How to Wrap Your Head Around Cryptocurrency: A Beginner's Guide
Cryptocurrency: it's the thing everyone's talking about. It's also the thing that's kind of tricky to grasp, especially when the chat among those in-the-know is moving at rapid pace and billions of dollars' worth of digital art sales are all humming away. Let's slow down and go back to basics, shall we? This beginner's guide to cryptocurrency by Ana Wang is essential reading if you want to know how crypto came about and where it's heading; if you're curious about the lucrative world of NFTs but don't really get it; if you don't know your blockchains from your bitcoins... you get the gist!
Okay, okay. So you've probably heard of cryptocurrency by now. Even if you don't quite get it, you know it's important because everyone's talking about it. Its prominence has been pushed to the forefront of news and even pop culture, aided by celebrities like Paris Hilton (who is "very, very excited") to Reese Witherspoon, who just announced her (presumably) first cryptocurrency purchase on Twitter, to the tune of over 60k likes.
There hasn't been something like this that's so divisive yet so broadly yet shallowly adapted. As in: lots of people are investing, but its intended use as a form of currency hasn't been fully realized. When's the last time you saw someone pay in cryptocurrency? (Well, apparently many are, if you’ve been hanging out on the internet and have caught wind of Opensea’s recent $160 million month.)
So what are all these people betting on? Basically the future –whether it's theirs because they believe in the possibility of a financial windfall or the utopian dream of a world run on a better system.
That dream of wealth? It's not too far from reality. Many don't quite understand cryptocurrency, but they might've heard one of two kinds of stories amidst all the kerfuffle:
People who've become billionaires (see: the Winklevoss twins, who missed their chance to become Facebook billionaires but are now bitcoin billionaires – they're rumoured to own 1% of the world's bitcoin supply.)
People who are the ultimate examples of FOMO (see: the man who traded 10,000 bitcoin, aka $500 million USD today, for a slice of pizza in 2013)
But there's a lot more to cryptocurrency than making people rich.
Here's your beginner's in-plain-english, what-this-means-for-you guide to the wonderful, wild, and weird world of cryptocurrency.
What this is not: a guide on investing and getting rich quick, and certainly not SuperHi's foray into finance for creatives. It's just a way to understand, once and for all, what cryptocurrency actually is, why it's important, and why you might want to pay attention.
So what is cryptocurrency and how does it work?
Crypto comes from cryptography, which is the study and practice of using codes to protect information and communication. Currency means, well, money. Together, they refer to a new form of money invented in 2009, created through secure code. New money invented by people who just dreamed it and wrote some code? Pretty cool, isn't it?
Let's dive deeper into what cryptocurrency is and how it works.
Just like money's value is dictated by perception of its value, cryptocurrency isn't any different. It doesn't have any inherent value: it's just recorded data and numbers. The difference?
While traditional forms of currency are controlled by governments and banks, cryptocurrency is decentralized and controlled by no one, with its data being stored on many peoples' computers all over the world.
These people aren't authorities or governing bodies, by the way. That means to own money, you just need an internet connection and a digital wallet, no bank account needed. Kind of like cash, but virtual.
This data (who bought what, the price, all previous transactions and ownership, etc.) is verified to make sure that any cryptocurrency transactions are real and that they're secure. (Remember, it's money. Without proof of authenticity, it doesn't work. Even though it's invented, it's invented as a system that has built-in security.)
And that happens on something called the blockchain. A blockchain is a publicly available decentralized ledger, which you can think of like a database. On this database, everyone can see and verify any transactions that happen, if they wanted to.
Cryptocurrency miners are the people who verify transactions, by using computers that solve cryptographic puzzles. These verified transactions turn into “blocks” and are added to the blockchain as public records. It becomes a longer and longer chain. Thus, the blockchain.
For doing this work, miners are rewarded with small amounts of cryptocurrency. Mining accomplishes two important tasks: introduces new cryptocurrency "earned" by the miner into circulation (kind of like a get-rich-quick scheme, or more like a get-rich-or-poor-very-slowly scheme, but we'll get to that), and maintains the blockchain for everyone.
It's like the gold rush, all over again, only this time with computers, if the gold rush weren't a rush to mine natural resources but to mine completely invented ones.
Cryptocurrency and the environment (a brief interlude)
Speaking of resources, anyone can be a miner, but it requires a lot of hardware and energy consumption. That's a big criticism of cryptocurrency right now.
Just imagine, computers that are on 24/7 consuming tons of energy (more than entire countries). One of the solutions is using solar-powered energy to mine, which some companies are already doing. Some people hope that new cryptocurrencies will incentivize green energy.
Another solution is moving from the highly inefficient "proof of work" system to solve cryptography problems to "proof of stake", which many newer blockchains are already using. Proof of work asks people to use hardware and electricity to help the network process and verify transactions through solving math problems, like I mentioned above. But remember how there's a reward for solving these problems? That means there's lots of people competing to verify transactions, and a lot of extra work and energy consumption. Proof of stake means only people who have put in their own stake of the currency as collateral can validate transactions. Less energy used.
Not all cryptocurrencies can be mined (and in fact, not all cryptocurrencies are public), but many of them are, including Bitcoin, the world's first cryptocurrency.
A brief history of cryptocurrency
Oh, I forgot to introduce myself. My name is Satoshi Nakamoto. Just kidding. If you've read anything about bitcoin, then you know. If not, here's the story of how cryptocurrency actually came to be.
Once upon a time in 2008, a man named Satoshi Nakamoto wrote a whitepaper called Bitcoin: A Peer to Peer Electronic Cash System. He talked about a currency free from the control of governments and banks. A few months later, Bitcoin was released.
Thing is, nobody knows who Satoshi really is. A time traveller from the future, a group of people, a genius, Elon Musk? There's all kinds of theories and to this day, he remains anonymous. It's all a bit strange and mysterious.
Bitcoin is now worth billions, and it was created with just 31,000 lines of code.
(In contrast, I've made websites with thousands of lines worth less than nothing considering the amount of time I spent building them.) Its value has gone way up, then down, then way up again. Is it the universal world currency many believed and hoped it would become? No, not even close. But that's what many are betting on.
And that was just the beginning.
There are many who are betting one of the other 6,000 (and growing!) other cryptocurrencies now on the market, including:lat
Ethereum, the second largest cryptocurrency with a blockchain that allows people to program it for other things like apps (called DApps for decentralized apps) and NFTs (non-fungible tokens, which are objects on the blockchain that represent assets like art, content, music, and many other things). Some predict that Ethereum may become even more popular than bitcoin because it can do a lot of really cool things that bitcoin can’t, like storing code which can be used to power tamper-proof smart contracts and applications. (If you’re interested in learning more about using Ethereum to build your own NFTs or create a decentralized login system for your web apps, check out the SuperHi course).
Dogecoin, a cryptocurrency with no limits on the number of coins that can be mined, comes with a Shiba Inu mascot
Litecoin, basically a bitcoin spinoff. Similar to bitcoin, but faster and focused on cryptocurrency as a payment method
Cardano, one of the greener cryptocurrencies on the market because it uses the Proof of Stake model
Tezos, another green cryptocurrency using the Proof of Stake model with a name that means “smart contract” in ancient Greek
...just to give you a taste.
Yeah, but aside from investing in it, what can you actually do with cryptocurrency?
The people who're investing in cryptocurrency are betting on it. It's like someone invented a new form of money, kind of out of thin air, with the hope that people will use it one day. But if no one does, then that money really isn't worth anything, right?
Signs point to cryptocurrency becoming more widely adopted: some companies are paying salaries in cryptocurrency, and Shopify, a company that powers over 1.7 million businesses, now accepts cryptocurrencies as a form of payment for their merchants' stores.
But, there are a lot of things that experienced a surge in popularity, then vanished into near-oblivion. So, cryptocurrency still isn't a sure bet.
Right now, there are some places you can actually use cryptocurrency, one of them being the growing NFT market (see: OpenSea, SuperRare, and Foundation, some of the most popular NFT marketplaces.) NFTs can be purchased with credit cards in normal currencies but many NFT marketplaces accept certain cryptocurrencies. NFTs aren't the same as cryptocurrency; but they do share the big beautiful blockchain in common. And with NFTs, Ethereum is the cryptocurrency of choice, since bitcoin can’t store code in order to make or buy NFTs. Still wondering what the hell an NFT is? This article gives a good, no-nonsense rundown.
That said, many places (most) still don't take it. Go to the mall and ask to pay in cryptocurrency and you'll probably be met with blank stares. So for now, it's mostly just sitting in wallets and crypto exchanges.
Cryptocurrency: a brief recap
The most popular cryptocurrency is bitcoin, which is also the world's first. There are 6,000 others. Among them is Ethereum, which is currently second most popular.
Cryptocurrency is built on the blockchain
It's legal in most places, but isn't yet regulated
You can buy things with cryptocurrency, where it's accepted. Most people are buying and holding or buying and selling.
But why are people betting on a new form of currency at all?
So now you understand what cryptocurrency is, how it works and what you can use it for. Why is it a big bet in the first place? Cryptocurrency wasn't invented as a way to make people rich, but that's one of the reasons it's been such a big news story. People love shiny things and rags to riches stories (or riches to more riches stories, as is primarily the case for the current influx of crypto investors).
But, cryptocurrency was invented with a different dream in mind: a belief in self-governance and freedom from institutions.
It's not a coincidence that it was invented after a major economic recession.
One of the main tenets of bitcoin was trust, or rather, building a system that didn't depend on trust of a governing body or bank, but that was peer-to-peer and secure by design.
The concept of decentralization has already made a big impact in a lot of industries, which often don't end up in major news stories like those about 20-year-olds becoming millionaires overnight. Since every transaction is accounted for in the blockchain, this technology has been used in the pharmaceutical supply chain to help counter counterfeit drugs, as an example. That kind of verification and security can also help to make companies more accountable, and fraud less prevalent.
It's the kind of bet like the one we made when we invented money to replace trade, when we invented the banks to hold money, when we invented credit in the form of a card, when we invented eCommerce with the very first online transaction, and when anyone invented anything: that there's a better way to do things, a way that can open up a whole new world.
What this all means for the future of creative work
Hey, if you go and buy some cryptocurrency after reading this and end up making tons of money, way to go. If you lose some, well, that's not news. I bought $200 worth back in 2017 after the first wave, saw the value of those hundreds drop, thought I'd missed the train, then four years later it climbed back up and then down again. Kind of like the stock market, it's a gamble that can pay off (or not).
But the impact of understanding cryptocurrency goes way beyond making money by betting on its future viability.
There are many clues about a future that's already here, impacting not just the flow of money but of creative work, how we build technology, even more abstract concepts like ownership, security and accountability.
Cryptocurrency has helped to popularize the blockchain, helping it become a more openly accepted technology, which means we're (probably) moving toward more decentralization across everything. Watch for changes across many industries and new ways of creating, selling and valuing all kinds of creative work too.
If all this sounds interesting to you and you want to get creative with crypto, check out the brand new SuperHi course: Crypto + Web 3 for Creatives.
Ana Wang was previously the Head of Content at SuperHi. She is an ex fashion designer and copywriter who ran a whole bunch of ecommerce stores and brands and then helped other people run ecommerce stores, then helped other people help other people run ecommerce stores. Now, she's a creative generalist who plays with different mediums to tell stories.