Memes, Twitter tweets, and Reddit threads.

These all have something in common as of late:

They are fueling huge swings in the Cryptocurrency market.

However, contrary to current popular belief, Elon Musk's tweets are not providing the sole value for Cryptocurrency.

There is more to Cryptocurrency that gives it it's value, and we are going to break it down into simple terms here below.

Keep in mind, that we may touch on a few points that have varying details when you really get into the different blockchain technology and networks. This is just a high level overview of the basic idea.

Cryptocurrency operates like digital money on a network. The term Blockchain refers to the varying technology inside the network, which is a chain of information constantly moving and being put together based on the code.

Cryptocurrency Operation, Value, and Decentralization

What happens when a government starts printing out more of their own currency? We have seen it happen before, recently in Zimbabwe and Venezuela. Sometimes to try to stimulate the economy by providing more money to be spent.

Inversely, this causes what is referred to as "Hyperinflation" and just provides a temporary (and false) relief by providing the money before it very quickly loses value. Fun fact: an egg at the market in Zimbabwe in 2008 costed 500 Billion Zimbabwean Dollars as a result.

Unfortunately, this is just one of many examples of the sketchy things that can happen when someone has "control" over currency. This is where the idea of decentralization comes in to play.

Decentralization-

Cryptocurrency presents a solution this problem of authority messing with money - No one has control over the "money", it is governed by the written code.

You will hear a term called "whitepaper" helps prove the security of this idea, that no one can just create more tokens for themselves. This is the idea of decentralization, a currency that operates within given guidelines with zero interference from someone on the outside. No government interference and no central banks. 

Think of the aforementioned whitepaper as an overview of the code, rules, and guidelines that the specific Cryptocurrency abides by - there are tons of different Cryptocurrency "coins" and they each have their own whitepaper.

It is important for these whitepapers to be vetted to ensure that truly operate the way that the developers are saying it operates.

The takeaway here - once Cryptocurrency is set in motion, it is self-governing by it's code and should not be able to manipulated by governments or even the people who created it. There is no bank or central institution, just everyone with their own wallets. It is like a self sustaining community, where everyone is passively pitching in just by owning it, buying it, selling it, and sending it. The Cryptocurrency essentially works for itself.

Operation-

Before we get into the value, it is important to understand the basic inner workings of Cryptocurrency - because this helps give crypto currency it's value. The value can correlate with it's different attributes, such as creating passive interest from holding it, similar to how a bank would with a savings account. 

 In regular transactions, from Credit/Debit cards and Bank transactions, the data of the transaction is sent through pre-selected hubs for "processing" validity - to make sure the money is there and that it is properly transferred and received.

Kind of like waiting for a check to clear, or when you have a pending transaction in your bank account. 

In Cryptocurrency, thanks to decentralization, these hubs (which can be manipulated and accessed or influenced by governments or outside authorities) do not exist. 

Enter: Cryptocurrency Miners. 

You may have heard the term of mining Crypto. Think of the network as a community, and miners are dedicating their computer power and GPU's to help validate transactions. This typically takes a strong computer and a few GPU's.

For doing this, "miners" are rewarded with a small amount of the Cryptocurrency, which is typically represented like a "transaction fee" to the sender/receiver. The fee depends on the Cryptocurrency, some are higher and lower, depending on the rules that are set. 

In some examples, part of the fee is distributed to all of the people who own the Cryptocurrency. This is another huge benefit of the decentralization, there are no "bank fees" or authority collecting these benefits, it's distributed to the miners and currency holders! 

Value-

Alright, now the biggest question for most: what gives Cryptocurrencies their value?

How do we know that Crypto won't just lose all of it's value tomorrow?

In short, the answer to these two questions are simple: it has value because we are giving it value by using it.

Just like we chose to give the US Dollar it's value and accept it as currency, the same goes for all Cryptocurrency. 

The best way to explain the start of the valuation is to rewind back 11 years ago, when Bitcoin transactions were first starting to be tracked. In 2009, the first valuation was done as transactions were being processed. The valuation was described this way:

"During 2009 the exchange rate was calculated by dividing $1.00 by the average amount of electricity required to run a computer with high CPU for a year, 1331.5 kWh, multiplied by the the average residential cost of electricity in the United States for the previous year, $0.1136, divided by 12 months divided by the number of bitcoins generated by my computer over the past 30 days"

In essence, Bitcoin started it's price out by being matched with how much energy someone was using to complete and mine one bitcoin. Once that was established, the price increased as more people owned the currency, and mined it.

The more a Cryptocurrency is mined, the more difficult the blocks become to mine, resulting in using more power, correlating with higher price. 

To sum it up - Bitcoin had a real foundation for it's base price based on our valuation of energy with the US Dollar, and it increased as more people used it as currency, and as more people owned it.

Connecting The Dots

There is way more to Cryptocurrency than what we just went over, but we skimmed the surface on the most basic aspects - Transactions.

My advice for your next step? Do some research on different tokens and networks. I am a personal fan of certain tokens on the Ethereum network (Bitcoin's rival, some would say).

Different tokens have different attributes, such as lower fees, transaction speeds, transactions that are completely private and unable to be tracked (the government does not like this idea, they want to know everything we spend).

Some Cryptocurrency's have long-term goals and aim to do specific beneficial tasks, such as easy transactions across borders, without currency exchanges and low fees but fast transaction speed. This is a goal of XRP/Ripple.

This technology is becoming limitless!

One day I believe we could hold Cryptocurrency that means something to us - more than just a piece of paper. Something that benefits things we care about, whether it's creating passive income, or helping connect international businesses, or lowering greenhouse gas emissions for the Earth through blockchain technology.

It is only possible if we truly explore it and put our minds to it. Please share and feel free to leave any feedback in the comments below!

- KaleidoCrypto