transaction. This also helps prevent fraud and provides a significant increase in confidence.
While some critics point to the anonymity of cryptocurrency as a concern, it is actually a significant benefit. It helps crypto appeal to anyone who wants to maintain their privacy. For example, it appeals to those who don’t want others to know how much money they have.
Simple global transactions and currency exchange
Many cryptocurrencies appeal to people thanks to their ability to be used worldwide. This has several elements to it. One is the simple convenience of paying for something in cryptocurrency when traveling.
Another is the fact that cryptocurrency offers an affordable intermediary currency for conversions between fiats (e.g. USD or Euro). Compared to the typical transaction and conversion fees that banks charge, the fees for using crypto to convert between two fiats are negligible.
Cryptocurrency is particularly useful for international transactions in countries where foreign currency is in short supply or not easily accessible. People in those countries may find it near-impossible to trade internationally. By providing a bridge between fiat and by functioning across borders, cryptocurrency overcomes this. Simply put, it is accessible by all, regardless of their access to international fiat.
Also, the unbanked (those with no bank account) can use cryptocurrency due to the lower barriers of entry and its global reach. This gives cryptocurrency huge potential in societies where much of the population does not have a bank account and cannot get one. Across the world there are still over 2 billion people with no bank accounts, in some nations the unbanked represent over 50% of the population!
In addition to expanding the reach of transactions while reducing the fees, cryptocurrencies also reduce the time involved. There is no need to wait for an intermediary to process the transaction. This is particularly evident with international transactions. Instead of having to wait days or longer for a traditional fiat transaction, crypto only requires you to wait minutes.
Even with online banking, across most countries your transactions will only be completed on business days during business hours. By contrast, cryptocurrency is active 24/7. This means you can buy, sell, or use it at any time of the day, no matter where you are. This lets you make financial decisions and transactions without having to worry about limited banking hours.
Like anything, cryptocurrency is not without its critics.
One of the common complaints about cryptocurrency is its lack of stability. Cryptocurrency prices are known for their volatility.
However, supporters point to the fact that prices tend to follow an upward climb over time. They also note that as adoption increases, prices will become more stable. If you look at Bitcoin, in 2013 it was worth a bit over $100. Today it is worth over $45,000.
There are a handful of safety concerns regarding cryptocurrency. Some critics say that their anonymity will attract criminals. However, the same can be said of many other technologies.
The other security concern that critics cite is the lack of protection against scams and fraud, including the fact that you cannot reverse transactions.
One more related concern is that if you lose your private key, you will not be able to access your money. This increases the risk of complete losses for forgetful people. Thankfully, this can be overcome. All you have to do is store the private key and seed code somewhere secure. One option is where you put important papers, such as your birth certificate.
A new concept
Some critics’ main argument is that adopting cryptocurrency requires a learning curve because it is a new system. Of course, this was also the case with most new concepts or technologies over the past decades.
Finally, some critics point to the high energy consumption of Bitcoin mining. While this is a valid concern, few other cryptocurrencies require a similar energy consumption.
Are cryptos ready to be used as currency?
Yes, cryptocurrencies are ready to be used as currency, although perhaps not on the same scale as fiat yet. The fact that more than 15,000 businesses around the world either accept Bitcoin, or have Bitcoin ATMs on their properties, shows that it is already in use.
More retailers and service providers are beginning to accept cryptocurrency, and the number of people with crypto wallets is expanding. Both point to widespread acceptance.
The caveat is that there are still many places where cryptocurrencies are not accepted. There is also the fact that while Bitcoin is widely accepted, many others have lower rates of acceptance in stores. However, as the demand for more places to accept crypto payments rises, so retailers will have to increase acceptance.
If you want to look at the sheer numeric perspective to answer the question, you only need to look at the market volume of some of the biggest cryptocurrencies. At the time of writing, USDT-USD has the highest volume at 146.61 billion, followed by BTC-USD with 86 billion, ETH-USD at 43.91 billion, DOGE-USD at 16.75 billion, and ADA-USD at 9.27 billion.
Big businesses that already accept crypto
Those 15,000 locations that accept Bitcoin are not only small local companies. Many of them are international conglomerates with thousands of locations. Looking at some of the major businesses that already accept cryptocurrency, or plan to do so in the very near future, provides an idea of the adoption rate.
We’ll go into a bit more detail about some, but as of early 2021, all of the following accept at least one cryptocurrency. You will notice that some let you directly pay in crypto while others offer workarounds to accept it.
In addition, PayPal and MasterCard announced that it will be launching cryptocurrency support in 2021. This will be initially only available to those in the United States, but it should expand soon. It will initially support Bitcoin, Ethereum, Bitcoin Cash, and Litecoin.
Tesla also recently announced that it will soon be accepting Bitcoin. In addition, it bought $1.5 billion worth of Bitcoin, which fueled the cryptocurrency to a new all-time high.
Influential individual investors in crypto
Looking at influential people who have invested in cryptocurrency also shows the depth of its adoption. Note that we’re only listing those who are not necessarily in the crypto space. As such, Bitcoin founder Satoshi Nakamoto, Ethereum founder Vitalik Buterin, and similar figures are not included.
Why businesses should accept crypto regardless of its future
While many experts believe that cryptocurrency has a very strong future, there is still some debate. Regardless, it is smart for businesses to begin accepting it. This is a savvy move that helps appeal to consumers.
Essentially, there is currently consumer demand for the ability to pay using Bitcoin and other cryptocurrencies. By offering the ability to pay with crypto, companies can expand their reach and appeal to their audience. With millions of people using it, accepting crypto can dramatically expand the reach of a company. This high demand is why Nexford decided to start accepting cryptocurrency in February 2021.
Want to learn more about our new payment options? Check out our Payment page.
Fadl is Founder & CEO of Nexford University. His vision is to enable greater social and economic mobility through high-quality, affordable education.
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