A cryptocurrency is nothing more than digital ‘coin’ that has a value of its own.
Think of it this way: Let’s say I take a rectangular piece of paper and write $10 on it. Would you say that piece of paper is now worth $10? I didn’t think so. Now if I take an actual $10 note out of my wallet, you would agree right away that it was worth $10. Another example would be my writing ‘Apple’ on a piece of paper doesn’t make that a single Apple share. But a piece of paper issued by Apple would make it an Apple share
A digital coin, or a cryptocurrency works the exact same way. The only difference being that instead of a bank, we have a secure network that decides the value of each coin. And just like Apple shares, you can buy and sell cryptocurrencies with other people, which determines their price.
You can invest in cryptocurrency to increase in value over time. Apple shares were worth $25 in 2008. 10 years later, each share is worth almost $200.
Cryptocurrencies work in the exact same way. You can choose to invest in them, just like you would shares or property, with the expectation that the price could increase 10 times or 1000 times as some have in the last 5 years.
Some cryptocurrencies, like Bitcoin work exactly like currencies do and you can buy things or pay bills with them.
Other cryptocurrencies work like frequent flyer points – in that they have value but only within the network they are issued in. For example, you can use your Qantas Points to upgrade your next Qantas flight seat but you can’t use those points to say, pay your rent.
Cryptocurrencies go a step further and let you sell your ‘points’ to someone else. So rather than have your points expire, imagine if you could sell them to somebody else. You would have made an easy profit because you would have got those points for free (from a previous flight) but would have just sold them for cash.
Broadly, there are 2 ways to get cryptocurrencies, you mine them or you buy them.
This is the equivalent of printing money. It’s like how a country’s federal bank prints currencies notes thereby ‘making money.’
Because cryptocurrencies are not governed by a central authority, like a bank, anyone can use their computers to get onto an individual secure network and make cryptocurrencies. This is called mining and the process involves using your computer power (i.e. processor and electricity) to create new coins.
The cost of the computer power is the value of the cryptocurrency. Because of this, popular coins, like Bitcoin are more expensive to mine i.e. they take longer. And other, newer coins, that don’t have too much demand can generate millions of coins in a matter of days.
In fact, you can create your own coins by setting up your own secure network and become a millionaire of your own coin.
The other way to own cryptocurrencies is to buy them and that can be done in two ways:
Cryptocurrency exchanges are similar to the stock exchange that trade shares. You can buy different cryptocurrencies directly with Australian dollars or, if you already own cryptocurrencies then trade those for other currencies or back to Australian dollars. At the time of writing this, there are nearly a dozen different cryptocurrency exchanges in Australia, each with their own costs of buying and selling cryptocurrencies.
And finally, you can buy cryptocurrencies from service providers – like Chillur. Service providers differ from exchanges in that they buy the cryptocurrencies from the exchange for you. There are several advantages in buying cryptocurrencies from service providers such as ensuring that you get the best price and managing your portfolio so that it stays up to date.
You can invest in cryptocurrencies in two ways – Either buy cryptocurrencies directly through and exchange or create and invest in cryptocurrencies through a cryptocurrency index portfolio. In other words, there’s the DIY method or the service method. In both scenarios, you would not be actively trading (buying and selling cryptocurrency) but holding on to your cryptocurrency portfolio with the expectation of gains over the long term.
Currently there are over 1500 cryptocurrencies that you can invest it. Like with the stock exchange, rather than having to research every stock and trying to figure out how to place them in your portfolio, it’s a lot easier to invest in a range of coins as part of your portfolio. This makes it easier to continue investing – making it easier to therefore stick with the habit. And by investing in a range of cryptocurrencies, you spread out the risk of putting all your eggs in one – or two – baskets.
Chillur offers an index portfolio of the top 10 cryptocurrencies by market capitalisation. What this means is that rather than have you invest all your money in one or two cryptocurrencies, we use your funds and invest them across 10 cryptocurrencies in the same proportion as they exist in the market.
Cryptocurrencies are stored in… wait for it, ‘wallets.’ Wallets are nothing more than specialised storage devices for cryptocurrency. They resemble pen drives or thumb drives but are designed and built only to store one or more types of cryptocurrencies.
Wallets can sit on your computer, your phone or with your service provider.
The mysterious Satoshi Nakamoto wrote a paper that described a currency supported by a computer network and cryptography. This paper was the source for the concept of the first popular cryptocurrency, Bitcoin.
A year later, people were able to create Bitcoin for the first time by using their computers to join the secure network and mine the cryptocurrency.
The first known, recorded exchange was made where 10,000 Bitcoin were traded for two pizzas. Today, those damn pizzas would be worth $100 million!
New cryptocurrencies emerge. Litecoin being the most well known of that batch
And the rest, as they say… is history.
At the time of writing this article, there are well over 1,500 cryptocurrencies. As we mentioned earlier, not all of them are equally popular. The popular ones like Bitcoin are worth thousands, others like Ripple and Cardano are worth under a dollar and there are those that are worth less than a cent.
The mainstream news media loves a good disaster. Be it an attack, a hack, a scam or a heist – they love a good scandal. And that’s what ends up get reported about cryptocurrencies. If the only news stories you read are the negative ones, you’re going to believe that everything about cryptocurrency is negative.
While the tech news or the industry news does cover the latest innovation or the latest successful implementation of cryptocurrency, it doesn’t always make it to the TV headlines and that’s one of the biggest challenges in the way cryptocurrency is perceived.
Those who are threatened by something new are the first to criticise it. When AirBNB launched, the hotel industry started complaining as if people were wrong in expecting better prices for holiday homes. Similarly, when Uber launched, the taxi industry started rioting because how dare consumers expect to pay lower prices?
And that’s exactly what’s happening with cryptocurrencies, those who fear it the most have the loudest voices and their voices are usually negative.
The short answer is: No one is 100% sure.
It is a new technology and with all new technology, there are skeptics. In 1998, no one believe anyone would buy and sell houses, cars or furniture online when placing an ad in the newspaper worked just as well. In 2006, people used to laugh at social networks because no one thought people would ever want to talk to their friends online when they could just as easily talk to them in real life. In 2012, people thought the idea of putting animal ears and noses on your pictures were stupid. The reality is that people are still figuring out how to use the technology.
Some predict that it could be the future of internet currency – that you would use cryptocurrency to easily pay for all online services. Others believe they would be just another investment option – like art or cars or sculpture.
The best way to find out just what the future holds for cryptocurrency is to become a part of that journey.