What is Cryptocurrency?
Pixabay.
Cryptocurrency is a bit like online banking without a central bank. It is software-based, like an online banking platform. There is a ledger (called a blockchain), balances, and account numbers. You access your balances by using a password and can make transactions this way. Just like with online banking, you don’t need to know how it works under the hood to use it. Is a type of digital asset that functions as a currency. The system that makes a cryptocurrency possible is based on cryptography (“crypto”) and a cryptocurrency is meant to be used like a currency (“currency”). With that in mind, not every digital crypto asset is meant to be used as a currency like the popular cryptocurrency Bitcoin is.
Here's a video that can help you understand more:
What is Fiat Currency?
Pixabay.
Fiat money (or fiat currency) is a currency that a government has declared to be legal tender. Cryptocurrency is not legal tender and not backed by a government.
Fiat roughly means, “let it be done.” Cryptocurrency implies, “a decentralized and digital medium of exchange governed by cryptography.” Both are currencies, but there are some notable differences:
- Fiat currency is “legal tender” backed by a “central government.” It can take the form of physical dollars (for example paper Federal Reserve notes), or it can be represented electronically, such as with bank credit. The government controls the supply and you can pay your taxes with it.
- Cryptocurrency is not “legal tender” and it is not backed by a central government or bank (it is decentralized and global). Its form is more like bank credit sans the bank (in that it is represented digitally, but not backed by a bank or government). An algorithm controls the supply and you can’t pay your taxes with it (instead you have to pay taxes on it).
Otherwise, there is no intrinsic difference. Both fiat currency and cryptocurrency can be called money or currency, both are mediums of exchange that are used to store and transfer value, both can be used to purchases goods and services, both have their value governed by supply, demand, work, scarcity, and other economic factors, both have their value affected by the quality of the system surrounding it, both can be traded on exchanges, etc.
Cryptocurrency, gold, a bundle of wool, and a dollar are all stores of value and all have exchange value. Some value stores like the wool and gold have use value, some like fiat currency and cryptocurrency are meant to be a store of value and medium of exchange only.
How is Cryptocurrency Different From Fiat Currency?
Fiat currency, like the U.S. dollar, is controlled by central banks and controlled by states. It is legal tender and you can pay your taxes with it. Cryptocurrency, like Bitcoin, isn’t controlled by a central entity… but it isn’t legal tender and you can’t pay your taxes with it. Otherwise both fiat currencies and crypto currencies act as mediums of exchange and stores of value. With that in mind, some argue that cryptocurrency is a digital asset with exchange value, but not a true currency.
What are the Benefits of Using Cryptocurrency as a payment method?
There are a number of benefits of cryptocurrency as a payment method. The main benefits of cryptocurrency in this sense are the often low transaction costs and quick transaction fees compared to other payment systems. On a good day cryptocurrency is the quickest and cheapest way to send money around the globe (XRP is a great example of this). Cryptocurrency is also an easy way to make payments online, especially for peer-to-peer transactions. Another big benefit is that cryptocurrency doesn’t require trust, which removes potential worry for both the sending and receiving party. Meanwhile, for some people in some states, cryptocurrency can act as an alternative to a states’ currency (which can be good if that currency is suffering from rapid inflation for example).
What is a token?
Pixabay.
Token is a word that has a few different meanings in cryptocurrency. In simple terms, it just describes a cryptocurrency and its unit of value (a cryptocurrency = a token). For example one could say “I have 10 Bitcoin tokens.” The term is also sometimes used to describe cryptocurrencies existing on other coin’s networks. For example, the KIN ICO is a token on the Ethereum network. Lastly, encrypted bits of data that don’t contain identifying information are also called “tokens,” this type of token is also used in cryptocurrencies. In other words, what the term means depends on context.
What is a Cryptocurrency Wallet?
A wallet can be thought of as software that allows one to store cryptocurrency and create cryptocurrency transactions. This is a simple way to think of a wallet even though cryptocurrency isn’t technically stored in a wallet (instead public addresses are associated with transactions recorded on the blockchain, and thus are associated with balances, which the wallet software can read and display for you). More technically then, a wallet is software that allows you to store your private keys, view balances associated with public addresses, and create and sign outgoing transactions. With that noted, one must differentiate between wallets where you control your private keys (like the Bitcoin Core wallet), and custodial wallets where third parties host the wallet for you and are in control of the private keys (like the wallets on Coinbase or GDAX).
How Can I better Secure My Cryptocurrency?
Pixabay.
Since losing your keys and theft are real issues, it makes sense to follow some best practices of basic internet security. Keep your keys backed up offline (learn more about secure cold wallets), don’t store all your crypto in one location, be careful about URLs (make sure the URL is the real one), use a browser dedicated to crypto, use two factor authentication on any account you can, choose strong unique passwords, and don’t use your public email to log into your accounts. Taking just a few of these steps will go a long way to protecting you, taking none of these steps is asking for trouble. As a rule of thumb two-factor authentication is a must, so make sure it is enabled on all platforms that allow it! TIP: Although there are exceptions to this rule, the main security risk with the major cryptos isn’t the software (the software takes a ton of work to hack) or the major exchanges (the major ones are ensured, keep most of their funds in cold storage, and have security teams), it is people not taking care to secure their accounts.