Bitcoin, blockchain, and NFTs have rapidly become part of our vocabulary. Cryptocurrency adoption is growing rapidly among investors, financial service firms, celebrities, and even your next-door neighbour. This disruptive technology is on the rise, as is the use of cryptocurrency in our daily lives.
Trying to make sense of it all can be challenging, especially if unfamiliar with this industry. This post covers the basics of cryptocurrency and how it works. It also includes a brief crypto overview for beginners.
There is a lot of hype around cryptocurrencies. On the one hand, they are praised for transparency, transferability and inflation resistance. On the other, they have been criticized for volatility, infrastructure vulnerabilities and use in illegal activities. Whether you want to invest in crypto or brush up on your knowledge, here are some basics to help you.
What is cryptocurrency?
Cryptocurrency, often abbreviated to crypto, is digital money based on cryptography. Cryptocurrencies are decentralized, which means they have no central authority or regulation like a bank or government. A decentralized exchange governs all transactions, and each transaction is publicly recorded, making the information impossible to delete.
All cryptocurrencies are digital assets and don’t physically exist, so all transactions take place online. Cryptocurrencies are generated by a mathematical process done by a peer-to-peer network of computers known as nodes. Every coin has a unique line of program or code that can’t be duplicated.
Each node stores its own copy of all past transactions – called blocks, which are part of a more extensive blockchain. Network members must authenticate every transaction before any funds transfer is complete, eliminating false identities and making the transactions secure while keeping personal information hidden from view.
Anyone using the network can see all the activity on the blockchain, which includes information about transactions made with cryptocurrencies between people and businesses after nodes have confirmed them. Participants validating transactions and solving equations receive rewards in cryptocurrency.
Are blockchain and cryptocurrencies the same?
Blockchain and cryptocurrencies are not the same. Blockchain is the technology that acts as a digital ledger that records all cryptocurrency transactions. Every time a transaction is made, a new record is added to every participant’s ledger, showing the entire history of transactions.
Think of it as a giant database that is not owned by a single person or entity. Since nobody controls the blockchain, a person can’t take over and rewrite the records as they are stored on multiple nodes across the web.
Some blockchains are private, meaning that only certain people can access them to exchange cryptocurrencies. Other blockchains are public and open to everyone to read, send transactions, or mine new blocks into the chain.
Bitcoin’s blockchain is an example of a peer-to-peer distributed network where anyone can read or write data because it’s decentralized, but there’s also no central authority.
What is the purpose of cryptocurrency?
Buying and selling cryptocurrencies has grown in popularity, although there are many more reasons to use them. Other purposes of cryptocurrencies include paying bills, purchasing gift cards/vouchers at select stores or purchasing products from select businesses that accept cryptocurrency as payment.
More and more companies are accepting Bitcoin as a form of payment for their goods and services. Recently, El Salvador became the first country to adopt bitcoin as legal tender alongside the US dollar. Will other countries follow suit? Only time will tell.
Difference between tokens and coins
Tokens and coins are often used interchangeably. While both are blockchain-based digital assets, they are not the same thing. A coin (like Bitcoin or Ether) has its own blockchain, and crypto tokens are built on an existing blockchain. For example, tokens that are part of the Ethereum blockchain are known as ERC-20 tokens.
Like cryptocurrency, tokens hold value and can be exchanged. Tokens fall into four categories: payment tokens, utility tokens, security tokens, and non-fungible tokens. Think of coins as digital money and tokens as ownership. Tokens represent physical and digital assets or ownership of an underlying asset or equity in a legal entity. For example, non-fungible tokens (or NFTs) have been all the rage lately.
Related: Learn more about the difference between tokens and coins
What are NFTs?
NFTs (non-fungible tokens) represent unique digital assets. These types of tokens can’t be substituted for one another, which means they’re not interchangeable. NFTs are the opposite of fungible tokens, which are identical and can be exchanged for other units of that same token.
NFTs are popular among artists, professional athletes, musicians, models and digital creators. They offer creators a way to monetize their talents to supplement their income. NFTs can represent anything from art, music, games, videos and collectibles. When an artwork is converted into an NFT, it contains a unique digital signature of ownership. Every time the NFT is used or shared, the original owner receives royalties.
How many cryptocurrencies are there?
According to Statista, there are over 6,000 cryptocurrencies as of 2021, while CoinMarketCap puts the total number of cryptocurrencies at 7,812. The numbers fluctuate as cryptocurrencies are relatively easy to make by anyone, and not all cryptocurrencies survive. As new cryptos are created, others fall into oblivion and disappear.
The top currencies today make up the majority of the total market. Although Bitcoin is the most popular and well-known cryptocurrency today, there are many others, including Ethereum, Dogecoin and Litecoin, to name a few. At this growth rate, it’s challenging to predict how many more will be created even in the next five years.
How do I get cryptocurrency?
You can buy cryptocurrency through a broker or an online crypto exchange platform. A cryptocurrency exchange allows buyers and sellers to trade cryptocurrencies. Each exchange has its own set of rules for buying and selling cryptocurrency. Many exchanges charge an asset-based fee. Some of the well-known crypto exchanges are eToro, Coinbase and Binance.US.
If you have the skills and the time, you can earn cryptocurrency through a complex process called mining. Mining cryptocurrency is the process of verifying transactions on a blockchain by miners to receive newly minted cryptocurrency as rewards.
Is cryptocurrency for me?
Investing in cryptocurrency can diversify an existing investment portfolio, but it’s not a guaranteed get-rich-quick solution. It can be highly profitable but also risky, as the industry is unpredictable and volatile. Before investing in any cryptocurrency, make sure you understand the risks involved and have a specific amount set aside to invest.
While it might be tempting, don’t throw all your savings into something you’re not familiar with, no matter how tempting it is. Research the cryptocurrency you want to buy and learn the basics of the industry. If you’re not ready to jump into crypto trading, opt to invest in stocks of companies that facilitate the industry, like Coinbase or Paypal.