Cryptocurrency is one of the most common topics when it comes to conversations to do with finance.
In the last decade, digital currency has steadily gained acceptance in world markets as an alternative method of making online payments. However, before we dive into the ins and outs of cryptocurrency, it is good to understand what is meant by cryptocurrency.
What Is Cryptocurrency?
A cryptocurrency is a form of electronic money that is managed through the use of blockchain technology. A blockchain is a form of technology that makes use of advanced computer networks. Blockchains are created using coding and mathematics.
The main difference between cryptocurrency and fiat currency is that fiat currency is issued and regulated by governments. However, cryptocurrency is decentralized, not issued by governments, and is not regulated by any government.
The phrase “crypto” in cryptocurrency refers to the complex cryptography processes used in creating digital currencies and the processes used when making transactions. The primary purpose of creating cryptocurrencies is to ensure that the government does not manipulate or control digital currencies in any way.
Genesis of Cryptocurrency
Bitcoin was the first cryptocurrency, and it was launched in 2009. Back then, it did not have any competition. However, by 2011, other types of cryptocurrencies were emerging, thus creating substantial competition.
Currently, there are thousands of cryptocurrencies, and each one of them comes with new features and functionalities. However, they share common features among them, just like Bitcoin had when it was first launched.
These features include:
- They are not issued, regulated, or controlled by central authorities such as banks
- They are mined using blockchain or distributed ledger and peer-to-peer review
- They are regarded as assets, and as such, they are stored in digital wallets or, more commonly, blockchain wallets. This enables users to trade and manage their coins
Different Forms of Crypto
Tokens vs. Crypto Coins
Tokens and coins are generally considered as forms of cryptocurrency, but they have different functions. Coins are built on their own blockchain to be used as currency. Any cryptocurrency that is based on blockchain and is not bitcoin is referred to as an altcoin.
On the other hand, tokens are created on a blockchain that already exists, but they are not regarded as currency. Instead, they are programmable assets that help in creating and executing unique smart contracts.
The contracts help in establishing assets ownership outside the blockchain network. Tokens are units of value, and they even have real-world value in terms of coins, points, money, and electricity.
The term altcoin was first used to refer to other cryptocurrencies except for bitcoins. The term is derived from the phrase “alternative to Bitcoin.” Most altcoins were created to improve on the functionalities that came with Bitcoin. We will look at altcoins later on.
Most altcoins share the same characteristics with Bitcoin, but each cryptocurrency offers some unique features. Some altcoins use an entirely different process to create and validate blockchain transactions. Such features include lower price volatility and smart contracts.
Tokens are created, and five out through ICO or Initial Coin Offering, just like how stock markets function. They normally come in the form of:
- Utility tokens – These are designed for specific uses
- Security tokens – These are similar to stocks in the stock market
- Value token – These are similar to bitcoins
One crucial thing to note about tokens is that just like U.S. dollars, they represent value, but they do not have value. The paper on which a one-dollar bill is printed is not worth $1.
Common Types of Cryptocurrency
CoinMarketCap is responsible for checking and biggest cryptocurrencies through market capitalization. Since many cryptocurrencies are available, the market cap helps people identify the cryptocurrency with the highest value.
While looking at the common types of cryptocurrencies, it is worth noting that the name of the blockchain platform may differ from its digital currency.
This was the first cryptocurrency, and it was created in 2009 by a person or a group by the name Satoshi Nakamoto. By September 2021, there were around 18.8 million Bitcoin tokens circulating with a cap limit of 21 million.
Bitcoin miners use high-powered computers to generate bitcoins and verify transaction blocks. The transactions are permanently lodged on the blockchain to ensure that the validation and securing of each bitcoin and the entire network is successful.
Ethereum is similar to bitcoin in terms of the fact that it is generated through a blockchain network. However, the main difference is that Ethereum is a programmable blockchain. This means that it was not created to support currency but to enable users to create, publish, use applications, and monetize the blockchain.
By September 2021, Ethereum was rated as the second most used virtual currency after Bitcoin. Ethereum has played a significant role in ICOs because most ICOs use Ethereum blockchain.
Cardano projects itself as a third-generation blockchain platform. It casts itself as a player in the next level of cryptocurrency. Instead of using peer-to-peer networks, it uses proof-of-stake. This implies that it uses a lot of electricity and complicated calculations to mine coins.
Cardano’s currency is called ADA (named after a 19th-century mathematician called Ada Lovelace). Its principal applications are traceability and identity management. Data is collected from multiple sources, and then that data is used in auditing a product’s manufacturing process to prevent counterfeit goods and fraud.
This was the first virtual currency that was marketed as a “stablecoin.” It is a form of cryptocurrency referred to as fiat-collateralized stablecoins. The value of tether is tied to the U.S. dollar. Just like other stablecoins, the tether is designed to lower transaction charges, transparency, and stability.
To Sum It Up…
Bitcoin created a platform that led to the crypto craze over a decade ago. Today, there are thousands of cryptocurrencies that you can learn about and also invest in them. The most important thing to note is that it is possible to exchange fiat currency with cryptocurrencies for goods and services.