Crypto noobs: What to tell newcomer friends about digital currency

Curiosity in crypto has been rising for the reason that 2017 bull market and has elevated even additional since 2021, which noticed the nonfungible token (NFT) growth and Bitcoin (BTC) hitting its highest worth to date. 

So, what can a crypto investor inform household and pals who’re excited about cryptocurrency? Listed below are some widespread and essential questions that one can come throughout relating to crypto and a few applicable responses with opinions from specialists within the trade.

What’s cryptocurrency?

One of the crucial widespread questions a crypto investor would possibly get requested is what cryptocurrency is within the first place. Cryptocurrency is a digital foreign money that’s designed for use as a medium of trade. This trade can come within the type of peer-to-peer (P2P) funds and retail purchases. 

Lucaz Lee, CEO of Affyn — a mobile-based metaverse platform — instructed Cointelegraph, “A cryptocurrency is a digital or digital foreign money designed to work as a medium of trade. It makes use of cryptography to safe and confirm transactions, making it troublesome for anybody to create pretend transactions or counterfeit cash.”

Lee continued, “Moreover, cryptocurrencies are decentralized and use distributed ledger expertise, that means no central financial institution or authorities is controlling them.”

Cryptocurrencies exist on the blockchain, which is a public ledger that information all transactions that happen, making it potential for anybody to see how cash strikes via the community. Whereas anybody can see how a lot cash a consumer owns and the way it’s spent. Customers want a pockets to ship and obtain crypto, and these wallets use alpha-numerical identifiers, which add a layer of anonymity to the customers.

What objective does cryptocurrency serve?

The primary objective behind cryptocurrency is the flexibility for anybody to ship and obtain cash via a decentralized P2P community. This works as a digital model of money. For instance, when customers pay with money, they pay straight to a different particular person with out having to undergo an middleman similar to a financial institution or cost processor.

Cryptocurrency does this on a digital stage, permitting anybody to switch cash straight to a different particular person, entity or group whereas retaining management of their funds always. Lee agreed with this take, stating, “cryptocurrencies can be utilized as a medium of trade or cost for particular companies with none middleman or centralized management. It removes the constraints of conventional finance, enabling the globe’s giant numbers of unbanked and underbanked customers to entry monetary companies.”

Cryptocurrencies are additionally getting used as funding autos, with customers with the ability to make excessive returns as a consequence of their restricted provide, excessive volatility and excessive stage of hypothesis.

Lee added, “With every passing day, cryptocurrencies have gotten extra enticing funding choices. Sure variations additionally help alternatives to generate passive returns, serving to buyers broaden and diversify portfolios.”

If crypto isn’t backed by something, how is it price something?

Most cryptocurrencies aren’t backed by any conventional property other than stablecoins like USD Coin (USDC) and Tether (USDT), which have a big portion of their tokens backed by reserves of fiat cash and bonds. Some folks might marvel why cryptocurrency has any worth in the event that they aren’t backed by something. 

First, a number of the worth comes from the utility of a cryptocurrency. The extra a cryptocurrency is required for a specific activity, the extra demand there will likely be for that cryptocurrency. Examples embody utilizing crypto as a retailer of worth and makes use of for explicit protocols inside sub-industries like decentralized finance (DeFi) and NFTs.

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Igor Mikhalev, accomplice and head of rising Tech at EY and decentralized autonomous group chairman of Blueshift — a decentralized trade — weighs in on this query, telling Cointelegraph, “cryptocurrencies constructed effectively are price more and more extra as a result of they exhibit the foundational capabilities of conventional currencies: shortage, medium of trade/account and retailer of worth. It’s potential as a consequence of advances within the underlying tech, laws and folks’s basic angle towards it.”

It’s additionally price noting that fiat currencies like the USA greenback, euro and Nice British pound aren’t backed by something (therefore the time period “fiat” foreign money). Mikhalev spoke on this, including, “the USD is just not backed by actual property similar to gold and is just backed by folks’s belief within the U.S. because the issuer. So, why ought to we not wish to help, personal and trade currencies issued by different mission-driven collectives backed by their worth and utilities? That is the muse of the brand new decentralized financial system.”

Lee gave his opinion on the worth of cryptocurrency, including, “cryptocurrency is just not backed by something, however it’s intrinsically price one thing as a result of folks imagine it has worth. Market forces of provide and demand decide the worth of a cryptocurrency.”

Hypothesis and funding additionally play a task within the worth of cryptocurrency. If buyers imagine the worth of a coin will enhance over time, they’re extra doubtless to purchase and maintain that coin, anticipating to show a revenue sooner or later.

Lee added, “the extra folks wish to purchase a cryptocurrency, the upper the worth will likely be. The extra folks wish to promote the cryptocurrency, the decrease the worth. Blockchain expertise has confirmed dependable and safe; accordingly, many individuals imagine in its longevity and subsequently put money into cryptocurrencies.”

Can cryptocurrency change actual cash?

In a broad sense, no, as cryptocurrency isn’t regulated, and there are a number of companies, merchandise and commodities that may at all times want conventional money. Nonetheless, governments are wanting into creating their very own digital tokens often called central financial institution digital currencies (CBDCs) and there are rising makes use of for decentralized cryptocurrencies.

“You possibly can’t stroll right into a Starbucks in America and pay with Swiss francs or kilos. But, each of those are actual cash. Context issues.” Rockwell Shah, co-founder at Invisible School — a Web3 studying neighborhood — instructed Cointelegraph, including:

“Equally, the main cryptos are native currencies of their very own digital nations. They’ve relevancy in their very own blockchain borders. If the use instances of crypto are so compelling that individuals use them as a substitute of conventional currencies even outdoors of their digital borders, then nice. Welcome to the free market.”

Lee additionally believes the reply to this query is context-based. “The reply to this query is just not a easy sure or no. It is dependent upon the nation and the corresponding financial system. In nations like Venezuela, the place the federal government has mismanaged the financial system and sparked excessive hyperinflation, cryptocurrency has turn out to be a lifestyle for many individuals.”

“In contrast with conventional cash, cryptocurrency could be very new and its implications on the bigger society are but to be tried and examined. However, central banks are exploring the thought of transition to digital currencies, often called central financial institution digital currencies,” he added.

Some specialists imagine that the underlying ideas behind cryptocurrencies really put them forward of conventional currencies in relation to adoption.

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“Remarkably, crypto has already began surpassing nationwide currencies on the foundational capabilities due to their democratic and clear nature folks intrinsically lean towards. Coupled with the decline in belief in authorities/official establishments, this presents fertile grounds for accelerated adoption,” Mikhalev stated, persevering with:

“One can see this awkward (for conventional cash establishments) scenario already right this moment: The controversy across the introduction of CBDCs (nation-level digital currencies) is stalling. Central, by nature, establishments don’t want decentralization, as it’ll result in their demise. Nonetheless, there is no such thing as a turning again. As soon as the expertise is mature sufficient (and one can argue that it has already occurred), it’ll solely take one main geopolitical occasion for the explosive adoption to start.”

Can cryptocurrency be hacked?

Blockchains themselves are largely impervious to cyberattacks. Lee spoke so far:

“Blockchains, by design, are almost inconceivable to hack as a result of they’re decentralized and depend on totally different safety mechanisms. Nonetheless, exterior variables similar to sizzling wallets, centralized wallets, bridges and even sensible contracts might be hacked.”

Due to this fact, the easiest way to safe customers can safe their funds is by storing them in a noncustodial pockets, which is a pockets that permits them to personal the personal keys and pockets seed. This manner, an attacker would wish to know the personal key and pockets seed to entry their funds. Concerning platforms, hackers often resort to phishing assaults to attempt to trick customers into gifting away data similar to passwords and login data so the hackers can entry their funds.

What causes cryptocurrency costs to extend?

Hypothesis and provide and demand are a number of the most important elements driving cryptocurrency costs. Most cryptocurrencies have a restricted provide, and when there may be a number of demand for that coin (as a consequence of hypothesis of utility), the worth often surges in response to this.

Lee additionally believes provide and demand is the principle cause a cryptocurrency’s worth will increase, stating that “the worth of all property, together with cryptocurrencies, are decided by demand and provide. When the demand for an asset exceeds the provision, it creates a worth surge. At instances, macroeconomic and geopolitical elements additionally affect crypto costs.”