The concept of cryptocurrency seems daunting and complicated, but it can be explained in simple terms. Here’s an explanation of cryptocurrency that a child can understand.
Today, there are problems with the way money, called fiat, is created and used. Money is created in huge buildings called mints. It can also be created when central banks buy and sell treasury bills to change how much money is available to everybody. Lots and lots of money gets made like this every day. The more money that gets printed or made available, the less it is worth, because there is so much of it. As time goes on, it gets harder and harder to have enough money to buy the things we need or want.
Cryptocurrency is made differently. It is not made in mints, nor is it created by central banks. Instead, it is made on networks with computers that are connected to the internet. Anyone can use their computer as it solves math problems to help with making cryptocurrency. A computer that helps make cryptocurrency is called a “miner“, just like miners who dig for gold or silver, for example.
Cryptocurrency is decentralized
When a miner successfully mines a block of cryptocurrency, the person who owns the computer is rewarded with a “block”, often called a coin. This person can keep this coin, buy things with it, sell it, or send to it anyone they please. So, no single person makes or holds the money in a building somewhere. It is not made in any single central place. Instead, it is made by all the computers connected to the network as they compete with each other to find new blocks. In other words, cryptocurrencies are decentralised.
Cryptocurrency uses computer code and mathematics called cryptography that keeps it safe and prevents it from being copied or stolen. This makes it worth more because nobody can just make up more of it whenever they feel like it. This is a big problem with government-issued money, called fiat, since it can be printed whenever central banks decide it should be printed. The problem with this, is that the more it gets made, the less it is worth. This is called inflation. Over time, everything we buy costs more than it used to cost.
Cryptocurrency is trustless
Cryptography also makes sure any time someone sends, receives, buys, sells, or trades cryptocurrency, that nobody is lying and that all of these activities, called transactions, are correct. Each transaction is verified by mathematics, using cryptography. The transactions are confirmed by the network of miners, so users do not need to trust that any government or bank is keeping track of things correctly. This means cryptocurrency is trustless.
Cryptocurrency can be verified
Miners help with making sure that all the trades are correct and can be rewarded for doing this work. Most cryptocurrencies record these trades in a chain of blocks, called the blockchain, with each block keeping track of trades. Each block gets checked by miners to make sure it is true. When miners agree that a block is true, it gets added to the chain. This makes cryptocurrency much safer, more secure, and more trustworthy than fiat money. It is verified by mathematics and by the network.
Cryptocurrency is permissionless
Cryptocurrency is also very cheap and easy to send anywhere in the world, unlike fiat. Since it is decentralised and no banks are needed to send it anywhere, fees can be tiny. If you try to send traditional money to another country, it can be a very slow and expensive process, with lots of fees and sometimes days spent waiting for money to arrive. With cryptocurrency, miners all over the world are rewarded with small rewards for their work, sending cryptocurrency wherever people choose and making sure it goes to the right place. Anyone can send cryptocurrency to anyone, anywhere, making cryptocurrency permissionless.
Cryptocurrency is borderless
This way, money can be sent anywhere in the world from one person to another. Sending cryptocurrency to the other side of the planet costs as little as it would to send it to your neighbour. It is borderless.
Sometimes people say that cryptocurrency is bad because people can use it to pay for bad things like crime or drugs. In truth, any currency can be used for both good and bad things. If someone uses fiat money to pay someone to do something bad, does that make fiat money bad? Of course not!
Of all cryptocurrencies, the best known, by far, is Bitcoin. It is the oldest blockchain with the most miners. It is the safest and most secure because it has been around the longest and has the most miners checking it to make sure it is safe and correct.
But there are many other cryptocurrencies that can do different things. Ethereum, for example, is not just a cryptocurrency for buying and selling things. It can be used to tell computers or other machines what to do with commands written in the blockchain. It’s like a collection of computers working together to run programs on a network instead of on a single computer. There are lots and lots of cryptocurrencies that do different things and serve a variety of purposes.
You can learn to mine cryptocurrencies on your own computer or you can buy them from exchanges like Coinbase, Kraken, Vertbase, and Binance. There are new exchanges constantly springing up around the world, so look for cryptocurrency exchanges where you live.