What do you mean by “unlocking cryptocurrency”? One topic that everyone seems to be talking about these days is cryptocurrency. You might question what people are really talking about when they discuss Bitcoin, digital wallets, blockchain, cryptocurrency investing, or digital assets.
I’ll be completely honest with you; I’m still learning about cryptocurrencies. When I first started hearing all these terms, I thought, “What is all of this?” Maybe you’ve wondered the same thing.
The encouraging news is that you don’t have to be a computer expert or a financial professional to understand the basics.
My goal here is not to tell you to buy cryptocurrency or to convince you that it is the best way to make money. Instead, let’s take a brief look at what cryptocurrency is, how it relates to blockchain, and what people really use it for.
What is Unlocking Cryptocurrency?
Blockchain or other distributed-ledger technology can be used to create, issue, or transfer cryptocurrency, a kind of digital asset. Additionally, you might hear terminology like coins, tokens, digital currency, virtual currency, or crypto assets. These can be created, issued, or transferred using blockchain.
Unlike the physical cash you can hold in your hand, cryptocurrency exists digitally. It is made to enable electronic value transfers.
You have probably heard of Bitcoin more than any other cryptocurrency. But Bitcoin and cryptocurrency are not the same thing.
Think of cryptocurrency as a broad category, with Bitcoin as one well-known example of it.
Different crypto assets can have completely unique designs, purposes, and risks, so it is important not to assume that everything called “crypto” works exactly like Bitcoin.
Cryptocurrency and Blockchain: What’s the Connection?
If you’ve read my article about blockchain technology, you may already know that blockchain is essentially a type of shared digital record.
Cryptocurrencies use that technology to record and validate transactions.
A simple way to think about it is this:
The technology is called blockchain. One kind of digital asset that can make use of that technology is cryptocurrency.
For example, the Bitcoin network uses a blockchain to keep a record of Bitcoin transactions. Bitcoin users can send and receive Bitcoin through digital wallets, while the network helps verify those transactions.
That doesn’t mean all blockchains are Bitcoin, nor does it mean every blockchain works in exactly the same way.
Developers are always coming up with new applications, and technology continues to change.
What Can Cryptocurrency Be Used For?
This is the point at which cryptocurrencies become interesting.
Although investing is one of the main reasons people are interested in cryptocurrency, it is only one reason people pay attention to it.
Digital assets can serve various purposes, depending on the cryptocurrency and where it is accepted.
1. Buying Goods and Services
Some businesses and organizations accept certain cryptocurrencies as payment.
When a business accepts cryptocurrency, a customer may be able to pay digitally rather than using cash, a check, or a traditional payment card.
However, cryptocurrency is not accepted everywhere, and acceptance can vary considerably from one business or country to another. The SEC notes that cryptocurrencies are not widely accepted as a means of payment.
So it is better to think of cryptocurrency as an additional payment possibility rather than a replacement for everyday money.
2. Sending and Receiving Digital Value
One of the interesting ideas behind cryptocurrency is the ability to send digital assets from one person to another.
A person can use a crypto wallet or another service to send cryptocurrency to another wallet address.
Bitcoin, for example, allows users to send and receive bitcoins using a wallet, while transactions are recorded on its blockchain.
One reason cryptocurrency has gotten so much attention is that the process can be very different from writing a check or giving someone cash.
3. International Transactions
Cryptocurrency can also be used for certain transactions that cross national borders.
Traditional international money transfers may involve banks, payment companies, currency conversions, and fees. Cryptocurrency operates through digital networks instead of moving physical cash from one country to another.
That does not mean cryptocurrency is always cheaper, faster, or better for international transfers. Fees, network conditions, exchange rates, regulations, and the particular cryptocurrency being used can all matter.
Still, the possibility of transferring digital assets across borders is one reason people continue to explore the technology.
4. Donations and Fundraising
Digital assets can also be used for donations.
Some charities, organizations, and fundraising campaigns have looked into accepting cryptocurrency from their supporters.
This can be particularly interesting when a contributor wishes to make a digital donation or when a fundraising organization wants to connect with people that hold cryptocurrency. Such scenarios might be especially intriguing.
As with any financial donation, however, organizations and donors must be aware of the tax, regulatory, security, and transaction aspects of any cash donation.
5. Financial and Blockchain Applications
Cryptocurrency also connects to a larger world of blockchain-based financial applications.
You may hear the term DeFi, which means decentralized finance.
In simple terms, DeFi refers to financial applications that use blockchain technology instead of relying entirely on traditional financial institutions.
This is an area that can become quite complicated, so I’m not going to pretend we can explain the whole subject in a few paragraphs.
For now, the important thing to understand is that cryptocurrencies are part of a much larger digital-finance ecosystem that continues to develop.
6. Digital Assets and Online Applications
Blockchain technology can also be used to create and transfer different kinds of digital assets.
Some cryptocurrencies and tokens are designed for specific networks or applications rather than simply functioning as digital money.
This is one reason the word “crypto” can be confusing. Not every digital asset has exactly the same purpose.
Some may be designed primarily as a means of transferring value. Others may be connected to a particular blockchain network, application, or digital service.
What Is Bitcoin?
Bitcoin is the cryptocurrency most people recognize.
It was introduced as a digital form of money that could operate through a peer-to-peer network. The Bitcoin network uses a blockchain, which records transactions and allows the network to verify them.
Bitcoin is only one part of the larger cryptocurrency world.
Many other crypto assets exist, and they differ significantly in their design and intended purpose.
So when someone says they are interested in “crypto,” it is worth asking:
Which cryptocurrency?
That little question can make a big difference.
What Is a Cryptocurrency Wallet?
If you own or use cryptocurrency, you’ve probably heard about a crypto wallet.
A wallet is not quite like the wallet you carry in your purse or pocket.
A crypto wallet generally provides a way to access and manage crypto assets through keys or other credentials. The cryptocurrency itself is not simply sitting inside the wallet like cash inside a leather wallet. The SEC explains that crypto wallets generally store the private keys or passcodes used to access crypto assets. This is an important distinction.
A person using a crypto wallet may have a private key, which is used to authorize transactions. There can also be a public key, which can be used to receive crypto assets.
And this is where security becomes extremely important.
Losing access to a private key or recovery phrase can result in losing access to crypto assets. That’s why anyone using cryptocurrency needs to understand how their wallet works before putting money or digital assets into it.
Why Are People Interested in Cryptocurrency?
There isn’t one simple answer.
Some people are interested because they believe digital assets could become an important part of the future of finance.
Others are interested in the technology behind cryptocurrency.
Some appreciate the ability to transfer digital assets without using the traditional banking system for every transaction.
And, of course, some people are interested because they hope cryptocurrency will increase in value.
That last reason deserves a big caution sign.
Being interested in cryptocurrency is not the same thing as knowing that an investment will make money.
In fact, crypto assets can be highly volatile and speculative. The SEC continues to warn investors that the risk of loss can be significant.
Cryptocurrency Has Risks, Too
This topic is probably the most important part of our discussion.
Cryptocurrency may sound exciting, but it isn’t magic money.
Prices can change dramatically. Some crypto assets may become difficult or impossible to trade. Companies or platforms involved with crypto can experience financial problems. Hacking, malware, fraud, scams, and technical problems are also real concerns.
There is another risk that beginners sometimes overlook: scammers know that people are curious about cryptocurrency.
You should treat promises of guaranteed profits, unbelievable returns, or pressure to invest immediately as major warning signs. The SEC specifically warns investors about crypto-related scams that use promises of high returns and little or no risk.
If someone tells you that cryptocurrency will make you rich, stop and ask questions.
If someone tells you that you must send money immediately or you’ll miss your opportunity, take a step back.
And if you don’t understand what you’re being asked to buy, don’t buy it just because someone else says so.
Learn Before You Leap
This is probably the biggest lesson I would like to leave you with.
You don’t have to become a cryptocurrency expert overnight.
Start with the basics.
Learn what cryptocurrency is.
Learn what blockchain means.
Learn what a wallet does.
Learn how transactions work.
Learn about the risks.
And if you are considering cryptocurrency as an investment, learn about the particular asset and service you’re considering rather than assuming that every cryptocurrency is alike.
The SEC’s investor guidance emphasizes understanding the risks before investing and warns that crypto investments can be exceptionally volatile and speculative.
Most importantly, never invest money you cannot afford to lose.
My Take on Cryptocurrency
I’m still learning about cryptocurrency, and I think that’s okay.
Sometimes we hear a new word or technology and decide it’s too complicated before we ever take the time to understand it.
That’s what happened to me with cryptocurrency.
The more I learn, the more I realize that I don’t have to understand every technical detail to get the basics.
And that’s really what I hope this page does for you.
Maybe you were like me and heard the word “cryptocurrency” and immediately thought, “That’s not for me.”
Maybe you’re simply curious.
Maybe you’ve heard your children or grandchildren talking about Bitcoin and wanted to understand what they were talking about.
Or maybe you’ve been considering cryptocurrency and realized you should learn more before making any decisions.
Whatever brought you here, start with curiosity.
Ask questions. Learn. Take your time.
You don’t have to jump on every new thing that comes along.
But you don’t have to ignore something simply because you don’t understand it either.
Simply Armie: Keep It Simple
Cryptocurrency may be part of the changing world of money and technology, but understanding it doesn’t have to be complicated.
I think the best way to start is with the basics:
What is it?
What is it used for?
How does it work?
What are the risks?
And most importantly:
Do I understand enough to make a responsible decision?
I’m still learning, and maybe you are too.
That’s okay.
Occasionally the best way to understand something new is simply to take it one step at a time.
That’s how we learn. That’s how we grow. And that’s how we keep Life Unboxed.