What is currency? Currency is money that is issued by a government of a country.
What is cryptocurrency? We talked about what cryptocurrency is a few weeks ago, and also discussed how it was born.
As a reminder: Cryptocurrency is virtual or digital money that has secret codes embedded in it, to make it safe and secure. In some cases, it gives the owners an alias, so that their true identity is kept secret. It is not particular to any country, and can be used to buy things around the world – from whoever accepts it!
Where can you exchange your money for this different kind of currency? You can buy cryptocurrency online – there are sites like Coinbase that allow you to do this. Your parents can buy some using their credit card. The coins you buy are kept online in a secure digital wallet. There is an exchange rate for it like there is for any currency.
What does it cost? Two very well known cryptocurrencies are Bitcoin and Ethereum. Just like US dollars, Euros, and the Indian Rupee, the price of a bitcoin or ethereum is set by buyers and sellers. This means that if there are a lot of people who want to buy it, the price will go up and the sellers can ask for more money. Kind of like if you have a Lego Minifigure that a lot of people want. Instead of charging $5 for it, you could charge $20 for it – if there was someone willing to spend that much money to own that particular minifigure. Then $20 would be its new price.
Check out the graph above to see how the price of Bitcoin has soared over the past year. You could buy 1 Bitcoin for close to $800 (USD) at the beginning of 2017, but you would spend around $13,200 on 1 Bitcoin today, at the beginning of 2018!
It’s a similar story for Ethereum. You could buy one unit of Ethereum (Ether) at $8 in January 2017, but will spend $1300 on it today, at the beginning of 2018.
What? Why is it so valuable?! The developer(s) of Bitcoin wrote the code for it such that there can only EVER be 21 million bitcoins in the world. The harder it is to get something, the more valuable that thing will be! Since it is an asset (something that you can own) with limited availability, Bitcoin was cleverly designed such that if people wanted to buy it, its value would only appreciate since you can’t make more of it. Kind of like gold, which is a natural resource and is an asset with limited availability. Sometimes people like to buy gold at times of political or financial uncertainty. If there are any major changes coming that could make the currency of a country decrease in value, people often buy gold to counter balance that.
So why has Bitcoin appreciated so much in value? It’s not really clear, other than it’s a new technology that has potential. There are definitely some people who want to buy cryptocurrency. When there is a resource for which there is high demand and limited supply, the price goes up!
What could happen to make it go down? Currently, no one is regulating cryptocurrency. There are no real laws to set the rules for it. This means that anyone can pretty much launch a currency – you could have unicorn coins tomorrow and you could trade them, as long as there are people willing to buy and sell them, and exchange them for goods.
Some governments are now talking about putting some guidelines in place to regulate these currencies, so uncertainty or doubt here could make the prices go down.
What can you do with the Bitcoins that your parents buy? A few things, it turns out! Meals at some restaurants, airline tickets and hotel stays at some online travel booking sites, for starters. I think it’s safe to say that we will all be watching this space very closely!
Written by: Sunaina Murthy