Cryptocurrency has earned fame for being one of the hottest topics in the finance sphere today. Whether you have come into an investor's shoes or assumed it from a techie perspective, or while standing candidly as someone curious about the noise being made, understanding what crypto stands for and how it functions should be in your dictionary. Let's expose you to the general concept of cryptocurrency, how it is different from traditional money, into a few known cryptocurrencies being used today, Bitcoin, and Ethereum.
Cryptocurrency is a kind of digital or virtual money that relies on cryptography for security. While traditional governments issue their currencies-German euros or the US dollar-data like cryptocurrencies are decentralized and run predominantly on technical grounds in the blockchain. A blockchain is an openly available and distributed ledger that records all transactions within a given network of computers; it offers transparency and guarantees security.
The primary draw of cryptocurrencies is the fact that they work outside of government and conventional financial systems. That way, Cryptos empowers the users to transact directly with one another without having to be dependent on intermediaries like banks, thus, making cryptocurrencies a means of payment and a tool for emancipation and privacy.
At a very distant glance, one might feel that crypto is just like another form of money, but conceptually, it is different from traditional currencies. Let us see the main points of difference:
Traditional money is centralized, i.e., it belongs to governments and financial institutions and is regulated by them. Central banks can print money at will and change the monetary policy. With cryptocurrencies, however, the situation is opposite; they are decentralized. No single institution controls them, and a network of computers spread around the world usually enables their operation. This, in turn, makes them immune to the control of a central authority, with both potential merits and demerits from different perspectives.
Traditional money exists in a physical form consisting of coins and banknotes, whereas cryptocurrencies are purely digital and exist only as data on a blockchain. This means that there is no need to think about physical storage or transportation; yet, cryptocurrencies carry digital hazards, such as hacking and loss of access, in their hands.
Delays in transaction processing are encountered, in particular with international payments, under regular banking channels. Crypto transactions, however, can occur within a matter of minutes or seconds, completely actuated on geography. While transaction fees for cryptocurrencies are kept low, there can be exceptions based on the network and cryptocurrency used.
Much talked about in the world of interstellar finance are Bitcoin and Ethereum, but there are actually thousands of them. So first, let us take a glance at our two main players and then look at others in the remaining scene.
Considered to be the first cryptocurrency, Bitcoin came into being back in 2009 through the mind of an unknown entity or group called Satoshi Nakamoto. Bitcoin is thus basically a store of value and a means of exchange. Because Bitcoin is decentralized, it can be used anywhere in the planet, without requiring any bank account or governmental interference.
Success of Bitcoin has instilled it as a benchmark for the entire crypto market. It is often referred to as digital gold. Like gold, Bitcoin is seen as a hedge against inflation and economic instability. Over the years, the network of Bitcoin has been evolving, getting bigger, with increasing numbers of businesses accepting the currency for payments and more investments of institutional players.
Ethereum, perhaps the second-largest cryptocurrency thought of, is somewhat different from Bitcoin in that it is supposed to be much more than just a digital currency. It is a decentralized platform that allows developers to build and deploy smart contracts and decentralized applications (dApps). Ether (ETH), the native cryptocurrency of Ethereum, is used by these applications for power and gas for transaction fees on its network.
Ethereum is the actual platform of choice for developing DeFi applications, NFTs (non-fungible tokens), and even games. The blockchain flexibility has become the main reason for developers and entrepreneurs alike to mount their efforts on decentralization.
Besides Bitcoin and Ethereum, several other cryptocurrencies warrant mention.
Getting started in crypto involves first buying some. There are plenty of ways to do this. Among them are centralized exchanges such as Binance, Coinbase, and Kraken. These platforms allow one to trade, buy, or sell cryptocurrencies for fiat currencies (such as USD, EUR, etc.). They accept payment through credit cards, debit cards, or bank transfers.
Thereupon, it is wise to store your cryptocurrencies securely. The exchanges offer wallets for their users to store their coins, but a private wallet provides much better security, which includes hardware wallets such as Ledger and Trezor or software wallets such as MetaMask and Trust Wallet.
While many advantages are ascribed to cryptocurrencies, they come with their own set of risks and challenges:
Cryptos are incredibly volatile. Prices fluctuate madly within short time intervals, declaring these investments as highly risky. This is one of the reasons why traditional investors have approached crypto with a lot of suspicion.
While blockchain is secure, crypto exchange and wallet providers are prone to being hacked and have been victims of such. There are some high-profile cases of systems being hacked in which millions of dollars worth of digital assets were lost. Following good security measures should go, enabling 2FA, and best of all, never sharing your private keys.
Crypto regulation varies from country to country. While some governments go to the length of embracing crypto, others place outright bans on crypto or put heavy regulations on it. Lack of uniform regulation thus ultimately serves to create uncertainty, which could possibly have a bearing on the market and its potential growth.
Cryptocurrencies have certainly made their way into the financial world. For now, the distant future is uncertain; however, the very essence of digital currencies and the innovative blockchain technology suggest firmly that it is here to stay. Whatever your aim may be, be it investing, developing on a blockchain, or just generally exploring, the first step lies in understanding the cryptocurrency basics that allow one to navigate this new age venture with ease.