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Episode #75: How Does Cryptocurrency Work?

Episode #75: How Does Cryptocurrency Work?

A Brief Primer on The Concepts & Technologies That Drive Digital Money
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Photo by Kanchanara on Unsplash

Some months ago, I asked my readers what they wanted me to cover. The topic of cryptocurrency was mentioned, so I’ve continued to write some episodes on that topic. There’s a LOT to understand in the world of digital currencies and, at least to me, much of it seems weird or confusing.

Especially someone paying $544 million for two pizzas, something I’ll get to in a bit.

Therefore, I’ve decided to do what I always do in these moments: use examples from the real world to better explain how the digital world works.

Let’s jump in.

Real World vs. Digital World

Cryptocurrencies are digital currencies. Like traditional currencies, people can use them to pay each other for goods, services, or gifts. Unlike traditional currencies, there is no such thing as digital cash that someone can hand to you.

That’s because digital currency isn’t exchanged physically, it’s done electronically: people transfer funds to one another using applications on their mobile devices or computers. If you use PayPal, Zelle, or Venmo to make any of your purchases, then you understand this concept already.

See?! We’re halfway there! Kind of.

A Matter of Trust

As cryptocurrencies gain in popularity, more and more people invest in them and use them as real-world currency. El Salvador even made Bitcoin one of its national currencies in September of 2021, an event that shocked the world.

Why did the country’s President make that decision? And why do so many people in El Salvador - and around the globe - use and rely on digital currency? Keeping more of their own money certainly has something to do with it:

  • Local banks charge exorbitant fees to send money to other nations. Bitcoin transaction fees are teensy-weensy currently. As of October 2022, they’re at $0.64.

  • Central banks - like the Federal Reserve here in the US - can decide when it wishes to create new money and pump it into the national economy, something that influences markets and prices. Bitcoin, by comparison, isn’t manipulated by a central bank, but instead by code which reliably produces new coins on a predefined schedule that’s publically available for all to see.

Fascinating stuff.

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Tech Talk - The Technology Newsletter for Everyone
Tech Talk - The Tech Podcast... for Everyone
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