What The Heck Is Crypto Anyway?

If you’ve been on the internet at all in the last few years, or been cornered at a party by someone really into tech, you’ve probably at least heard a little bit about cryptocurrency, or crypto. Maybe you saw a clip of Elon Musk talking about Dogecoin on SNL, or one of your mates made a bit of cash getting in early on Ethereum.

Problem is, there’s so much stuff out there that it’s hard to know what it means for you or me. That’s why we’ve done a quick rundown of what crypto is, how it works and why everyone’s so gassed about it.

So what is crypto actually?

Crypto (short for crypto-currency) is basically a digital, decentralized currency. But what the hell does that mean? If you think about your classic currency like the Aussie dollar, it’s essentially controlled by the Reserve Bank, and then by private banks, who track how much money is moving around our economy at a time. 

All the transactions we make, such as when we transfer our mates money after a night out are recorded by the banks to make sure the money actually goes out of one account and into another. This record is called a ledger - and having the banks control the ledger makes it a ‘centralised’ currency.

Instead of a centralised system, crypto relies on everyone keeping track of where the money is going. When you make a transaction, there are a bunch of other users who ‘witness’ you send the money over, so they’ll back you up if the receiver says they never got the money.

The idea of people instead of governments and big corporations keeping track of money has got lots of people really excited about how we could do things differently in the future.

How do you get crypto?

There are two main ways you get crypto - through buying it or receiving it on an exchange platform like Coinbase or Binance, or through ‘mining’ bitcoin. 

Most banks don’t accept it as a form of payment, and you can’t ‘mix’ it in with your usual bank accounts, so if you want to convert it to cash you’ll have to sell it for AUD and transfer that into your usual bank account.

Mining bitcoin is a reward for processing a big block of ledgers, and people spend heaps of money running really powerful computers to process them as fast as possible. There’s currently a limited amount of bitcoins that can exist in the world - around 21 million, which is worth around $1 trillion dollars US (at the moment).

What can you use crypto for?

Just like any currency, crypto can be used to buy and sell stuff with anyone who will accept it. One of the things people like about it is that it’s fairly anonymous - you can have a crypto address without any of your deets attached to it. That’s why some people use it to do illegal stuff like buying stuff on the black market or getting ransoms paid in bitcoin, but it’s not 100% anonymous. But - your transaction history is available for everyone to see, so if someone can figure out that that account belongs to you, they know your financial history.

The other big part of crypto is using it as an investment. The idea behind any investment is that you take some of your cash and buy something with the hope that it’ll be worth more down the track when you sell it.

You might have heard people talking about something called ‘volatility’ or saying that buying crypto is risky. With your traditional currencies, the central banks put a lot of work into keeping the price of things fairly ‘stable’ - you can usually buy a bacon and egg roll at a cafe for 5 bucks one day, and come back the next day and pay the same amount. At the moment, the price of crypto currencies could rise or fall super quickly.

Like any other investment strategy, you need to keep in mind that there’s a possibility that you could lose money, so you need to think about how much you’d be willing to lose if that were to happen.

What's all this stuff I've heard about it being bad for the environment?

Remember we mentioned those crypto miners? Their supercomputers churning through algorithms is a deeply energy-intensive process, so much so that Bitcoin has an annual carbon footprint equivalent to Argentina, according to Cambridge Bitcoin Electricity Consumption Index. Just another thing to consider when you’re contemplating jumping on board the crypto express. 

If you’ve gotten this far, you now know more about crypto than the average Joe. It’s clearly a wild concept with even wilder implications, so whether you’re already into crypto, if you live by HODL or you just want to keep it old school with your dollarydoos it’s good to keep across the cryptocurrency market. It’s made a fair bit of noise already, and chances are it’s here to stay.

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The information in this article is for general information purposes only. It should not be taken as constituting professional advice from the website owner - Year13. Year13 is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the information in this article relates to your unique circumstances. ASIC is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this article.