Crypto sounds complicated, but it’s not. On this page we explain what cryptocurrencies are, what the advantages and disadvantages are and how such a value is determined. In this introduction we tell you what you need to know before you start investing and trading cryptocurrencies yourself.
“A cryptocurrency is a digital currency that uses digital encryption techniques to produce new currency units and verify transactions, independent of a central bank…”
Okay, that’s a mouthful. Let’s start at the beginning. Cryptocurrencies can be seen as a by-product of another discovery, one we’ve probably all heard of: Bitcoin.
The inventor of Bitcoin is Satoshi Nakamoto (a pseudonym), altough no one knows who he really is, there are many theories about who created it and why…
Bitcoin was intended to be a new electronic payment system that uses a peer-to-peer network to address the problem of “double spending,” Nakamoto said in the original explanation of Bitcoin.
You can read about what this all means and what problem Bitcoin originally sought to address here. This is not directly relevant to understanding what a crypto-currency actually is. Or you can listen to the audiobook here –>.
When you take away all the noise and information about crypto and Bitcoin and look at what a crypto-currency really is, you can greatly simplify it.
Try to imagine what your bank account looks like. What does this money look like? Actually, this money is nothing more than a number in a database that can only be changed under certain circumstances, right? Crypto-currencies are exactly the same.
Like any form of money, it has to be verified in some kind of database, where you arrive at a certain balance and a number of transactions.
With traditional money, this database lies with an authority such as the banks. In the case of crypto currencies this database is shared and verified decentrally across the world in an encrypted way using the blockchain.
Cryptocurrencies have a number of properties that are different from a euro. For example payments with a cryptocurrency are:
One of the things that people seem to find especially interesting is speculating on certain cryptocurrencies, so we’re going to take a closer look at that in this paragraph. The reason why we explain this in more detail is to make you aware of what exactly you are buying, in this way we hope to make it sufficiently clear to you what the risks but also the opportunities are when speculating on crypto currencies. Because, who or what actually determines the value of a crypto currency?
The short answer to the previous question is: you and me. Most cryptocurrencies have no inherent objective value of their own, so the market is largely highly speculative!
Now there are exceptions to be found, for example there are certain “stablecoins” that claim to be pegged to the dollar in order to make trading easier for certain day traders.In addition, there are crypto currencies that are linked to the price of gold, or even oil. However, this is more the exception than the rule.
The traditional forex and stock markets are therefore much safer to speculate on. But frankly also less fun. Within crypto trading, it’s just what the public thinks the underlying product is worth. This makes speculating on crypto currencies often an emotional affair, which can cause the price to fluctuate greatly. It happens daily that one can earn thousands of dollars worth of Bitcoin, but also lose!
The value of a currency depends mainly on the confidence of the investor in the team and product behind the crypto currency. This trust is in turn influenced by developments such as a product launch, an update for certain software and/or the rollout of smart contracts. Often such developments then also lead to a price increase for the currency, as the technology behind it becomes “more valuable”.