Cryptocurrency has been dubbed anything from future money to a very risky asset that you should avoid, like the plague. Which is it, then? And, more importantly, should you be spending your hard-earned cash on it?
Cryptocurrency ideas and strategies spread quickly. That is because cryptocurrency is a complex and unique technology that is also widely available. Anyone, regardless of their background, can understand it. It spreads like wildfire in this manner.
Let’s not forget about the fear of missing out that comes with cryptocurrency. Perhaps you’ve had it with cryptocurrencies being a hot topic in the news and on the internet recently. That may make you worry, whether you should invest in it if it’s safe and how it works.
This post will explain the cryptocurrency basics by breaking down its complex nature, so you can gain a better understanding of the subject. By the end of this article, you’ll know the beginning fundamentals of cryptocurrency. That includes what exactly is a cryptocurrency and what are the many types of cryptocurrencies.
What is cryptocurrency?
It’s easy to get tripped up by cryptocurrency’s complexities, so let’s start with the fundamentals. Cryptocurrency is a type of digital money. There are no actual coins or bills associated with it because it is entirely digital.
Cryptocurrencies do not link to valuable assets—they do not tie to anything of value in the real world. As a result, their value fluctuates unpredictably, as you may have noticed. For example, after trading flat for the day in July of 2019, Bitcoin plunged around $530, or 5%, in a 40-minute timeframe. Why? There was a lot of speculation but no definitive answer. The price of a single bitcoin “briefly soared above $50,000” in February 2021, hitting a new high. Why? There was a lot of speculation but no definitive answer.
Cryptocurrencies, unlike stocks, bonds, real estate, artwork, or precious metals, have no value or purpose outside of possession. Mike Maloney, the founder of GoldSilver, loves to compare “crypto” to gold, except that gold has a purpose other than being used as currency. Gold is vital in electronics and jewelry, and as a result, it has worth outside of its finite supply. On the other hand, cryptocurrency only costs money because someone else has it—and is willing to offer it to you in exchange for the money. In general, currencies have had two issues. To begin, they require a centralized authority to oversee their value, production, and authenticity. Second, they fall victim to fraudulent creation.
One of the numerous types of cryptocurrency, Bitcoin, was created to combat these issues. The blockchain system and high-level encryption address both obstacles. The system does not need a central authority to regulate it—in fact, they cannot regulate it—and transactions cannot be fraudulent because Bitcoin is automated and highly encrypted. Bitcoin is simply the answer to the question, “What would it take to build a virtual currency without a central authority?”
How does cryptocurrency work?
You need to be familiar with the following technologies and principles to comprehend cryptocurrencies.
Cryptocurrency relies on cryptography, a way of concealing and disclosing information to protect the confidentiality of user data and secure transactions.
A blockchain is a kind of Distributed Ledger Technology (DLT), which is essentially a distributed database over numerous operators, such as nodes, computing devices, etc. This technology allows a cryptocurrency to function. It’s simply a digital ledger that checks accounts, balances, and transactions. Outside of financial applications, you can use blockchain for supply chain management, art ownership tracking, and even digital collectibles. A node is a term associated with blockchain that will appear throughout this text. A node is an individual component of a larger data structure of a blockchain. The system would collapse if nodes were not present. Cryptography and blockchain assist cryptocurrencies in the new coin creation, the enforcement of legal transactions, and the establishment of a safe system.
Decentralization—as shown in Bitcoin—means that all authoritative power spreads across all peers on a network, with no single point of failure. To “hack” Bitcoin, someone would have to gain access to at least 51 percent of the massive network of computers that run Bitcoin, which regards as an impossible undertaking.
Without the use of a middleman, two persons can send directly to each other cryptocurrency. Users can avoid the hefty transaction fees charged by more standard payment transfer providers by using these transfers. They have relatively minimal processing fees that go to support the network. That eliminates the need for PayPal, Zelle, or a bank account.
Cryptocurrencies in their many forms
When most people think of cryptocurrencies, they probably think of Bitcoin (BTC). Bitcoin regards as the cryptocurrency’s flagship—the coin that sparked the creation of thousands of others. There are approximately 2,500 cryptocurrencies listed on renowned cryptocurrency price tracker CoinMarketCap.com. Many of which use their unique blockchain built to their requirements.
Don’t worry. You don’t need to know every single cryptocurrency to grasp the fundamentals. Let’s take a look at a couple of the more popular varieties to get you started.
1. Bitcoin (BTC)
Bitcoin, which launched in 2009 and is known as “digital gold” or the gold standard for cryptocurrency, has reigned supreme over all other cryptocurrencies. Bitcoin dominates the rest of the cryptocurrencies with a market value of over $900 billion. When compared to other investment vehicles, purchasing a single Bitcoin is a costly exercise. One bitcoin is worth $48,920.30, to give you an idea.
2. Litecoin (LTC)
Known as the “silver to Bitcoin’s gold,” Litecoin was created as a fork (or split) from Bitcoin in 2011, and it was published as a competitor in 2011. Litecoin was designed to process transactions more quickly and at a lower cost than Bitcoin. One Litecoin is currently worth around $178.93.
3. Ethereum (ETH)
Ethereum is another cryptocurrency powerhouse, but unlike Bitcoin, it is not designed to be a peer-to-peer payment system. Ethereum is a decentralized software platform that powers smart contracts (programmatically enforced contracts) and distributed apps, often known as dApps. It was developed in 2015.
These decentralized programs are open source, self-contained, and utilize all of the benefits of a blockchain—no central server, extremely difficult to be hacked, etc. Nearly 3,000 dApps use Ethereum’s blockchain, as well as the blockchains of several Ethereum competitors including EOS, NEO, and Qtum.
5. Smart contracts
When particular criteria are satisfied, these are strings of code that execute a specified task automatically. Alex may, for example, create a smart contract that says, “Pay Steven $40 if he sends ten unique logo concepts by December 8th, 2021.” When Steven completes this work, the smart contract pays him $40 automatically. If he doesn’t, Alex receives his $40 back.
Different types of cryptocurrency
Let’s take a look at a distinction that many people miss when trying to grasp the fundamentals of cryptocurrencies. The two types of cryptocurrencies are coins and tokens.
A coin, such as Bitcoin, Ethereum, Litecoin, or Ripple, is a cryptocurrency with its blockchain. When someone says they’ve “purchased cryptocurrencies,” they’re talking about purchasing coins.
A token is a cryptocurrency constructed on top of another blockchain, such as a decentralized application (dApp) that runs on Ethereum’s blockchain. Tokens reflect a project’s asset or utility and are sold (or given) at the project’s first public sale, known as an Initial Coin Offering (ICO), which is similar to an IPO in the stock market. With tokens, there is even another significant distinction to be made. Tokens divide into two categories, which are utility and security.