Undoubtedly, cryptocurrencies are the rave of the moment. In fact, the digital assets ecosystem in general, and the cryptocurrencies ecosystem, in particular, have been growing at an astounding rate as adoption increases.
Many governments are looking into cryptocurrencies and many banks and financial institutions are also beginning to embrace, however slightly these assets given the demand of their customers for the same.
More and more people are looking for crypto meaning to understand all about cryptocurrency. Everybody wants to gain cryptocurrency information, their types, how it works, and how to invest in cryptocurrency. We have covered these essentials in this guide to explain cryptocurrency.
What is cryptocurrency? Our definition
What is crypto? At some point, you must have asked this question whether you’re now a crypto investor or still just an enthusiast.
Wherever you may fall on the spectrum of knowledge, it is important that you accurately define crypto to be able to take maximum advantage of the opportunities that abound in the ecosystem.
We thus define crypto as a decentralized digital asset that can be a store of value but is run by the users instead of the government or any central authority.
This guide contains everything you need to know about cryptocurrency and how to invest in it.
Understanding cryptocurrency for beginners: the basics
There is no better time to learn about cryptocurrency than now. While it may be said that the market volatility of the currencies has increased, the gains have also been humongous. The result is that more individuals and investors are pitching in their forks into the market to catch a bite.
Cryptocurrencies must be differentiated from digital money ( or digital currency) which is any means of payment that exists in a purely electronic form and is government-controlled.
The journey to understanding cryptocurrency and all crypto assets generally begins with an understanding of the basic terminologies you are bound to encounter while dealing in the ecosystem, what they mean.
In our beginners’ guide to cryptocurrency, we list seven of the most common terminologies and what they mean.
Cryptography
Cryptocurrencies use extremely complex code systems that encrypt sensitive data transfers, to secure their units of exchange. These protocols are cryptographic and are built on advanced mathematics and computer engineering principles that render them virtually impossible to break and to duplicate or counterfeit.
Data on individual transactions as well as the people involved are secured using cryptography. It also protects the identities of users, making transactions and fund virtually untraceable to any individual within the network.
Blockchain Technology
Essentially, blockchain technology is a growing ledger based on continuous cryptocurrency transactions. It guarantees the security, transparency, speed and efficiency, automation, and instant traceability of the system. These five reasons are why blockchain is beginning to find uses beyond cryptocurrencies.
Every time crypto is bought or sold, the transaction is added as a new block to the blockchain. These transactions are verified using proof of work or proof of stake, consensus mechanisms on which the blockchain ledger is built. There are other less common consensus mechanisms like delegated proof of stake, proof of elapsed time, proof of identity, proof of authority, etc.
Some of the most common is Bitcoin, Ethereum, and Cardano blockchains.
Decentralization
With blockchain technology, data is not stored centrally. Rather, it uses a distributed ledger system that allows the same data to be recorded concurrently in multiple locations across the globe.
Unlike fiat currencies which are backed by a central bank and distributed through financial institutions, cryptocurrencies are maintained and valued by their users.
Private Keys
While there are no personal identity markers, holders of cryptocurrency need a private key. The private key is used to authenticate any attempt to log into the system and to carry out transactions.
Essentially, the private key is used alongside the public key to secure your cryptocurrency holdings from theft and unauthorized access. Unfortunately, if you lose it, you also lose access to your entire holding. As such, many people resort to storing their keys in digital locations. Usually, these storage locations are usually not connected to the internet. Alternatively, it is stored on paper or in some other physical form.
Cryptocurrency Wallets
While credit cards require a physical wallet, cryptocurrency transactions need a digital wallet. A wallet is a unique address owned by an individual. With it, such an individual can send and receive cryptocurrency.
Wallets reduce the risk of losing your crypto assets to thieves. However, they have been known to be hacked in the past. You can secure your digital wallet by storing it on the cloud, or internal/ external storage.
Mining
Mining is how new units of cryptocurrency are released into the world, generally in exchange for validating transactions. Miners create new cryptocurrency units of blockchain using vast amounts of computing power, and highly technical methods.
Miners maintain the supply of crypto at a predetermined level. As a reward for their efforts, miners enjoy a pre-specified number of cryptocurrency units and several other existing units from optional transaction fees.
Finite Supply
Most cryptocurrencies have a finite value to ensure they don’t become valueless. This is usually specified in the white paper for the project. For example, in Satoshi Nakamoto’s bitcoin whitepaper in 2009, the total supply of Bitcoin was prespecified as 21 million. Currently, over 18 million coins have been mined.
This singular fact makes cryptocurrencies more similar to gold and other precious metals than to fiat currencies which have an unlimited supply. Little wonder cryptocurrencies are deflationary, while fiat currency is inflationary.
Cryptocurrency Exchanges
Cryptocurrency exchanges create liquidity markets for cryptocurrencies and set their value against traditional currencies like the U.S Dollar (USD), Euro, Pounds, etc.
You can exchange crypto for these fiat currencies or crypto for other crypto-assets like cryptocurrency derivatives on certain crypto exchanges. You can also track broad-based cryptocurrency portfolios. In return, a service fee of less than 1% is charged off the cryptocurrency transaction.
Some of the major crypto exchanges include Binance, Coinbase, eToro, Gemini, and Robinhood (which offers Bitcoin, Ethereum, and Dogecoin, without the fees of many of the major exchanges).
Investing in Cryptocurrency
Cryptocurrencies have been known to amass value with time. As such, many are apt to choose them against traditional investing. A CNBC survey recently found out that 1 in 10 people invest in cryptocurrency and associated the finding yo the ease of trading crypto assets.
Nevertheless, the cryptocurrency market is a very volatile one making investments quite unpredictable. This is particularly true because cryptocurrencies have nothing backing their value.
Cryptocurrency can be purchased on peer-to-peer networks and traded on crypto exchanges. However, as with any type of investment, it is important to learn about how the system works before investing.
To learn more about investing in cryptocurrency, check out cryptocurrency trading for beginners.
Cryptocurrency 101: How does cryptocurrency work?
Cryptocurrency explained: A cryptocurrency is a digital medium of exchange that is encrypted and decentralized. They are produced, tracked, and managed through a distributed ledger system which is regulated by the users instead of any central authority.
Thus the influence of governments and central banks on the currency is effectively curtailed. This decentralization is one of the appeals of cryptocurrencies.
Bitcoin was the first cryptocurrency to be produced and it was designed so that no more than 21 million coins can be issued. Since then, many more have been created since Bitcoin started gaining mainstream acceptance in 2017.
Once you purchase any, you can store it in a cryptocurrency wallet accessed only with a special key. With the key, you can carry out transactions anonymously. You can buy more cryptocurrency or sell the ones you have, and the cycle continues like that.
And that’s it. Cryptocurrency is explained in the simplest way possible.
Cryptocurrency types
According to CoinMarketCap.com, there are currently over 10,000 types of cryptocurrency with a cumulative value of about $2 trillion. These can be subdivided into two broad categories:
- Coins, with an independent blockchain such as Bitcoin and Altcoins (non-Bitcoin cryptocurrencies) like Ethereum or XRP
- Tokens are cryptocurrencies without their own blockchain
Coins
Coins are digital currencies backed by independent protocols. Bitcoin was the first coin to be developed by Satoshi Nakamoto in 2009. Since then, many other coins have been developed as alternatives to bitcoin on the bitcoin protocol These are known as altcoins, and some of the most common are peercoin, litecoin, dogecoin, aurora coin, and namecoin.
Instead of using the Bitcoin protocol, others have also developed their protocols, and with it self-supporting coins. Some of these are Ethereum, Ripple, New york coin, Waves, and Counterparty.
Tokens
Although without value in themselves, tokens are a good store of value. They are usually given out through initial coin offerings. At this point, users stake existing coins for the tokens and receive the tokens as a reward.
They are of three types; security tokens, utility tokens, and value tokens. They are not meant to be used as a medium of exchange like the U.S Dollar. Rather, they have specific and varying functions.
For instance, both Bitcoin and Ether (from Ethereum) are considered crypto tokens. We discuss specific coins and tokens in more detail below.
Cryptocurrency examples
Cryptocurrency usage has exploded since Bitcoin’s release. Hundreds of crypto are traded daily. Here is a list of eight cryptocurrencies based primarily on stable adoption, robust user activity, and market capitalization of more than $10 million.
1. Bitcoin
Bitcoin (BTC) was the very first cryptocurrency. Created in 2009 by the pseudonym Satoshi Nakamoto (a person or a group). Bitcoin is a digital currency that operates in a decentralized manner. Based on blockchain technology, it works without the need for a third party. No government, no central bank, nor a bank is needed to earn, hold or send bitcoins.
As of March 2022, there are over 18.9 million bitcoins in circulation with a total market cap of around $789.5 billion according to CoinMarketCap. Bitcoin transactions are stored on a public ledger. Bitcoin miners use powerful computers to verify transactions and log them.
Bitcoin is the most popular coin globally and is accepted as a means of payment in many places. It even has the status of a legal tender in a country like El Salvador. Its proof-of-work (PoW) mechanism is a downside, as miners require a vast amount of energy, which is the major concern about environmental pollution.
2. Ethereum
Ethereum (ETH)is the second most popular cryptocurrency and, the second most valuable coin in terms of market capitalization, after Bitcoin. It’s also called ether or ETH and was launched in 2015 by Vitalik Buterin and 4 other co-founders.
It is an open-source blockchain platform with great “smart contracts” functionality, that enforce the performance and completion of a given transaction. These smart contracts are automatically initiated once preset conditions are met and contain mechanisms for refunds should one party violate the agreement.
Ethereum is well known for its continued development. Open source development is currently underway for a major upgrade. The main goal and purpose of Ethereum 2.0 are to increase transaction speed. ETH2 will split up the workload into many blockchains in parallel (also called sharding) and take advantage of the proof-of-stake consensus model. This will massively reduce transaction costs and protects the environment.
3. Litecoin
Litecoin (LTC) is one of the oldest Altcoins and was designed as an improvement on Bitcoin with shorter transaction times and lower fees. It also has a different encryption algorithm. Litecoin is easily the third-most-popular cryptocurrency by market capitalization and has a higher supply limit of 84 million.
LTC was created in 2011 by Charles Lee, a former Google engineer. Charlie always called Litecoin the “lite version of Bitcoin”. Litecoin differs in two main aspects: faster block generation rate and use of Script as a proof-of-work scheme.
LTC was launched as the “silver” coin next to Bitcoin as the “gold” coin. Litecoin produces 4 times as many blocks as BTC. One new block every 2.5 minutes, while BTC takes 10 minutes per block. Litecoin has implemented several new features since its launch. The developers have never compromised in security nor in integrity.
4. Ripple
Ripple (XRP) uses a consensus ledger system that speeds up transaction confirmation and blockchain creation times. It is touted as the most easily converted cryptocurrency coin with an in-house currency exchange that can convert Ripple units into USD, yen, euros, and other common currencies. Ripple’s open-source platform enables developers to build their own payment solutions on the XRP ledger.
Ripple was released in 2012 and co-founded by Chris Larsen, an angel investor, and Jed McCaleb, a programmer who co-founded Stellar and created the Mt. Gox exchange.
XRP transactions are confirmed in seconds with very little cost. XRP became the leading digital payment network. Many major banks use the XRP payment protocol. XRP is pre-mined and less complicated than Bitcoin transactions. Next to payment settlement, XRP is also used for asset exchange, and remittance systems similar to SWIFT.
5. Cardano
Cardano (ADA) is billed as a third-generation cryptocurrency. It’s a proof-of-stake blockchain platform and the first to be founded through evidence-based methods. In 2021, its token value has risen by more than 1600% making it one of the fastest-growing cryptocurrencies.
Charles Hoskinson, the co-founder of Ethereum, founded Cardano in 2015. The Cardano Foundation is based in Zug, Switzerland. Atypically, there is no white paper issued. Instead, they use design principles and try to overcome crypto-issues such as scalability and interoperability.
The Cardano blockchain recently completed the Alonzo fork to bring smart contract functionality to the network.
6. Tether
Tether (USDT) was the very first Stablecoin (stable-value cryptocurrency). It’s a blockchain-based cryptocurrency backed by an equivalent amount of U.S. dollars. Therefore, 1 Tether is always worth 1 USD.
USDT was launched as “Realcoin” in 2014 by Brock Pierce, Reeve Collins, and Craig Sellars. The company is based in Hong Kong and controlled by the owners of Bitfinex, a crypto exchange registered in the British Virgin Islands.
Tether is hosted on the Bitcoin and Ethereum blockchains, among others. The purpose of USDT is to combine the unrestricted nature of cryptocurrencies and the “stable” value of the US dollar. Stablecoins are used by crypto investors to keep their assets on a crypto exchange and easily trade from one cryptocurrency to any other.
7. Dogecoin
Dogecoin (DOGE) is an experiment in inflationary cryptocurrency launched in 2013. The Shiba Inu mascot makes it immediately recognizable. Some people even call it a “joke coin”.
Crypto experts around the world are watching it closely, even though, there is no real use case behind DOGE. Still, as there is a 21 million coin-cap on Bitcoin, DOGE mining is unlimited. Therefore, it is for sure a nice experiment to look at.
8. Binance Coin
Binance Coin (BNB) is a utility token launched in 2017. It allows traders to get discounts on trading fees on Binance. Binance is the world’s largest cryptocurrency exchange platform with a daily trading volume of over 15 billion US dollars.
BNB became the number 4 cryptocurrency with a market capitalization of 65 billion US dollars. Today, BNB can also be used for payments outside of the Binance exchange. You can pay online and for financial services, book travel packages, or buy entertainment offers.
So what is crypto? Key takeaways
A cryptocurrency is a type of digital asset based on a distributed network. This is the major difference in distinguishing between digital currency vs cryptocurrency. In the first, the asset is government-controlled and issued. In the latter, the decentralized structure limits control by governments and central authorities. While Bitcoin was the first to be created, cryptocurrencies now number in the thousands.
This crypto guide thus contained the basic things to know to take advantage of the system. If you need more information, you can book a free consultation with one of our experts today.
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CRYPTOCURRENCY FAQs
Why are cryptocurrencies so popular?
There are a variety of reasons why cryptocurrencies have become popular. Here are some of the most popular:
- 1. Many have touted them as the currency of the future seeing their many use cases and the way they amass value over time. This is a reason for the race to buy them.
- 2. The decentralized system removes central bank control from managing the supply. This is particularly important given that these financial institutions tend to reduce the value of money via inflation.
- 3. The speed of processing transactions and the security guaranteed by the system.
Are cryptocurrencies legal?
Whether or not cryptocurrency is legal depends on the country where you reside. For example, it is banned in China, India, and Nigeria but that is not the case in the United States. You will find that you cannot purchase cryptocurrencies directly from your bank account if it is not legal in your country.
Are cryptocurrencies a good investment?
In contrast to a well-managed business whose value increases over time as its profitability and cash flow increases, cryptocurrencies have no real value.
Despite this, many consider crypto as an alternative investment option apart from stocks and bonds. This is because they have become stores of value, and this value continues to increase with time. Some have even touted cryptocurrencies like Bitcoin as the future bitcoin.
This is associated with a potential for substantial yield. However because of the volatility of the market, one must exercise caution when looking to invest in cryptocurrencies.
Where can I go to learn more about how to invest in cryptocurrency?
You can learn more about cryptocurrency trading classes online. Many crypto exchanges also offer tutorials and lessons when you open an account with them.
How can you use crypto assets to make purchases?
While it is not yet generally accepted, you can now use your crypto assets as a form of payment. Several online retailers like Amazon, Overstock.com already accept cryptocurrencies. Payment systems like Paypal also allow their customers to buy, hold and sell cryptocurrency from their PayPal accounts.
In the U.S., you can sign up for the BitPay card, a debit card that converts crypto assets into dollars for purchase, but there are fees involved to order the card and use it for ATM withdrawals.
