Cryptocurrencies — All You Need to Know
Everyone and their mother seem to be talking about cryptocurrency. What’s the next big coin to buy? How can I get in?
Before you blindly jump on the digital currency train that’s speeding out of the station, take some time to learn all about cryptocurrency and protect yourself as an investor.
What Are Cryptocurrencies?
A cryptocurrency is a virtual currency. A central authority doesn’t issue it, and governments can’t manipulate or interfere with it. Instead, transactions take place on a decentralized peer-to-peer network.
The History of Cryptocurrencies
Cryptos’ origins trace back to 2008 with Bitcoin. An unknown group of people under the name Satoshi Nakamoto invented Bitcoin and released it as open-source software in 2009. It remains the largest cryptocurrency today.
Litecoin soon came after Bitcoin in 2011. Over the next ten years, multiple altcoins followed with their initial coin offerings, including Stellar, Ethereum, Tether, and Cardano.
How Do Cryptocurrencies Work? — Understanding the Technology Behind Them
When people start learning about how cryptocurrencies works, they often become skeptical.
It doesn’t have a regulatory body or central issuing authority. There isn’t a single organization to decide:
- How to track all the coins in circulation
- How many coins to produce
- When to make more coins
- How to investigate fraud
How is this digital currency so successful if it has no organization?
The thing is, it does have organization. It’s just decentralized, which is the complete opposite of what banks and governments do to manage fiat money.
Learn more about the technology that drives cryptocurrency:
When you send crypto tokens or coins, you aren’t sending a string of data to another user. Instead, you’re making an entry on a large global ledger. This ledger is called a “blockchain.”
The blockchain records every transaction that has ever occurred. Users classify it as a “central” record, but there’s no official organization who’s responsible for updating this ledger.
So, who updates the ledger? Literally anyone.
Anyone who’s interested can volunteer to keep track of all the transactions that take place.
Wouldn’t people alter these transactions to their benefit? It’d be hard to do — everyone keeps track of the same transactions, so it’s easy to spot inconsistencies.
Do people become miners out of the goodness of their hearts? Nope.
Cryptocurrencies reward miners for adding transactions to the blockchain. For every block they contribute to the blockchain, they’ll receive newly created coins in their accounts.
When you store fiat money in a bank, you never have complete control over it. A bank can loan it out as it pleases, but it promises to provide you with your funds when you need them.
Digital currency strives to solve this issue, but it’ll only work if you store your crypto in a wallet.
If you don’t want to go through the complexities of obtaining your own wallet, you don’t have to. You may keep your cryptos on the exchange you bought them from, but you may run into security issues.
A digital wallet will store your digital currencies using public and private keys so that no one else can access them.
You can also store your cryptos on a hardware wallet, which is a physical offline wallet. Many multimillion-dollar investors opt for hardware wallets, as there’s less risk of hacking involved.
A private and a public key link to every crypto wallet. The private key marks, or “signs,” transactions. Pretend you, Jamie Taylor, want to send a coin to your friend, Owen Green.
You’ll sign the transaction “Jamie Taylor sends 4 coins to Owen Green” using your private key. No one else can replicate this signature, so there’s no risk of someone using your account number and pretending to be you.
Proof of Work vs. Proof of Stake
These two concepts measure how miners complete their duties.
The Proof of Work concept is costly and requires a lot of electricity to perform. Its growth is exponential.
The Proof of Stake provides miners with mining power based on the ratio of coins they hold. Its growth is linear.
Is Cryptocurrency Safe & Secure?
Digital currencies are secured by cryptography, making it challenging for scammers to double-spend or counterfeit them.
What Are the Legal Aspects of Cryptocurrencies?
Cryptocurrency as an investment is legal in most developed countries, including the U.S., U.K., and Japan. Developing countries like China heavily restrict altcoins but often don’t criminalize them. For more accurate information, you must look into countries’ individual laws.
How Are Cryptocurrencies Valued?
The source of cryptocurrencies’ value is complicated. They get their value from various factors like:
- The coin’s utility
- User demand
- A company or project’s perceived value or viability
How to Invest in Cryptocurrency
Traditional trading platforms like Robinhood sometimes allow users to buy cryptos. However, the currency gets held by the company. So, you won’t be able to use your Bitcoin, Doge, etc., to pay for services or transfer it to an external wallet.
List of Cryptocurrencies
Some cryptocurrencies available for sale (that aren’t in the top 5 for highest market capitalization) are:
- Monero (arguably the most private cryptocurrency)
Largest Cryptocurrencies by Market Cap
The five largest cryptocurrencies by market capitalization:
- Bitcoin — $1.2 trillion
- Ethereum — $263.4 billion
- Binance Coin — $87 billion
- XRP — $81.8 billion
- Tether — $45.4 billion
Different Kinds of Cryptocurrencies
We can divide digital currencies into two categories:
- Coins (Bitcoin and any other altcoin that isn’t Bitcoin)
Coins are independent digital currencies that operate on their separate blockchains. Tokens are built on top of existing blockchains.
Store of Value Cryptocurrency
Can digital currency maintain its value? Most digital currencies like Bitcoin have a fixed supply. A limited supply means that with an increase in demand, the value of the coin or token will increase. So, cryptocurrency is an ideal store of value asset — it won’t depreciate in value.
Think about when you buy a hamburger at a restaurant using a credit card. Once you hand over your credit card, a financial institution gets in between you and the company. This institution records the transaction on its ledger and can pause or stop it if it detects fraud.
DeFi, or decentralized finance, digital currencies strive to remove this middleman from all transactions. Their goal is to keep the transactions between the initiator and recipient.
Summary — Understanding Cryptocurrencies
Cryptocurrencies are changing the way that we make transactions. They’re taking buy and selling to the online realm and removing the middlemen for every applicable transaction. The coins and tokens get their value from multiple factors, including user demand and the perceived value of projects that back them.
It’s difficult to say whether cryptos will undermine more traditional forms of money in the future, but they are certainly here to stay one way or another.
Still have questions regarding cryptocurrencies? Read on for the most commonly FAQs.
Are cryptocurrencies safe?
In general, yes. All transactions are highly secure, so there’s little chance that malicious parties can trace them. However, this kind of investing comes with volatility, so you should only buy what you can afford to lose.
Can cryptocurrencies be regulated?
Yes, but the regulation is often indirect and complex, and it varies from country to country.
Is cryptocurrency the future of finance?
The answer to this question depends on who you ask. Some investors remain skeptical, as they see cryptos’ value as purely speculative. Others view cryptos as the currencies of the future.
Where are cryptocurrencies stored?
When people buy cryptocurrency as an investment, they store it in web-based or hardware-based digital wallets.
When were cryptocurrencies invented?
Many investors regard Bitcoin technology as the original crypto, and it was invented in 2009.
In which countries are cryptocurrencies banned?
Countries like Vietnam, Pakistan, Nepal, Morocco, Bolivia, and Algeria ban this payment method altogether.
Why should I invest in cryptocurrency?
Investing in digital currencies means that you can distance yourself from the modern banking system’s flaws and more easily trade and store the world’s top-performing assets.
What can you do with cryptocurrency?
You can use digital currencies to make online payments for goods and services.
What are privacy coins?
As their name implies, privacy coins allow for anonymous coins. Some of the most popular ones include ZCash, Monero, and Dash.
What are stablecoins?
Stablecoins are “reliable” digital currencies. Outside assets, like gold or the U.S. dollar, connect to stablecoins to steady their prices.
What are colored coins?
Colored coins are variations of cryptos that represent real-world assets like cars, precious metals, and property.
What are central bank digital currencies?
A central bank digital currency uses an electronic note to represent the digital form of a fiat currency like the US dollar.
Are cryptocurrencies energy efficient?
There is a lot of debate surrounding crypto’s energy efficiency. On one side, supporters argue that the Bitcoin ecosystem uses less than 10% of the energy than the traditional banking system demands. However, the industry is still growing, so this figure may change as more people get on board.