//a extremely simplified way of explaining crypto to somebody who doesn't yet get it. My purpose is not a precise and exact explanation, but an over-simplified one, to make it easy to understand quickly and answer the most common questions. Enjoy!
Most people use alternative currencies already!
It’s common in our day to day life to use alternative currencies. Think about the time you exchanged your Frequent Flyer Miles for a discount on your plane ticket, or when you got enough stickers or points in your supermarket fidelity program to exchange it for products. That was a medium of exchange created by private organizations, to be used for a specific purpose. They were not created by the government.
Now let’s imagine a hypothetical scenario, where Joe is a person who has earned many Frequent Flyer Miles and is going to become a new parent soon. He’s not interested in flying now, his whole mind is focused on being ready for when the baby comes, and as such, he needs to go to the supermarket soon to get nappies and a stroller.
Now, on the other side of the country lives Barbara who has a two-year-old. Over the past few years she has accumulated a vast amount of points on her supermarket fidelity card due to the impressive number of nappies bought over the last few years. The value in these points is that they can be exchanged for discounted nappies. However, her toddler is no longer using nappies so the value in her points is lost. What she currently wants is to take her toddler on a holiday outside of the country.
It would be safe to guess that they would happily do an exchange of the type of currency they own, for the currency they currently need.
Now let’s move to cryptocurrencies. These are a way to quickly and cheaply create alternative currencies for a specific purpose and distribute them easily in a secure way. Also, it’s a way to make them easy to trade over the internet. There are different markets where people sell what they have in exchange for what they need. Cryptos also provide several advantages that we will talk about later.
Exchanging value
Anybody on the planet can create a coin, and anybody on the planet can recieve it. It’s like having a system where everybody (for free) can have a bank account to send and receive different coins. But how does a coin get actual value? Its defined by what can you do with it. The coin is as valuable as the price that people are willing to pay for it.
Most coins are created with a specific purpose in mind. For example, if you are a good writer, a digital newspaper can pay you in NewspaperCoins if you write articles. Those newspaper coins can be used inside that platform for different benefits (such as a way of payment for customers to get access to the articles or VIP services) so other people could be interested in buying them from you.
In another example, if you have a computer that you don’t use a lot, you can sell its spare storage and processing power and people can pay you in ComputerCoins. Then you could sell them or exchange them for something else you need, like NewspaperCoins.
The amount of money that NewspaperCoins and ComputerCoins are worth is only determined by the price agreement between a person who wants to buy and a person who currently owns it and wants to sell.
Starting a business (Or what is an Initial Coin Offering?)
Another great use would be for starting a new business. There are many people with great ideas that don’t have the funds to start. That person can use cryptocoins to ask for funds in exchange for some future benefit he will offer. That benefit will be represented in a coin he creates. So, that coin is a promise to fulfill a “contract”.
To make it simpler, lets imagine Carlos wanting to start a new bakery business. He doesn’t currently have the money to start, so he decides to ask for funds, and he creates a website for this regard. He decides to use cryptocurrencies to fund his business.
He creates his own coin that he will call “BakeryCoin”, and the agreement will be that all 50% of all the profits his bakery will make will be distributed proportionally to every person who holds a BakeryCoin.
So, in this case, every coin created by Carlos is actually a contract for him to fulfill in the future to share his profits. At the beginning people holding coins will receive a small amount of profits but as business gets bigger, they will receive more money.
As such, a BakeryCoin will get more valuable as time goes on and people who hold it will be able to sell it or exchange it for some other coin at a better rate.
So, what’s a cryptocurrency?
A cryptocurrency is a token that can represent anything his creator intended and has monetary value determined by desirability defined by the buyers and sellers (the market) by the services or goods it can provide. A cryptocurrency can be created by anybody and given or sold easily to another person anywhere on the planet. It doesn’t rely on a central authority (like a bank, a government, or a private institution) but on the people who hold the coins. As such cryptocurrencies live by the rules of which they were created and by supply and demand.
Every coin created has rules from its inception (written in the code) such as:
• How will new coins be created? (or are they all already created)
• What’s the maximum supply of coins that will ever exist? (Or are they infinite)
• What’s the unique value that it can provide? What can it be used for?
• Etc.
So, let’s talk about bitcoin.
As the most popular (and the first) crypto currency created Bitcoin is used as a “universal” coin. It’s the most widely used medium of exchange for other coins. So, for example if you hold BakeryCoins and want to exchange them to ComputerCoins then it’s going to become time consuming to:
- Find somebody who would have the same type of coins you need
- Who is willing to sell
- Will have the right amount you need.
- Will want the same amount or type of coins you have.
- For the right price
You could either wait to find an exact match or it would be much easier and quicker to transform it to something universal and neutral. Something that can be easily transformed into something else. Bitcoin is that road that connects the different currencies (even from/to “normal” cash like US dollars)
Where does bitcoin get its valuation from?
The same way as people could find value in buying NewspaperCoins to read the articles somebody else wrote, people find Bitcoin highly valuable because it allows them to
- As it is the most famous crypto currency, and widely known, it’s easier to find somebody that is willing to accept it in exchange for goods and services as a Universal currency in the “real” world.
- Quickly exchange from one type to another type of cryptocoins (as there are a lot of services available for this)
- Quickly exchange from cryptocoins to “normal”currency (as there are a lot of services available for this)
It serves a well-defined purpose. Because supply is limited (there are only a limited number of bitcoins that have and ever will be created), and because demand for the services it provides keeps growing as more and more people want to participate in the crypo ecosystem, price will probably keep increasing in the future. That’s why people usually buy it to hold it so it can be sold at a profit as the price increases.