You've probably heard the word cryptocurrency being thrown around in recent news. It can be confusing, so I'm going to explain what it is and why it's important.
History of Money
Hang on, before we get into that, let's talk about money for a second. You know how you have dollars in your wallet? That came from the US government. You know how you can use your dollars to buy things? That's because someone else thinks they're worth something. Money is basically a promise that someone will give you something useful for it later.
Yes, money has been around for a long time now. But honestly, it wasn't always so good at being useful. People used to use shells and then rocks as money. Maybe you're saying "Okay but not all shells are the same and I can't put a shell into a slot machine! There's no way that was useful!" If only these people had something better like gold instead…
How we learned about gold
Historians aren't sure exactly where gold came from. They just know that people have been using it as money for a really long time, and now they use it to make fancy artwork too.
How do we mine gold? Miners get paid a certain amount of money to find the gold before someone else does. It's kind of like going on an adventure in order to find treasure. It's not easy, but the payoff is really worth it!
No one knows when people started mining gold, but we do know why they like to use it as money: it's shiny and rare. They also like how you can melt it down to make anything you want. You could even turn your gold into a piece of jewelry. It's really useful if you want to buy something with your money! We can say that gold is worth something because people will actually give it to us in exchange for our money.
How Gold became Cryptocurrency
Gold is very valuable, but there are a couple of problems with using it as money:
1) You have to carry it with you all the time.
2) If a government decides gold isn't worth as much as they thought, people will lose money.
You could say that gold is kind of like a decentralized cryptocurrency. It has some problems we'd really like to work on! In order to solve these problems, someone invented cryptocurrency.
What is Cryptocurrency?
Cryptocurrency is a form of digital money that comes with two big differences:
1) You can't touch it.
2) It's decentralized (no government backing it).
If you want to know how cryptocurrency works, think about these questions: how does gold get mined? How do we make sure no one cheats when trading gold for money?
If you're thinking about that, you can stop wondering right now. It's the same as how cryptocurrency gets mined and traded. Miners use computers to do the work of tracking down blocks. They get rewarded with newly-made currency for their efforts! Compare this to gold mining: sometimes people can cheat to get more money, so there needs to be a better way of keeping track.
Bitcoin is the best-known cryptocurrency. It's very valuable because people like how useful it is as money: it's decentralized and doesn't have any government backing - meaning governments can't change its value at will! For example, bitcoin has split into two: bitcoin and bitcoin cash. It's also been used for buying illegal things like drugs or stolen credit card information.
Most cryptocurrencies out there right now are built to be decentralized, just like Bitcoin. This means that no one can make a list of all the people using it and see what they're spending their money on (which is good if you're trying to buy drugs). It also means that no government can change how much your money is worth.
What's the difference between cryptocurrency and real money?
It might be helpful to see what exactly makes up real (or fiat) money so we know why people like cryptocurrency so much.
Real (fiat) money is made up of these parts:
1) It's useful as money (see above).
2) People are willing to accept it for payment. This means there needs to be a third party like the government to make sure people don't cheat when trading money. So if a barber takes your real money in exchange for a haircut, he should give you a haircut and not say he'll cut your hair later. That would be too easy!
3) The government guarantees that it's real money. This means that if someone who isn't the government gives you some cash, you don't actually know if it will work as real money. Because governments are super powerful and smart, we trust them to make sure that other people who say they have money really do.
4) It has value because we believe it has value. People trust the government, so they know real money will always be worth something (providing the government stays in control).
So now that we understand what fiat money is made of and why we like it, let's talk about cryptocurrency!
What is cryptocurrency
Bitcoin is just the most popular cryptocurrency on the internet. There are many more out there.
1) Cryptocurrency is useful as money (see above).
2) People are willing to accept cryptocurrency for payment. In exchange for your digital money, you can get real things like food or a haircut!
3) Cryptocurrency is decentralized - no government or other third party decides how much each piece of currency is worth. Instead, it's all decided by the people using cryptocurrency in exchange for things they want.
4) If you own some cryptocurrency, it has value because we believe it has value. If a lot of people no longer believe cryptocurrency is a good way to do business, then the value of your currency will go down.
If you're brand new to cryptocurrency or you want to explain this to someone else who is, I hope this definition helps.
