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What are Cryptocurrencies?
Many people believe cryptocurrencies like Bitcoin, Etherium and Rhino Coin to mention a few to be very complicated, when in fact it's a lot simpler.
The easiest way to explain is: How did the human population conduct business or transactions many, many years ago? There was no currency used. We simply exchanged different items with each other creating equal value for each of the items exchanged or numerous items for a single item we deemed to have more value, as we still do with cash today. However, when money was digitalised someone needed to keep track of all the records, and the way the banks and credit card systems dealt with this was to create a 'ledger system' – basically records of account showing how much each person has in their bank account. E.g. When Paul wants to transfer money held in his bank account digitally to Adam, the bank moves the money from Paul to Adam keeping a ledger of the transaction. We trust the bank to send the money and make sure it only gets sent to one person. The banks in theory can still cheat and send to more than one person, but we as society trust them that they don't cheat.
If Paul and Adam use the same bank, it's easy to transfer, but if they use different banks its is more complex as each bank has different process and different ledger systems that need to be reconciled, including at what time the transaction and ledger is reconciled. In order to transfer the funds, each bank charges a fee. When these banks are in foreign countries, it gets even more complicated.
Cryptocurrencies change all of that. It is simply one massive global ledger system that synchronises across the entire internet, so that everyone can access the same ledger account in real time no matter who or where they are. What does this mean? Currency can easily be transferred between parties without all the red-tape, time delays and exorbitant fees.
There are other differences between cryptocurrencies as well:
A cryptocurrency is a digital representation of value that can be digitally traded and functions as a:
Medium of exchange;
Unit of account; and /or
A store of value.
A cryptocurrency does not have legal tender status (i.e. when tendered to a creditor, the creditor has to accept payment, for example ZAR or $) whereas a creditor may if they wish accept the cryptocurrency as payment.
There are various virtual currencies which includes cryptocurrencies which are either centralised or decentralised, and convertible or non-convertible. Convertible currencies have an equivalent value in real currency such as ZAR or $ and can be exchanged back-and-forth for a real currency. Non-convertible can be seen as game tokens.
Convertible cryptocurrency may be centralised or decentralised that are distributed, open-source, math-based peer-to-peer currencies with or without a central administration, monitoring and oversight authority.