One of the latest trends in the financial sector, something some people would even label a fad or, even worse, a speculative bubble, cryptocurrencies are backed by the innovative and multipurpose blockchain technology that could soon back everything from money to contracts.

Whether you’re an investor in cryptocurrencies like Bitcoin or Litecoin or if you’re exploring making an investment in this segment it might help to know all you can about what you’re getting into.

After all, cryptocurrencies are simple in concept but complicated in execution.

In this article we are going to demystify the concept of cryptocurrencies for you so that not only will you have know what you’re talking about but also you can explain this new market opportunity to people like your parents or other consumers that may not stay as up to date on the latest in technological developments.

First, you need to understand that, just like the dollars in your wallet, Bitcoin is a currency. By that we mean it can be exchanged for goods and services. In addition it has a value that fluctuates based upon market demand for it. Unlike fiat currency, like a US dollar or Japanese yen, cryptocurrencies are de-centralized. This means that no one controls it or “sets” its value.

This is actually quite a simple economic concept. Say you have a limited number of widgets, set at 1000, and you place them on the market, selling one at a time using an auction method. As you begin selling your widgets, their convertible value, that is how much they cost to buy, goes up and down depending on demand. Bitcoin and other cryptocurrencies are similar. There is a fixed amount, the object is virtual, and its value is entirely determined in an auction.

Like a hard currency, a cryptocurrency can be broken up into smaller units however unlike a hard currency you cannot make more of it to meet a market need. This is why its value can go up and down. To understand this, would it matter if you had 8000 single dollar bills or one dollar bill worth $8000? The value remains the same. Similarly, with cryptocurrency, there is not need to “print” or create more virtual coins because a single coin or fractions thereof should have a value that more than reflects the market need for it. That is, you can have a bitcoin worth thousands of dollars to whatever price someone wants to pay but it is still a single bitcoin. No one can make Bitcoin “cheaper” by any other way than selling it and no one can inflate its value through any other method than purchasing it.

One area where cryptocurrency is similar to hard currency is the need for security. Your virtual coins can be stolen, just like money can disappear from debit account or fraudulent credit card charges can show up on your statement. There are a myriad of ways to secure your cryptocurrency, just as there are a lot of ways you can keep your money safe. Coinbase, one of the largest cryptocurrency exchanges, offers a robust set of account security features, for example. As cryptocurrency becomes more prevalent, it would not be surprising to see banks get in on the action from the security side of things.

Finally, you might be wondering if you can use Bitcoin to buy things. You can, but the options are limited right now. A lot of online vendors will accept it and many charities are beginning to take it as well. Again, it is a progressive and gradual market change rather than an immediate one. If you’d like to learn more about blockchain and cryptocurrency, visit Ernesto Lee at Ernesto.net for the latest news and strategies concerning Bitcoin, Ethereum as well as other Blockchain news. Bottom line is that cryptocurrencies, just like your regular currency, is a medium of exchange with a value that is determined by an auction-style market between peer-to-peer investors whereas a national currency is distributed by a bank with a potentially arbitrary value at the domestic level.