Home Accounting Payroll Formations Social Care Consultancy Blog Contact Blog Freephone 0800 345 7556 Cryptocurrency: A Beginners Guide Posted 07 Mar 19 Breaking Down Cryptocurrency For those who are complete beginners when it comes to the world of cryptocurrency, attaching a new meaning to the word ‘money’ can be fairly mind blowing. By definition, the Oxford Dictionary says Cryptocurrency is: “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank”. If an even simpler explanation is needed, the word 'cryptocurrency' can be broken down into its two parts: firstly, ‘crypto’ coming from ‘cryptography’ which is encrypting something (usually data or plain text) into something completely unrecognisable to anyone except the intended recipient, making the exchange of information completely secure. Lastly, ‘currency’, a more frequented term meaning quite simply a system whereby something considered (and agreed) to be a form of tender is used to exchange value. From this explanation it becomes a little clearer that cryptocurrency is centred around the extremely secure, digital, transfer of a currency holding monetary value. The Origins Of Cryptocurrency? For many, cryptocurrency is assumed to be just another form of digital money, but there’s a lot more to it than meets the eye. The idea of digital money in itself is certainly not new, having thought to originate back in 1989 with David Chaum’s ‘digicash’. With ecommerce not generally a part of everyday life at the time, this form of currency didn’t have much luck. It wasn’t until just over 10 years ago that Satoshi Nakamoto (of anonymous identity) suggested the reason for this failure is due to the way in which the financial system works, primarily in terms of the way in which it depends on trust. In this sense, the value of money today is no longer determined by a commodity (i.e. gold) as it has been in the past. Instead, the value of the money we commonly exchange and we now refer to as ‘fiat currency’ (i.e. GBP or USD) is determined by governments, and can fluctuate with the decision making power of a small group of people. This fiat currency is then stored in centralised systems such as banks, which are again, based on trust. It was a recognition of these flaws that sparked the emergence of cryptocurrency which was then created to encompass three unique characteristics: Firstly it is a trustless entity, meaning there is no third party (i.e. government or bank) involved in its transfer, only those individuals making the exchange. Secondly they are considered immutable and therefore completely transparent in the way they work, this means there is no room for ‘undoing’ of transactions or covering-up of any mistakes. Lastly, cryptocurrency is very much decentralised. Where governments can change the value of currencies by injecting more into the system or tweaking interest rates, crypto currencies are unable to alter the number of ‘coins’ or ‘units’ in their systems. (The only way to introduce new ones is through cryptomining, which is very simplistic terms is a mean of adding new transactions to the blockchain through the completion of an extremely intricate mathematical equation). As a result this means that without a centralised body taking control over it, there is no room for alterations in value or distrust in any information being shared. How Cryptocurrency Works Where governments and financial institutions are the backbone of most fiat currencies, the main component driving cryptocurrency is a technology known as blockchain. A blockchain is primarily a network of many (we’re talking thousands) of computers (also known as nodes) that serve as something known as a ‘distributed ledger’ based on the shared information they hold. It is these computers that then take part in a process known as cryptomining To really simplify, the way in which a blockchain works is that when a transaction takes place, there must be a majority vote of confidence amongst the nodes that this transaction is completely sound. Each block within the chain is effectively ‘sealed’ with a carefully crafted equation and ‘linked’ to the next block. If over 50% of these computers or nodes are considered legitimate, the end result is a completely secure system that records transactions with trust at its core. Within these blockchains lie the cryptocurrencies themselves, these are essentially the means of carrying out these transactions. Just like fiat currencies, there is more than one cryptocurrency and Bitcoin was the first currency to hit the ground running. There are now many cryptocurrencies, all competing against one another and each quite different to the next. To very simply compare two of the leading cryptocurrencies, the idea behind bitcoin was to create a way in which value can be both stored and exchanged. Whereas Ethereum was specifically built to allow almost anyone build their own decentralised apps (which exist only on blockchains) and carry out their own smart contracts within the platform. Keeping Ahead Of Cryptocurrency Following the well documented rise of Bitcoin in 2017, the challenges facing cryptocurrencies today has certainly been a hot topic for anyone in the know. But if you’re holding onto the hope of another potential surge in value for cryptocurrency, you’re not alone. The appealing way it challenges capitalism is thought to have sparked the popularity of cryptocurrency with millennials in particular, which seems to be at an all time high. But when it comes to cryptocurrency, the very nature of the beast can make it a near-on full time job to keep afloat of all the updates and transformations that are continuously occurring. Educating yourself in the subject over time is probably one of the best things to do before making any big jumps into the cryptoworld. A good starting point is to become familiar with some credible sources of what some term ‘crypto news’, something like ‘Coinzy’ could be a great place to start as this newsletter-style offering claims you can learn all you need to know in just 8 minutes per day. If you don’t quite have the time to read then a podcast could be more beneficial for you. ‘The Bad Crypto Podcast’ has also received some pretty impressive reviews, totting up over 4 million downloads. But there are of course many sources of information for you to discover, and whilst you may need a little time and patience to get up to scratch it will be worth it in the end. This is of course just a very simple introduction to the exciting world of cryptocurrency, and a starting point from which to start your own research and form your own opinions on the subject. Please note that this article does not constitute investment advice. All financial investments carry risk. Potential investors should therefore seek independent financial advice before making any investment. Back About Us As a leading UK accounting firm and expert business consultancy, Tawanda Accountants carry out scrupulous accounting and provide payroll services and procedures for small businesses, individuals and business start ups. 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