Cryptocurrency has been a hot topic for quite a few years. Yet, a lot of people still don’t understand it. That’s probably why we got the infamous “Fortune favors the brave” Matt Damon ad—the ad that says you don’t have to understand crypto to invest in it, you just have to be brave. But you don’t need a PhD to understand crypto. At least, not on a high level. As a small business, you only need to understand what is crypto on a high level to decide if you want to take crypto payments.
In this article, we’ll explain what is crypto and what it has to do with the blockchain. Our next article will tell you how you can take crypto as payment, if you decide it is something you want to do.
Cryptocurrency Looks and Acts Like “Real” Money
The easiest way to understand what is crypto is that it is supposed to work like any “real” money such as the Dollar or the Euro. (The technical term for “real” money is fiat money.) But crypto only exists electronically. So, you need a crypto wallet to keep your crypto coins. You can’t pull out a handful of crypto coins from your pocket, like you can with fiat money. But you can buy, sell, and use crypto like any other national currency.
There are different types of cryptocurrency, just like there are different types of national currency. The most well-known crypto is Bitcoin, followed by Ethereum. Others you may have heard of include Dogecoin, Binance coin, and Solana. What makes these coins different? They live on different blockchains (which we will explain later in this article).
There are Three Ways to Get Crypto Coins
There are three main ways to get crypto coins: buy them from coin exchanges, do a type of work called mining on a specific cryptocurrency’s computer network, and charge customers in crypto coins when providing goods or services.
Buy Cryptocurrency at Coin Exchanges from Other Cryptocurrency Owners
You can use fiat money to buy crypto coins at online coin exchanges or even from crypto ATMs. You can also sell crypto coins at these exchanges to get fiat money back. Some of the bigger exchanges include Coinbase, Crypto.com, and Binance.US. Even Cash App, PayPal, and Venmo have gotten into the crypto buying and selling business.
The idea of a coin exchange is basically the same as a regular money exchange for different national currencies. If you travel from U.S. to Europe and need to exchange U.S. Dollars into Euros, you do this at a money exchange. And, when you travel back, you’d exchange your leftover Euros back to U.S. Dollars. You can exchange your Euros to British Pounds and then to U.S. Dollars if you wish.
You can do similar exchanges with crypto at crypto exchanges. You can even do a private cash exchange and get crypto coins from your friend or cousin or, really, anyone.
Take Crypto as Payment when Providing Goods or Services
Another easy way to get cryptocurrency is to accept crypto payments when you provide goods or services. Not everyone has this option, but, as a small business owner, you do.
To do this, you price your goods or services normally, in fiat money. This way, the cost of your goods or services stays stable. (Cryptocurrency can fluctuate up or down a lot in just days or even hours.)
When someone wants to buy in crypto, you convert the price of the goods or service from fiat money to crypto (using any publicly available exchange rate that you can look up). Then, you take your payment in crypto. You pay and get paid electronically, via a payment gateway, a computer, or a smartphone app. Because the exchange rate for crypto can fluctuate very quickly, you don’t do the money conversion until the last minute.
Then, you can either keep the crypto payment in your crypto wallet or convert it back to fiat money to use.
Earn Crypto Through Mining
The third way to get cryptocurrency is through mining. We will explain mining in more detail later in this article. For now, think of mining as helping with a type of upkeep of a specific crypto computer network. So, you can do Bitcoin mining, Ethereum mining, Dogecoin mining, and so forth.
As in real life, if you do work, you (hopefully) get paid. If you do work on a crypto network, you get paid in cryptocurrency.
Crypto coins are rewarded to miners by the network, so, in a sense, the coins appear from thin air. If you think this is unusual, actually, it’s not. Governments print their country’s fiat money all the time. In a sense, that money appears from thin air too. Of course, how much a country puts new money in circulation is strictly controlled for lots of complicated economic reasons. But they do, in fact, conjure money from thin air.
How to Track Ownership of Cryptocurrency
Once you get your crypto coins, you “store” them in your crypto wallet until you spend or sell them. But, technically, your crypto coins aren’t in the wallet. Instead, the wallet stores your private keys.
Each private key proves you are the owner of a number of crypto coins memorialized on a unique database called a blockchain. The private key points to a specific segment on the blockchain.
The segment shows you are the owner of the coins. Each time you acquire crypto coins, you get a new private key pointing to a new segment on the blockchain that says you’re the owner of those coins. So, if you buy crypto at different times, you’ll have a private key for each purchase.
The information on a blockchain cannot be deleted or easily changed. If the blockchain says Person A owns x coins, that information is permanently recorded on the blockchain. Later on, the blockchain may show that Person A has spent all their coins, but the fact that Person A used to own x coins is forever memorialized on the blockchain.
If you want to use your crypto coins, you do the transfer from your crypto wallet. When you hit the pay or transfer button, you start a series of mathematically complicated steps that end when a new block is added to the blockchain. The new block would show that you transferred some coins to the new owner.
The person who transfers the crypto coins has to pay a transfer fee. The fee is typically a small amount of crypto coins. The exact amount can be different and depends on how quickly you want to complete the transfer.
The Blockchain Explained, Without the Math
If you want to understand what is crypto, then you have to understand what is a blockchain. So far in this article, we’ve mentioned the blockchain a few times, but we haven’t explained what it is.
The blockchain is an interesting encryption scheme. It was first invented to secure and keep track of Bitcoin ownership. But you can use it to track all sorts of other things like who has touched a shipment of bananas from the farm to your local supermarket.
There is only one blockchain for each type of cryptocurrency. That’s why people often say the blockchain instead of a blockchain.
Blockchains Run on Peer-to-Peer Networks
Each blockchain lives on a peer-to-peer network. A peer-to-peer network is a network of computers linked together to perform some function. There is no central computer that controls all the other computers. Instead, any computer on the peer-to-peer network can carry on the functions of the other computers on the network. This way, if one computer goes down, the network keeps going.
Even though each computer in a peer-to-peer network is theoretically supposed to be of equal importance, there are some computers that are slightly more important than others. These computers are called nodes.
Each node on a cryptocurrency peer-to-peer network contains a complete copy of the blockchain. There are a lot of nodes, so if one node goes down, you don’t lose the blockchain altogether. The other nodes simply pick up the computing work, and the peer-to-peer network sort of heals itself.
When there’s a change to the blockchain—i.e. a new segment is added—the network follows a set of internal rules to notify all the nodes of this change. Once all the nodes have made the change, we once again have just one authoritative copy of the blockchain.
Is the Blockchain Really a Chain?
The word blockchain does describe what it actually is—a series of blocks (of information) linked to each other using complex mathematics to form a chain. The oldest block is at the start of the chain. Then, the second oldest block is linked to the oldest block, and the third oldest block linked to the second oldest block. And so on and so forth, with each new block added to the next older block.
The newest block is always added to the end of the chain (instead of to the front or the middle).
Information is Stored in Each Link of the Blockchain
Each block in the blockchain contains two main compartments of information: the header and the data. The header is used to link the blocks to each other to form the blockchain and has other information that identifies it as a specific block in the blockchain. The data section contains the record of who owns how much cryptocurrency—i.e. the cryptocurrency transaction information.
Each data section can contain many transactions, and each transaction consists of a statement like Person A transferred to Person B x coins (so Person B now owns x coins). The actual name of Person A and Person B are hidden through encryption, so the identities of the owners are somewhat secure (but it is not 100% secure for other complex mathematical reasons).
The header section of each block contains information about its own location on the blockchain. The secret to chaining blocks on the blockchain is in the header.
How Are the Chains in the Blockchain Connected to Each Other?
To form a new header, you encrypt the information of the data section of the current block to get one number, take the header of the previous block (which is another number), and run both numbers through yet another encryption algorithm to form a third number. This third number then becomes the header of the new block. This means the header of the newest block depends on all the headers of all the blocks before it. And this dependency is how the blocks are “chained” to each other.
Because the header of each new block depends on the header of all the previous blocks in the blockchain, the order of the blocks that are linked together is nearly impossible to change. It is also nearly impossible to insert a new link to the middle of the chain to highjack the blockchain. In essence, a hijacker would have to change all the encryption of the blocks between the hijacking block and the newest block (which is constantly being generated every few minutes). From a practical standpoint, this would take too much computing power, so the effort would likely not be worth the crypto coins stolen that way.
Different cryptocurrency uses different algorithms to generate the encryption.
The Crypto Network Makes Sure You Can’t Spend the Same Coin Multiple Times
When you spend fiat money, you either hand cash to the other person or your bank makes sure money is transferred from you to the other person. This way, you can’t spend the same money twice. With crypto, the crypto network keeps track of who owns how much by using a second database that is not a part of the blockchain.
This second database lists the owner of the crypto coin and how many coins they own. Let’s say Person A owns y coins. Every time Person A spends or acquires coins, the number is updated in the second database to reflect how many coins Person A owns. When Person A spends all their coins, their name drops off from the list.
But the fact that Person A used to own crypto coins is forever recorded in the blockchain. If a person tries to transfer coins and their name is not on that ownership list (or if they do not have enough coins), then the transaction is rejected and is never memorialized on the blockchain. Every time a transaction is made, the system checks this list as well as the blockchain records to make sure that people do not spend coins they do not have.
What Do Crypto Miners Do?
So far, we know that crypto transactions live on the blockchain. When you transfer crypto coins, the transaction is memorialized in a new block and then added to the blockchain.
It takes work to make the next block in the blockchain. Specifically, someone needs to buy the computer and pay for the electricity to run the computer and spend the time to make the header for the new block and attach the block to the blockchain.
People who do this work are called miners. They are paid in the crypto coins they’re working on. That is to say, Bitcoin miners are paid in Bitcoin and Ethereum miners are paid in Ether. For now, every time a miner correctly encrypts a new block to add to the blockchain, the system pays the miner a set number of coins. Everyone whose transaction is recorded in this new block also pays that miner a transaction fee in crypto coins.
The number of crypto coins awarded for every new block made and attached to the blockchain changes over time and eventually will be zero. Then, the miners would be paid for making a new block only through transaction fees. The transaction fee is set by the person making the payment, and it can be any amount. Naturally, because people want to be paid more, the transactions with the higher fee get placed into the next block faster than the ones with the lower fees. In this way, the transaction fee would naturally increase so that the miners can make money when working on the blockchain.
Is Cryptocurrency Real Money?
If you ask most people what is crypto, they’ll probably tell you it’s some sort of money. And, if you look up the definition of money, you’ll generally get something that says money is money if it is accepted as payment for goods or services or as repayment for a debt.
So, as small business owners, you are in a unique position to decide if crypto is money. If enough of you accept crypto as payment, then crypto becomes real money. But if few or no business accepts crypto, then crypto is merely a mathematical curiosity worth little to nothing at all.
As we write this article, cryptocurrency is mostly an investment. It is not widely used as a way to pay for goods or services. Those who own cryptocurrency just hold it, hoping more people would want to buy crypto so the price would go up. They don’t (or have no opportunity) to spend their crypto to buy goods or services. This is why the future of cryptocurrency is not clear: nobody knows if crypto will ever be used as money.
Going back to that Matt Damon ad we mentioned at the start of this article, while fortune might favor the brave, there is a fine line between bravery and stupidity.
If you’re a small business owner who believes in the future of crypto, the smartest thing you can do right now is to start taking crypto as payment for your goods or services. If you treat it as money, then it becomes money. We cover this in our next article:
How to Accept Crypto Payments, for Small Businesses
Questions? Comments?
