Thanks to blockchain technology, the world is rapidly adopting a cashless, trustless financial system that relies on digital currencies to complete transactions. That means no go-between or any of his pitfalls.
Digital currencies, more commonly known as cryptocurrencies, have been causing quite the stir in the financial markets. And unless you’ve been living under a rock, you’ve certainly come across the term.
But what are cryptocurrencies? How do they work? And how do you get started on them?
This article delves into all the details you need and is the ultimate guide for any crypto newbie.
So, let’s get things rolling!
Just what exactly are cryptocurrencies?
Simply put- crypto is digital money. That’s it!
Well, not really. But it is the simplest way to explain this type of money that you can’t even touch. And no, it’s not PayPal or the banking app you have on your phone.
Cryptocurrencies rely on blockchain technology to run, which is where they get their decentralized nature. There are no central bodies, such as banks or other intermediaries involved.
All cryptocurrency transaction updates are recorded on a digital ledger. Blockchain is a decentralized, immutable ledger that facilitates the recording of cryptocurrency transactions and also can be used to track assets in a business network.
Access to a blockchain is distributed between authorized users. The information shared on a blockchain is transparent, instant, and not prone to tampering or modification.
The cryptosystem is well secured through cryptography and is decentralized, meaning the participants (nodes) work together as the software connects them to more participants. Therefore, they can share the information across the network transparently.
We’ll delve deeper into cryptos in the sections below. But first, let’s understand a bit more about the history of money.
The origin and evolution of money
The earliest forms of currency were precious metals, such as gold and silver. Independent states would later adopt coins as a medium of exchange. The coins gained legal status and authenticity after being stamped with seals and images of different leaders.
Paper money was later introduced in China as commerce became more intensive. It was adopted, printed, and issued legal status in the European states after breaking through the medieval Islamic world.
Undoubtedly, paper money brought about some solutions, but it wasn’t entirely without several faults. Sovereign states and central authorities have complete control over the money. They monopolize supply and issuance, creating inflation tragedies. Since paper money gained legal status, several cases of failure in the financial systems have contributed significantly to economic predicaments.
The evolution of internet trading and a significant financial crisis led to the emergence of cryptocurrencies. The first cryptocurrency, Bitcoin, was created and launched in 2009.
You’ve probably heard about the mysterious Satoshi Nakamoto, the creator of Bitcoin. Satoshi created Bitcoin to give ordinary people complete control of their finances from the monopolized sovereign states. Through a decentralized financial system, individuals can manage their finances and not rely on financial elites who have all the control (centralized financial systems).
In 2011, more cryptocurrencies continued to emerge, and many more are still being created. There exist over 18000 cryptocurrencies as of March 2022. These cryptocurrencies have vast popularity as bakers and investors are entirely devoted, while others have insignificant trading volumes or following.
Coins vs. tokens
Cryptocurrencies exist in two major categories: the crypto coins and the crypto tokens.
- Coins
A crypto coin is a digital currency that runs on its blockchain and functions as a native currency within a specified financial system.
Coins are used as stores of value or medium of exchange in a digital economy network. Different blockchains function as decentralized distributed ledgers that facilitate the verification and tracking of transactions. The coins can be transferred between participants of the particular blockchain networks.
Coins can be exchanged with tokens or other coins belonging to a different blockchain. This is possible through the crypto exchanges or through other private transfers.
- Tokens
These are digital units of value that cannot be mined and exist as registered entries in blockchains. Tokens are either used as encodes for specific data or as currencies in a specific ecosystem. You can redeem them in off-assets such as stocks, gold, and property.
Tokens serve utility functions, for example, denoting storage capacity on decentralized cloud storage or representing votes in a community.
They are acquired from companies that use third-party blockchains like the Ethereum blockchain. It is important to note that tokens are not cryptocurrencies like Bitcoin or ether. However, they are exchangeable units of values issued on top of a blockchain network.
What are some examples of cryptocurrencies?
1. Bitcoin (BTC)
BTC is the world’s first cryptocurrency, the King Coin. As mentioned earlier, its white paper was published in 2008, and it was launched in 2009.
Bitcoin remains the most significant crypto. It runs on its blockchain, and its transactions are verified by decentralized miners who create new Bitcoins up to a fixed cap.
In January 2022, Bitcoin had the largest market cap of US$902 billion. However, this figure had dropped to $568.73 billion at the time of writing.
2. Ether (ETH)
Ether runs on its own blockchain, the Ethereum blockchain. However, it is uncapped, meaning that there is no limit to the number of coins that can theoretically be created.
Ethereum also supports programs that run on the Ethereum blockchain and are executed automatically when certain conditions are met.
3. Binance Coin (BNB)
Binance Coin runs on the Binance crypto exchange. BNB reduces its transaction fees for this exchange to encourage the adoption of the Binance Coin. As a result, it is now one of the most significant crypto coins in the crypto market.
Binance burns a certain percentage of the coins in circulation to ensure stable value.
4. Tether (USDT)
Tether is a stable coin with a less-volatile price when linked to an external asset. In this case, each coin is backed by an equivalent number of US dollars, which keeps it from experiencing the same kind of pricing volatility that other cryptocurrencies face.
5. World Causecoin (CAUSE)
World Causecoin peer-to-peer digital currency designed based on Cause capitalism- is a utility token that runs on the Binance Smart Chain. It is a safe and secure token due to the underlying Binance Smart Chain technology that uses proof-of-stake authority to ensure that no centralized bodies are needed for a consensus.
How different are cryptocurrencies from fiat money?
Fiat money is simply a legal tender that has its value tied to a currency issued by the government. A popular fiat currency used globally is the US dollar.
The government and the central banks dictate the issuance and governance of fiat money, and as a result, it lacks inherent value. Its distribution needs the intervention of intermediaries. Through monetary and fiscal policies, central banks dictate fiat money before being released into circulation.
Fiat currency transactions happen through cash exchange or traditional banking facilities or intermediaries when transactions are done between two parties. Purchases could also be made through credit cards or financial service apps of payments companies such as PayPal and Visa. Transferring money to relatives or friends globally can be done through merchants, like Western Union, who facilitate the transfers.
On the other hand, cryptocurrencies simply gain their value depending on the demand and the supply of the number of tokens in circulation. The amount of tokens in circulation is usually limited, so the value will surely rise when the demand is high.
Crypto governance is through communities, codes, and protocols, and decentralized networks facilitate this distribution to create transparency in transactions.
Cryptocurrencies run on blockchain technology, which provides transparent monetary policies written into the protocol’s codebase. They do not have a fiscal policy, so their monetary policies depend on their consensus mechanism of the protocol and not on any central authority.
Cryptocurrencies give users more freedom as intermediaries are not a requirement. Transactions occur through blockchain, where they are validated and recorded. Despite fiat currency being the primary form of currency, cryptocurrency and blockchain technology create the next phase of money evolution.
Significant differences between fiat money and cryptocurrencies
- Regulation. The government controls the supply of fiat money and issues policies from time to time that affect its value. On the other hand, cryptocurrencies are decentralized, meaning no central bodies can control or influence their value.
- Tangibility. Fiat money exists in notes and coins; therefore, they have a physical feel. As for cryptocurrencies, they do not exist in physical form; they operate as virtual coins.
- Supply. Central bodies that regulate the fiat money supply do not have a cap. Therefore it is impossible to tell the amount of money in supply. When it comes to supply, most cryptocurrencies have a cap. The total number of cryptocurrencies in supply is set, and they can never exceed this number.
- Exchange of value. Fiat currency transactions are conducted within a traditional banking infrastructure which acts as intermediaries to facilitate the exchange of money between two parties. Transactions can also be done through cash exchanges. With cryptocurrencies, transactions do not need a centralized body as they occur through blockchain giving its users freedom.
- Storage. Fiat currency is versatile, meaning it can be stored in different forms. For example, banks act as custodians of hard currency. Cryptocurrencies have virtual aspects, meaning that they exist online. Users need digital wallets, commonly known as cryptocurrency wallets, to access their assets.
- Transaction speed. Fiat money transactions are pretty slow as they require the central bodies (intermediaries) to facilitate the transactions. With cryptocurrencies, users only need to access a digital wallet and fill out the necessary information to process a transaction. Crypto users do not need intermediaries to facilitate transactions, and blockchain technology ensures fast transactions.
But, how do I get some cryptos?
- You can get your cryptocurrencies through mining
This is a process that verifies and records transactions on the blockchain. It is also the process through which cryptocurrencies come into existence. Once a transaction is recorded on the public ledger, which is the blockchain, nodes verify it. Nodes can be any individual who is using that same blockchain network. The transaction will then be broadcasted between nodes and confirmed by the network.
After the verification process is complete, the transaction’s information will then be recorded in the blockchain, and the transfer is then completed. This process is referred to as crypto mining, and the people who offer their computing power are referred to as miners.
The process is often competitive, and the miner who wins is rewarded with some of the crypto mined and the transaction fee. The rewards make the mining process a good source of income.
- You can also get cryptocurrencies through trading on exchange platforms
Crypto exchanges are simply platforms through which sellers and buyers meet to trade their cryptocurrencies. Different crypto exchange platforms offer different cryptocurrency options for accounts that bear interests and a wallet for storage. They usually charge fees based on the type of assets.
Some famous crypto exchanges are Binance, Gemini, and Coinbase. These platforms offer excellent and user-friendly purchasing options at a convenient cost.
As a beginner, you might need to use the standard trading platforms before purchasing. Also, choose an exchange platform that allows the purchase of cryptocurrency with fiat currency. Some exchanges limit users to buying cryptocurrencies using different crypto only.
- Buy some coins from crypto brokers
Cryptocurrency brokers ease the task of purchasing crypto as their user interfaces are easy to use, and they interact with exchange platforms on behalf of the trader or investor. Some of these brokers charge higher fees, while others can be free. Robinhood and SoFi are well-known crypto brokers.
Brokers can be convenient though restricting users from transferring their crypto holdings from the platform. For instance, SoFi and Robinhood do not allow transfers out of their accounts. It might not be a good deal for futuristic investors who prefer to use crypto wallets for extra security-hard wallets for this case.
- You can also get cryptocurrencies from crypto airdrops
New crypto projects often run airdrop campaigns, where they send free tokens to their communities to encourage project adoption. Here, newly-minted tokens are sent to several wallet addresses to make the recipients more inclined to engage with the projects. As a crypto beginner, you may use this alternative to learn how to convert the free tokens into something.
How can I use my cryptocurrencies?
You might be wondering if the new digital and decentralized form of currency is solid despite the popularity that it has acquired over the years. Yes, crypto is far from replacing the fiat currency, but it is being accepted worldwide, and it has found some significant ways of being utilized.
Here are some of the common ways crypto is being used.
- Invest and earn profits on your assets
It’s common knowledge in the investment world that diversifying your portfolio is one of the best strategies. And what better way to do that than adding some digital currencies to your portfolio? Plus, there are several ways you can put your cryptos to work and make profits.
Most cryptocurrencies have the potential to appreciate, and there are different ways you can use cryptocurrency tools to bring in some handsome profits.
But don’t be fooled. Cryptos are highly volatile, which makes them high-risk investments. So, do lots of research before you put in your money. And, of course, only invest what you can afford to lose.
- Pay for your goods and services
Several industries and businesses are now accepting Bitcoin and other cryptocurrencies as payment medium. Apple Inc. is one of the most notable crypto acceptors. The company accepts different types of crypto to facilitate transactions in Apple stores. Other big companies that are accepting crypto include Facebook and Amazon.
- Support your favourite content creator
Different social media that are blockchain-based reward creators for creating and curating content. Content creators, especially those on Twitter, get paid through various cryptocurrencies.
Creators who come up with hot topics that drive conversations in the platform earn money in the form of cryptocurrencies, as they are connected to their audiences in different ways. A platform such as Twitter uses stripe to transfer these cryptocurrencies to their creators.
If you have some digital assets lying around, why not support your favourite tweep!
- Fund humanitarian projects
The Russian attack on their country led to Ukraine receiving funds in crypto form. Non-governmental organizations also receive funding in the form of cryptocurrencies.
Through blockchain technology, cryptocurrencies have eliminated the factor of intermediaries who used to receive funds from donors and then distribute them to the agencies or individuals who need this aid. Donors can now transfer their aides in cryptocurrencies and keep track of how these funds are being used.
Pros and Cons of Cryptocurrencies
Cryptocurrencies are double-edged and therefore come along with their pros and cons. Traders and investors need to understand these pros and cons before trading or even investing in cryptocurrency to be sure what they are getting into.
The Good
- Easy transfer of funds. There are no third parties involved when transacting, for example, banks when two parties make transactions.
- Affordability. Cryptocurrencies are cheaper to transact than other alternative transactions because the transaction fees are reduced, and the processing fees in crypto transfers are also relatively low.
- Secure payments. Cryptocurrency transactions are secure and safe as blockchain technology is involved that uses cryptography that facilitates security.
- Transparency. Blockchain technology enables different users to access any transaction information that has been recorded.
- Immutability. Once transactions are recorded on the blockchain, they cannot be altered. It is almost impossible for the transactions to be changed or manipulated.
The Bad
- Encourage money laundry and tax evasion. Most of these transactions are done privately, and no regulations are involved.
- Irreversibility. It is not possible to undo crypto transactions recorded on a blockchain. This makes it difficult for investors to regain funds if an error occurs in the transactions.
- Limited accessibility. Cryptocurrencies are not readily accepted everywhere as a medium of exchange.
Keeping Cryptocurrencies Safe
Cryptocurrency entities can hold digital currency units in wallets either offline or online. A crypto wallet is simply a physical medium, device, service, or program that stores public or private keys used in crypto transactions.
The wallets contain a public key, the wallet address, and a private key used to sign off payments. In any case, the wallets do not hold the cryptocurrencies but rather hold their private key.
There are two types of crypto wallets: cold wallets and hot wallets.
- Cold wallet (offline wallets). These wallets are not connected to the internet, making them secure to hold your cryptocurrencies. They are in the form of external devices like a USB drive or a hard drive. While using cold wallets, users need to be extra careful as losing the key code associated with the wallet means losing access to your cryptocurrencies. The same is true if the device used for storage breaks or fails, or gets lost. Examples of cold wallets include USB wallets and paper wallets.
- Hot wallets (online wallets). These crypto wallets use the internet to connect to tablets, computers, or phones. They are convenient for executing frequent transactions that only entail minimum amounts of cryptocurrencies. However, they pose a high risk of cyber scams due to the internet connection. Some of these hot wallets are managed by custodians who can help recover the critical code to your account if you are locked out. Examples of hot wallets include Coinbase wallet, Metamask, and Edge wallet.
Online wallets are used for regular transactions, and it is advisable to own one if you only transact a minimum amount of cryptocurrencies.
Storing can also be done on crypto exchange platforms, as they come along with their crypto wallets. However, you may want to transfer your cryptocurrencies to a separate hot or cold wallet. Storing cryptocurrencies on an exchange platform is risky, as these wallets are susceptible to hacking. So you can use the crypto exchange platforms’ wallets only when trading.
Will cryptocurrencies survive?
Determining whether cryptocurrencies have long-term potential is not an easy task. There has been so much debate about whether cryptocurrencies are here to stay, but it has existed for more than 11 years since it was first introduced.
We see billionaires investing in so many crypto projects, and even governments are warming up to this digital currency. Some governments have accepted cryptocurrency buying, selling, and trading in their jurisdictions. They even have regulations formulated to help manage their local crypto industries.
Cryptocurrency is not something we can ignore, especially with the significant technological advancements. Web3 advocates insist cryptocurrencies will play a significant role in the future of the internet. That is, Web3 applications that are on a particular blockchain will be using specific crypto coins. For example, services that run on the Binance Smart Chain may require CAUSE tokens and other cryptocurrencies that run on the blockchain.
Back in 2018, there was a massive crypto crash, and many promising crypto projects did not survive. Some experts say that an estimated 90% of cryptos will not survive a prolonged crash.
With research, we can identify some of the cryptocurrencies that can survive in the long run and those that will fall if a crypto market crash occurs. In 2022 we have experienced a decrease in the volatility of Bitcoin, the major crypto which gives light.
What Next?
We can speculate on the value of cryptocurrencies for investors in the coming years, if not months. Though keep in mind that this is a new and analytical investment.
The crypto space is ever-evolving, so keep your investment small and diversified in different projects. Spearheaders see endless opportunities, while critics see a lot of risks involved. Always do due diligence before throwing in your investments.
Be sure to catch our next posts as we delve deeper into individual cryptocurrencies.
