Understanding Cryptocurrency: Everything You Need to Know But Were Afraid to Ask

Cryptocurrency is a confusing subject, so let us help you understand it better.

This post is presented in partnership with Monash Business School.

In 2008, when the world was in the midst of the Global Financial Crisis (GFC), public trust in financial institutions hit a historic low.

According to legend, it was because of this context that a mysterious coder by the name of Satoshi Nakamoto began work on a currency that would be decentralised, extremely secure, anonymous and digital; a cryptocurrency.

One year later, the first fifty units of that cryptocurrency were created. They would be the first of many known as Bitcoin, and in the nine years since they came into existence, their worth has increased by about 48 times (and, briefly, by 133 times at its peak late last year).

However, many of us still feel like we’re in Crypto-kindergarten when it comes to the concept, with simple questions like what is a Bitcoin? and how does it even work? still inspiring a few head scratches.

To try and get our heads around this concept and what our crypto-futures might look like, we had a chat with Dr Kym Brown from Monash Business School, who helped untangle this mess of information.

What actually is 'cryptocurrency'?

Dr Brown told us cryptocurrency is a "computer program that’s encrypted so it’s hard to hack into."

"Sometimes [they're used] as a form of money like Bitcoin," Dr Brown explains.

"Other times maybe you want to transfer money and you want to keep it very private or illegal, so Monero is the [cryptocurrency] used there."

Dr Brown explains that those uses are only a very small portion of cryptocurrency's potential.

Nursecoin, for example, aims to help casual nurses demonstrate their working history with greater ease.

But the vast majority of cryptocurrencies, according to Dr Brown, are used as money-raising initiatives. Companies release an Initial Coin Offering (ICO) similar to an initial share offering. However, Dr Brown warns that, unlike the share market, these crypto-developers don’t have to go through rigorous regulation in order to offer their coins.

So, Bitcoin is just one of many cryptocurrencies?

Bitcoin was the first to be created, and since then, many other cryptocurrencies that similarly focus on money transfers have been released to market. These are sometimes referred to as 'altcoins'.

"Bitcoin is a private form of money that is not controlled by the banks, that’s not controlled by governments," Dr Brown explains.

Bitcoin, first created by the elusive Nakamoto, works through a "distributed ledger." Dr Brown says this distributed ledger technology (DLT) allows for a completely decentralised system. Where previously, any transaction you made might be held on a database within a bank, DLT means the transaction listing is synchronised and shared across many computers around the world.

The most common form of DLT, which is found across many cryptocurrencies, is called "blockchain."

Okay, can I use a blockchain to secure my bike to a fence?

Well, not quite. A blockchain is "like a long train of transactions" and is kept on lots of different computer nodes (anything that has an IP address like a computer or tablet).

"It's a sharing of that train of transactions," Dr Brown explains.

"That block has to be agreed on as a valid part of the chain by at least 51 per cent of the nodes."

If it's still a bit tough to get your head around, here's a handy video to try and help visualise it.

What do Veggiecoins and Dogecoins actually do?

Cryptocurrencies have a range of different functions with the main aspect in common being that they are encrypted and decentralised.

"There's a cryptocurrency for everything," Dr Brown jokes.

Dogecoin, for instance, was introduced in 2013 as a bit of a joke that has since formed a semi-legitimate purpose.

Now it's used to tip people who’ve supplied funny or noteworthy content online, with each Dogecoin being worth about a third of a cent.

Veggiecoin on the other hand, allows users to farm coins, which are then donated to animal shelters and other initiatives that support animal welfare.

The possibilities are pretty much endless.

Are cryptocurrencies the future?

While Dr Brown doesn’t believe cryptocurrencies will ever fully overtake the monetary system we currently use, she admits it's an evolving space and that there's a war between regulators and the cryptocurrencies trying to avoid them.

Cryptocurrencies, notably Bitcoin, have faced their fair share of criticism for being extremely volatile investments and being operated by creators who work outside of regulation. Still, with more and more cryptocurrencies being invented, Dr Brown thinks these issues will be addressed in the future.

"Bitcoin's the biggest, but it's not perfect," Dr Brown says.

"But Bitcoin [also] loves the idea that all these other cryptocurrencies are trying to improve on Bitcoin, how to do things better and quicker and with less energy.

"It will keep evolving."

Interested in finding out more about university life and maybe curious about business courses? Then come along to Monash University's Open Day! 

Held on 4 and 5 August across three Victorian locations, it's a great place to get first-hand information from Monash Business School staff and lecturers, hear stories from students, and learn all about the activities you could get involved in during your degree. Plus, visit their Business Open House on 12 August at 271 Collins Street.

Header Image: Nintendo / Bitcoin