Let’s step back a bit and clear up something else first. What, exactly, is MONEY?

In the UK – where we have a stable currency and access to modern banking – we take what money is for granted, even if we often wish we had more of it! Money is just the way we save up value, buy things, and measure what things are worth.

Who decides "this pair of trainers is worth £50”? It’s an agreement that we all reach and accept, via something called network effects – if everyone else agrees, so do we, and it just is. And that value is backed by state institutions, like the Bank of England, in the case of sterling.

Cryptocurrencies are simply money that is completely digital in form. Their value comes from the same network effects, and they are secured by complex mathematical algorithms (calculations and codes).

Their breakthrough came from the combination of blockchain technology and cryptography (find the definitions of key terms in the yellow panel), back with the launch of Bitcoin in 2009. Since then, thousands more cryptocurrencies have been created.

Ok… so you can’t hold them or see them?

No – at least, you can only see them in your digital wallet, or on blockchain, which is something like a spreadsheet that the whole world can collaborate on and see who has spent what.

It’s difficult to wrap your head around, but what blockchain technology enabled was a way to prove something digital was unique. This was a massive breakthrough, because think about any digital item like a photo – if you send that to someone, you make an instant duplicate of it, so you have a copy and so does your friend, or a hundred friends. It’d be no good if you could duplicate a bitcoin like that, as it would be worthless.

What blockchain brought to the table was the maths to make that cryptocurrency unalterable. This was then combined with cryptography, which makes it impossibly hard to tamper with or access someone else’s stuff on the blockchain, but very easy to see that stuff exists and has an owner.

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Why does this matter?

It’s important to understand that cryptos are actual currency, rather than electronic payments.

If you buy something with a debit card, then sure, it’s totally digital – but it’s actually the same money, moving in a digital transaction from your existing bank account to someone else’s. The cash doesn’t physically move, at that point, from your account to someone else’s – it’s a promise between your bank and the seller to settle it up later. In that moment, though, it’s just numbers – and you might even have buyer protection if you get ripped off or change your mind.

With a cryptocurrency, it’s like paying cash for something direct to the seller – once it leaves your digital wallet and settles in the other person’s, that’s a done deal. You can’t change your mind or cancel it, and there’s no ‘middle-man’ like a bank involved.

Because they’re a totally separate kind of money, the value of cryptocurrencies vary – often massively – against other currencies, in the same way that foreign currencies’ values change (meaning you don’t always get the same amount of euros for your pounds when you go on holiday). And the network effects? They vary hugely across the thousands of different cryptocurrencies as well, so think about that when you hear about the next new hot coin on the market. If no one is using it, where does its value come from?

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