Introduction to cryptocurrencies
Cryptocurrencies or cryptos are virtual currencies that only exist in digital form, unlike fiat, which are physical currencies like the dollar, pounds, and yen. Cryptocurrencies exist on blockchain networks and are secured by a system of encryption called cryptography. They are popular because they are decentralized and can be moved from one person to another without the need for a third-party institution like banks.
The evolution of money
To understand cryptocurrencies and why they are being considered the future of money, we need to understand the evolution of the concept of money itself. As you may already know, we didn’t always start by spending the bank notes we have today. Our ancestors began with the barter system, where they traded their goods for other goods. This system quickly became unsustainable, as it was always difficult to find a person who had the item you needed and was also in need of the item you had to trade. They soon discovered precious metals like gold, silver, and bronze and turned them into a store of value and a standardized medium of exchange. However, the difficulty in carrying large and heavy metals and the security need created the need for another form of exchange.
Around the 16th century, the banking systems developed. With more confidence, people could now deposit their precious metals in exchange for banknotes or the fiat currencies that we currently use. As we invented the internet and have made it an integral part of our lives, it is only natural that our money evolves into a more convenient form of payment that can be used over the internet, hence, cryptocurrencies.
We were all cool with the fiat system, or so we thought, until the financial crises of ‘08. This infamous event inspired Satoshi Nakomoto to create the world’s first cryptocurrency - Bitcoin. Satoshi’s vision was to build a secured, trusted and transparent peer-to-peer financial system, free of government regulation and centralization. This was made possible by blockchain technology.
Since the first bitcoin was mined on the bitcoin blockchain, we now have several cryptocurrencies being created. Currently, there are over 1000 different cryptocurrencies in circulation, including the most popular coins like Ether, Ada, Sol, and Litecoin. And there are tokens like LOCG, BAT, BNT, and stablecoins like USDT, USDC, and BUSD.
How do cryptocurrencies work?
As we have already established, cryptocurrencies are not issued by the government. They are generated and maintained by a peer-to-peer network of computers running free opensource software. This means that anyone can join the network.
Cryptocurrencies are stored in digital wallets. These wallets could be hardware or software. Crypto wallets are digital addresses that can send, receive and hold cryptocurrencies. They are similar to bank accounts but do not require all the personal information like traditional banks. Crypto transactions ensure privacy and anonymity.
Feature of cryptocurrencies
- They are decentralized
- Transactions are anonymous and secure
- Transactions are irreversible
- Transaction charges are low
Are cryptocurrencies the same as blockchains?
Blockchains are different from cryptocurrencies, although their names are often used interchangeably. Cryptocurrencies are a digital medium of exchange, while blockchain is the technology that enables cryptocurrencies.
Bitcoin is the cryptocurrency that exists on the Bitcoin blockchain, ETH is the native cryptocurrency of Ethereum blockchain, ADA is the native currency to Cardano, DOT is native to Polkadot Blockchain and MATIC for Polygon blockchain.
Coins vs. tokens
Cryptocurrencies can be coins or tokens. Coins are cryptocurrencies that are native to their blockchain, while tokens are cryptocurrencies without a native blockchain but, are hosted on someone else’s blockchain. For example, Ether is native to the Ethereum network which makes it a coin, but there are other cryptos also hosted on the network such as BAT, DAI, USDT, and MKR - they are referred to as tokens.
How are cryptocurrencies made?
New units of cryptocurrencies are generated by mining. Miners or validators are rewarded with cryptocurrencies for successfully verifying and validating blockchain transactions.
Are cryptocurrencies safe?
Cryptocurrencies are secured by cryptography. Although they are generally considered safe, cryptocurrencies have their flaws, the most important being their volatility. Their values can be sky-high in one minute and dipping through the floor in the next minute.
We strongly advise that you do your own extensive research before buying or investing in any cryptocurrency.
How to get started with cryptocurrencies?
Getting started with cryptocurrencies is as easy as setting up an account with an exchange like Binance or Coinbase. After which, you can deposit fiat via wire transfer or purchase cryptocurrency with your debit or credit card. As you become more comfortable, you can experiment by moving your coins and tokens into a decentralized wallet like Metamask or Trust wallet, where you have more control over your assets.
Are cryptocurrencies a good investment
Please note that we are not financial advisers.
Cryptocurrencies have become an investment vehicle. They are a relatively high-risk investment and should only make up a small portion of your portfolio. You can manage your risk by diversifying the range of cryptocurrencies you own.
Are cryptocurrencies valuable?
Cryptocurrencies get their value from the volumes of demand and supply. The supply refers to how much of a coin is available at a given time. Demand refers to the desire to own them.