What Is Cryptocurrency?

The concept of money has evolved significantly since the barter technique that existed as far back as 6000 BC. Civilization has developed newer mediums of exchange, from the use of solid valuable material to paper money, and bills of exchange. Today money takes various forms, including tangible paper or plastic notes, and virtual cash in the form of cryptocurrencies.

Cryptocurrency or crypto came with the Information Age and ushered in a new era of peerless, secure, and fast transactions.

What Is Cryptocurrency?

Coined from the words “cryptography” and “currency,” cryptocurrency is essentially a digital or virtual currency that functions as a medium of exchange. Cryptocurrencies are secured by cryptography, a technology that makes it hard or impossible to create fake currencies or double-spend one cryptocurrency.

On the surface, cryptocurrencies have the same use case as cash in hand. It can be sent to friends and family, used as a payment method for purchases, and so on. However, cryptocurrency and the blockchain industry is a multi-layered system with lots of innovation and alternative use cases. Crypto transactions exist on a decentralized system known as a distributed ledger which records every transaction and issues new cryptocurrencies.

Where Did Crypto Come From?

Before the emergence of Bitcoin in 2009, several cryptographers attempted to create digital cash that relied on cryptography for security. However, none of the conceptions came to fruition. In 1983, David Chaum came up with a digital cash idea backed by cryptography, which he called ecash. He tried implementing it with Digicash, a form of electronic payment, but it remained a software within the centralized finance system.

Chaum’s Digicash was followed by academic writings by the National Security Agency and authors William Rees-Mogg and James Dale Davidson. The writings of the authors in The Sovereign Individual made an accurate prediction about the type of currency to be used in the Information Age. They described it as “mathematical algorithms that have no physical existence.”

Finally, cryptocurrency emerged through the efforts of pseudonymous developer Satoshi Nakamoto in 2009. He created Bitcoin, the premier cryptocurrency using the SHA-256 cryptography hash function. Since then, more coins, including Litecoin and Ethereum, have emerged, expanding the crypto market. In November of 2021, the total crypto market cap reached an all-time high of $3 trillion. Today, the market cap stands at $812.93 billion, with bitcoin boasting a 39.88% share.

How Does Cryptocurrency Work?

Cryptocurrencies exist on a decentralized system known as a distributed ledger which records every transaction and updates existing ones. And each of these transactions is secured by cryptography. Cryptography involves mathematical and computational techniques used to encrypt and decrypt information.

When used for cryptocurrency, cryptography guarantees the anonymity or pseudo-anonymity of individual transactions. Cryptographic schemes comprise a major element called keys. Each transaction involving crypto contains a public key and a private key, which allow users to send money in an anonymous, secure, and trustless way.

Anonymous in the sense that each transaction on the distributed ledger lacks identifiable information. A normal wire transfer will often contain the sender’s details; if not the name, then the location and method of transfer. With crypto, none of this is available. The only data available on transactions is the public address, which is a bunch of random numbers that represent your transactions on the ledger. This public address or public key is useless without the private key.

Several cryptographic techniques are employed to enhance the effectiveness of cryptocurrencies. One such technique is hashing, which checks the validity or integrity of transactions on the cryptocurrency network.

Cryptocurrency Types and Examples

The cryptocurrency industry boasts over 9000 coins in circulation. Some of these coins have unique origins and unique functions. Cryptocurrencies can be categorized into mainstream coins like Bitcoin and Ethereum, Stablecoins, Memecoins, and Tokens.

Bitcoin

Created by Satoshi Nakamoto, Bitcoin is the first-ever cryptocurrency. It was created as a decentralized digital currency. The coin is transferred through a peer-to-peer network, free of centralized financial institutions, allowing for anonymity and seamless transactions. As the first cryptocurrency, BTC dominantes the crypto market cap and has the largest user base. Bitcoin can be used as a form of payment, held as a store of value or staked on some DeFi protocols.

Ether

Ether or ETH is the native token of the Ethereum, an open-source blockchain and home to most DeFi applications and protocols. Because ETH is the native token on the Ethereum blockchain, it is the primary coin for all forms of transactions on network. It is used to finance smart contracts and pay gas fees but it can also be traded on exchange platforms.

Stablecoin

A stablecoin is a digital currency that exists on the blockchain and represents a real-world stable reserve asset such as the United States dollar or silver. Stablecoins are preferred in the crypto industry because they introduce some stability to an otherwise dynamic and volatile market. It is a common occurrence for traders to balance out their portfolios by investing in stablecoins alongside volatile assets. Examples of Stablecoins include USDT and DAI.

USDT

Created by Tether in 2014, USDT is a stablecoin that is begged to the legal tender of the United States. This means that one 1 USDT is equal to $1. As the premier stable cryptocurrency, USDT has the 3rd largest market cap, the most trading pairs, and the highest circulation. The coin is an ERC-20 token that is backed by Ethereum.

DAI

DAI is a decentralized stablecoin launched by MakerDAO, a decentralized lending and borrowing protocol on the Ethereum blockchain. DAI is an example of an on-chain backed stablecoin that works by staking on-chain assets like BTC and ETH to anchor the price of the select fiat currency. In the case of DAI, its value is soft pegged to the US dollar at a 1:1 ratio. It is used to facilitate lending on the MakerDAO protocol.

Memecoin

Memecoins refer to popular cryptocurrencies that gain support primarily from comical or animated memes. Memecoins are largely driven by pop culture and, as such, are subject to sudden and drastic changes in value. Memecoins function includes trading and as a medium of exchange. The total memecoin market cap stands at $16.2 billion. Leading the market are Dogecoin and Shiba Inu.

Dogecoin (DOGE)

What first started as a community-shared joke regarding altcoins has now become one of the top ten cryptos in the market. Dogecoin is an altcoin that is based on the proof-of-work consensus mechanism and other technology apparent in bitcoin. Its primary function is to serve as a medium of exchange, but it can also make a profit through trading. Dogecoin currently leads the memecoin market with a market volume of over $776 million.

Token: Utility and Security

A token is essentially a cryptocurrency that can’t be mined. Tokens exist as digital units of value but come in different forms. Within a specific ecosystem, tokens can be for utility or security.

Utility tokens exist on a specific crypto product and are used to access the product or to function as a medium of exchange. For example, the Gate token is used to pay online transfer fees, to issue unique tokens, and as a reward. Some tokens can be extensive use cases such as liquidity pools and trading. Another popular utility token is Ether, the native utility token for the Ethereum blockchain. It was created by Vitalik Buterin to serve as a medium of exchange to finance network fees on smart contracts and other DeFi products.

Security tokens often serve as a representation of a financial asset. For example, security tokens can be issued by companies as proof of ownership of a stock or dividend in the company. These security tokens are legally considered to be the same as a share that’s distributed traditionally. But there’s no clear standard and many examples to explain.

Asides from security and utility tokens, we also have Non-Fungible Tokens (NFT). NFTs have one primary and sole function; to represent a unique asset that can’t be interchanged. NFTs are based on cryptographic technology and represent the ownership of a real-world asset.

How to Buy Cryptocurrency

There are various ways of buying cryptocurrencies including, centralized exchanges, decentralized exchanges, P2P exchanges, and brokers.

Centralized Exchange

Centralized exchanges are 3rd party platforms that create a connection between users looking to buy or sell their coins. To purchase a cryptocurrency on a CEX, a user needs to deposit fiat money in the exchange and trade that money for their desired cryptocurrency. Most centralized exchanges charge relatively low fees and allow users to store their coins in their custodial wallet. An example of a centralized exchange is Gate.io, a leading CEX since 2013.

To buy cryptocurrency on Gate.io, follow these steps:

• Visit the Gate.io website and click on Log in. If you don’t have an account, click on sign up and fill in your details.

• Click on Buy Crypto and select from the drop-down options.

• Enter the amount you’d like to buy and the crypto you’d like to receive.

• Your cryptocurrency will be deposited in your Gate wallet within seconds.

Decentralized Exchanges

Unlike centralized exchanges, there is no middle part between buyers and sellers. There is no custodial platform wallet, and the funds are transferred from your wallet to fund your transaction on the blockchain. Buying crypto on DEXs is largely handled by smart contracts and blockchain technology. DEXs also do not request personal details or for a user to verify their identity.

How to Store Crypto

Traditional money is deposited into banks or stored in physical piggy banks. Cryptocurrency’s digital nature, which means you can never physically hold it, makes traditional methods of storage impossible. Here are some common ways of storing cryptocurrency:

Custodial Wallet

Most cryptocurrency exchange platforms provide a default wallet, where your coins are kept after you buy or sell crypto. A custodial wallet functions just like a traditional bank account: selling a coin means the value of the coin is deducted from your wallet and vice versa. Custodial wallets are under the control of the presiding 3rd part exchange. Thus, the security measures taken to protect your coins are implemented by the exchange platform. The user merely needs to set an account password and, in some cases Two-Factor Authentication.

Custodial wallets are easy to access because they are linked to the user’s account on the platform. So, entering the password needed to access the account, grants automatic access to the wallet. Custodial wallets are the easiest way of storing crypto because of the ease of accessibility, however, they are not as secure as the more specific methods that a user can pursue. An example of a custodial wallet is the Gate wallet which shows you an overview of your funds, gains on assets, and more.

Cold Wallet

Cryptocurrency is digital cash that exists primarily on the blockchain. However, with a cold wallet, a user can store their coins offline. Cold wallet storage can come in different forms, but the most common is a hardware wallet.

A hardware wallet is a small but physical device used to store crypto. To use a hardware wallet, a user needs to connect the device to their crypto and use an internet connection to send or receive money from the wallet. Some hardware wallets store a specific and limited amount of cryptocurrencies. Cold wallets are by far, the safest method of storing cryptocurrency, because your crypto is offline, it cannot be targeted by an online attack. Also, as long as the device remains in the possession of the user, it will always be safe. Cold wallets are generally recommended for people who HODL over long periods. They also come at a cost ranging from $50 to $150.

The only downside to cold wallets is that the offline nature of the wallet makes sending or receiving money a lot slower than usual.

Hot Wallet

A hot wallet is a stand-alone application that stores your crypto online. They exist in the form of mobile and desktop applications, as well as web applications. Hot wallets are popular because they allow the user to exercise complete control over their funds. Hot wallets feature a recovery phrase that allows a user to access the funds if they ever lose access to the hot wallet. Examples of hot wallets include MetaMask and MyEtherWallet.

Is Crypto a Good Investment?

Cryptocurrency is best known for its volatility, a feature that tends to make people millionaires and put others at a great loss overnight. As such, the question of whether or not it’s a good investment will depend on an individual weighing its pros and cons.

On the upside, cryptocurrency is decentralized, allowing anyone with a crypto wallet to access the space, buy, sell and possibly turn a profit. With the crypto industry, the possibilities are almost endless, especially with DeFi new use cases for cryptocurrencies are continuously emerging. Further, cryptocurrencies are based on innovative technology that allows users to send money halfway across the world within seconds. Wire transfers are much more tedious and take much longer than a simple transfer from crypto wallet to wallet. Cryptography also guarantees a high level of security that cannot be duplicated in traditional banking systems.

On the downside, cryptocurrencies, as mentioned earlier, are incredibly volatile. This means their value can drop and rise suddenly and drastically, making some people millionaires and causing others to suffer a huge loss. The crypto market is largely speculative and rife with risks.

Based on the above, a person with a low-risk appetite may not consider crypto a good investment. Some users utilize the HODL technique- which is holding crypto for a long time- to quell the risk, but the benefits of this method are long-term and still unsure. A more explorative user with a risk appetite may consider crypto a good investment.

Ultimately, before investing in any cryptocurrency, it is important for a user to carry out extensive research into the desired cryptocurrency to determine the risks involved and whether they suit their needs and desires. It helps to envision your financial goals and pick cryptocurrencies that fit those goals based on your research.

FAQs

• What is crypto mining?

Crypto mining is a method used to generate new coins and to verify transactions on select networks like Bitcoin. The Crypto mining process involves using a competent computer to run complex mathematical calculations.

• What is the best cryptocurrency?

There is no single perfect cryptocurrency. However, based on a market cap, the top 3 cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), and Tether (USDT).

• What does staking crypto mean?

Crypto staking involves locking up idle crypto assets in liquidity pools on the blockchain in exchange for an incentive, usually in the form of another cryptocurrency.

• How do you trade crypto?

There are many different techniques employed by crypto traders to make a profit. You can trade crypto on a brokerage platform or a centralized exchange. For the latter, the basic steps are to create an account on the platform, fund your account and purchase the crypto you would like to use for your trading.

• Is crypto legal?

Historically, cryptocurrencies remain largely unregulated on a worldwide scale. However, some states, like the US, have implemented strict regulations on initial coin offerings (ICOs). On the European front, regulation merely limits crypto-related operations with certain guidelines. Cryptocurrency, in a generic sense, is not illegal, it merely lacks clear legal regulations.

Conclusion

Looking back at the history of money and the trajectory of crypto growth, there is an apparent technological jump in monetary and payment systems. Cryptocurrencies have been around for over a decade and the market only appears to continue to grow. It is safe to say that digital cash and its alternative use cases are here to stay.