What is cryptocurrency in the first place? I’ll explain it in a super easy-to-understand way for beginners.
This time, we will provide an easy-to-understand explanation for beginners about cryptocurrencies, including how they work, their characteristics, and why they are attracting attention from around the world.
Even if you have only a vague understanding of cryptocurrencies up until now, after reading this article you should be able to explain cryptocurrencies to your friends in an easy-to-understand way.
I’ve explained things in the simplest possible terms, so I’d be happy if you read at a relaxed pace and enjoy learning.
What exactly is a cryptocurrency? A super easy explanation for beginners!
In simple terms, cryptocurrency ismoney you can freely exchange over the internet.
Until now, money has been made with physical paper money and coins like thousand-yen notes and one-hundred-yen coins that you can actually hold in your hand.
Therefore, when you want to hand money to someone, you had to meet the recipient in person and physically hand over the banknotes or coins.
In contrast, with cryptocurrency you can freely send money to people over the internet.
Therefore, there is no need to meet the other person in person.
This is similar to how letter writing became much more convenient when email was born.
Before electronic mail existed, letters had to be sent on paper.
Thus, when sending a letter to someone far away, you could not personally deliver it, so you had to ask the post office to deliver it.
With the advent of email, you can send letters in electronic form to anyone, anywhere, regardless of distance.
Of course, since there is no longer a need to deliver physical paper over long distances, you can convey your message instantly, which is much more convenient than before.
By using cryptocurrency, just like email for letters, you can send money instantly and easily to people living overseas or far away.
And another defining feature of cryptocurrency is that it ismoney that can be used worldwide.
Until now, when you shop abroad, you could not use Japanese yen overseas, so you had to exchange it into the local currency before shopping.
For example, you would need US dollars in the United States, or euros in Europe.
In contrast, since cryptocurrency is “money usable worldwide,” if a global environment for cryptocurrency becomes established,
you can shop with cryptocurrency anywhere—Japan, America, Europe—no matter where you are.
Nowadays, when traveling abroad, after arriving at your destination you must first exchange into local currency, and when you return home you need to exchange the leftover local currency back into Japanese yen at Narita Airport.
With cryptocurrency, that process becomes completely unnecessary.
Not only does it save time on exchanges, but there are no fees, making it convenient and cost-saving.
As described above, cryptocurrency is freely transacted over the internet and can be used globally, offering many conveniences compared to traditional money, which is why it attracts public attention.
What is the basic mechanism of cryptocurrency?
As mentioned earlier, what exactly is cryptocurrency?
Now that you understand what cryptocurrency is, let’s take a look at how it works!
Cryptocurrency records money transfers (transaction information) on the internet using a system called the blockchain, and everyone verifies to ensure there is no fraud.
Typically, information recorded on the internet can be easily copied or altered.
For example, if you upload a photo you took with your smartphone to the internet, that image can be freely copied.
Also, the content of the image can be easily edited.
(It’s easy to swap faces in photos or rewrite characters such as the name on a signboard or a license plate.)
If cryptocurrency could be copied or altered as easily as images on the internet, it would be rife with fraud and could not function as money, so various mechanisms are used to check copies and alterations.
The most representative example is theblockchainsystem.
In cryptocurrency, transaction information is recorded in units called blocks.
When recording these blocks, a code that proves the connection to the previous block is encrypted and embedded.
This code is generated so that if the contents of the previous block are altered, it becomes detectable,
so by checking this code you can easily confirm whether the block’s contents (transaction data) have been altered.
Blocks are created daily as there are transactions, and blocks that have not been tampered with are linked one after another,
forming a chain that continues to grow,this chain is called the blockchain.
In the blockchain, because the connections between adjacent blocks are guaranteed, all blocks connected in this long chain are proven to be free of fraud, so
if you try to alter a single block somewhere, you would have to alter data from the first block to the last block of the chain.
Naturally, altering all data would take a considerable amount of time.
During that time, new transactions occur and new blocks are linked, so fraud cannot catch up and effectively cannot alter data.
Thus, cryptocurrency cannot be easily copied or altered like images, andit can be used on the internet as “secure money”.
Why are there so many kinds of cryptocurrency?
Now, why are there so many different types of cryptocurrency?
If it can be used worldwide, wouldn’t one good one be enough!?
You might think so, but currently there aremore than 2000 kinds.
The first cryptocurrency to be created wasBitcoin,Satoshi Nakamoto, a person who devised the system and published it in 2008.
Because it was a groundbreaking system that could change the concept of money, it gained support from many people,
and several engineers who were curious about it developed a working system and began operating it.
Bitcoin developers were scattered around the world and initially worked together, but gradually disagreements over opinions emerged.
To realize their own ideal cryptocurrency, each person began developing cryptocurrencies other than Bitcoin.
As a result, several cryptocurrencies other than Bitcoin were born.
Among them, some aimed to use the blockchain not only to record transaction information but also to record contract information, such asEthereum, and
cryptocurrencies specialized for efficient interbank international transfers, such asRipple, exist.
Later, as Bitcoin became known worldwide and its value rose sharply,it began to attract speculative interest.
Beyond Bitcoin, large amounts of money started flowing into other cryptocurrencies for speculative purposes,
and a global wave of new cryptocurrencies was born as people pursued profits from listings on exchanges.
Why does cryptocurrency attract attention worldwide?
The reason cryptocurrency attracts global attention is that it has a mechanism that could fundamentally change the role that financial institutions have played so far,a mechanism that could transform the role of financial institutions.
Until now, money transfers required
- various countries’ financial institutions using their own systems
- each country having its own currency
and thus took time and money due to the need for many adjustments.
With cryptocurrency, money can be transferred without going through financial institutions, making it possible to send money with no time or fees.
For financial institutions, there is a possibility that their current business models could become unnecessary, so they are increasingly adopting cryptocurrency mechanisms to coexist within their systems.
For example, the cryptocurrency Ripple has attracted investments from financial institutions around the world and major companies like Google, and is being developed collaboratively.
Thus, cryptocurrency has the potential to transform financial systems, which is drawing attention from financial institutions and large companies worldwide.
The relationship between cryptocurrency and the Financial Services Agency
As the world’s attention turns to cryptocurrency, Japan’s Financial Services Agency (FSA) is also drawing attention, which is not an exaggeration.
In 2014, the cryptocurrency exchange Mt. Gox went bankrupt after losing Bitcoin, causing a major incident.
At that time, the FSA took a watchful stance toward cryptocurrencies, which were still unfamiliar to them, and they were not yet subject to regulation; Mt. Gox users suffered significant losses.
The FSA used this incident as a lesson and, in 2017, enacted theAmended Funds Settlement Act, introducing a registration system for cryptocurrency exchanges.
Since then.......To be continued below
