Understanding cryptocurrency for beginners is crucial to tackle new global money needs. These digital coins run on blockchain tech enabling safe and clear transactions without middlemen. What is a cryptocurrency? How do they operate? What types of cryptocurrencies exist? This article covers all you need to know about cryptocurrency.
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| Understanding Cryptocurrency for Beginners |
What is a cryptocurrency?
Have you come across Bitcoin, Ethereum, Dogecoin or Solana and wondered what they are? They are cryptocurrencies, a digital form of cash made to be secure and use aliases.
The main draw of cryptocurrencies is their capacity to enable quick, safe, and worldwide transactions with lower fees compared to traditional banking systems. This feature matters a lot for cross-border transfers.
Besides serving as a way to exchange money, cryptocurrencies are their own type of asset giving people chances to invest and spread out their money. Many folks even think of some, like Bitcoin, as safe bets similar to gold.
All cryptocurrencies use a technology called "blockchain." It's like a public record book that shows all transactions. This system works without needing a central authority such as a bank or government, to run it.
It's crucial to grasp the reasons behind this: Bitcoin, the first cryptocurrency to achieve real success, came into existence on January 3, 2009. Its aim, and not a small one, was to become an alternative to the traditional financial system. Since then, this groundbreaking technology has paved the way for new financial and payment possibilities.
Cryptocurrency works on a network where a group of participants validates each transaction. These participants are called miners (in Bitcoin's case) or validators (in Ethereum's case).
These miners tackle complex math problems while validators lock cryptocurrencies to add transaction blocks to the blockchain. This process creates a secure and unchangeable record.
What Are The Advantages And Disadvantages of Cryptocurrency?
In 3 points, the advantages of cryptocurrency are:
- Security: Cryptocurrency uses advanced cryptographic technology to protect transactions, making it globally impossible to falsify data.
- Accessibility: Cryptocurrency is accessible to anyone with an Internet connection, making it widely available worldwide. People in some countries facing significant financial difficulties have already proven the usefulness of cryptocurrencies for peer-to-peer exchanges, particularly in some African countries where it is sometimes difficult to get banked.
- Transparency: With a few exceptions, blockchain allows anyone to verify transactions, thus ensuring the transparency of the system. Some cryptocurrencies, such as Monero's XMR, are on the contrary designed to anonymize transactions.
Today, several tens of thousands of different cryptocurrencies exist, and of course, they are far from all equal.
The Most Famous Cryptocurrencies to Invest in
We will present the 3 most popular cryptocurrencies by briefly reviewing their operation, their history and what differentiates them. It is interesting to note that Bitcoin, Ether and Ripple's XRP, the cryptos that we will discuss, each have their own specificities.
Bitcoin
Bitcoin (BTC), first mentioned on October 31, 2008 with the whitepaper written by Satoshi Nakamoto and officially launched on January 3, 2009, is much more than a simple cryptocurrency. It is a real revolution that will shake up the financial world in the aftermath of the subprime crisis.
All BTC transactions are verified by the network nodes and recorded in an unfalsifiable public ledger which is none other than the Bitcoin blockchain.
The most striking feature of Bitcoin lies in its absence of a central authority. Unlike traditional currencies, such as the euro or the dollar, which are issued and regulated by central banks, Bitcoin is completely decentralized. No one controls it, and it is managed by a vast global network of participants called miners.
In the case of BTC, it works by mining blocks (hence the term “miners”), which is called Proof-of-Work (often abbreviated to PoW). The mining process is at the heart of creating new BTC and validating blocks.
Miners solve complex mathematical problems using the computing power of specialized machines. When they succeed, new BTC are sent to them as a reward. This mechanism makes Bitcoin independent of any direct human intervention in its operation.
Since Bitcoin is only designed to exist in 21 million units, this particularity earns it the title of digital gold, which is rather well chosen, because BTC is today incontestably a store of value for many people.
Ethereum
Ether, the cryptocurrency of the Ethereum blockchain, appeared in 2015. It is a cryptocurrency that goes beyond the simple notion of a store of value. Ethereum is distinguished from Bitcoin by its evolved approach, centered on the creation of smart contracts and blockchain-based applications.
ETH is mainly used on the Ethereum ecosystem to power smart contracts and decentralized applications (dApps). Just like Bitcoin, which is mainly designed to be a store of value and a means of exchange, Ether is used to pay transaction fees on the Ethereum blockchain.
Since September 15, 2022, the Ethereum blockchain has moved from proof of work to proof of stake (PoS), which means that it has abandoned block mining in favor of a system of validators.
These validators participate in the proper functioning of the blockchain by depositing their ETH in stake. At the time of writing, more than 23% of the ETH in circulation are placed in stake, or more than 27.8 million ETH.
At the time of writing, ETH is the 2nd virtual currency in terms of market capitalization behind the king Bitcoin.
Tether (USDT) Crypto
Considering the cryptocurrencies available in the market, Tether (USDT) would qualify as one of the stable coins. Moreover, unlike a typical cryptocurrency, Tether is not subject to wild fluctuations of its value, which is what Tether was designed for: to be stable as it is backed up by the United States Dollar. To put it much more simply, a single USDT is intended to be equal to a single dollar in its conversion rate, which makes it a consolation for investors who experience discomfort regarding the crypto market instabilities.
The other most common reason people turn to Tether is for trading. It helps in providing protection from jumps in price that may occur in a down market and allows traders to seamlessly enter and exit positions without worrying about a sharp fall in prices. Tether, furthermore, can be found on numerous platforms and therefore can be changed for other coins effortlessly.
On the other hand, Tether can be said to be the most stable of all cryptocurrencies except for some concerns that it raises. Concerns have been raised with respect to its transparency, as well as the regulators’ attention to it, thus it is important to be cautious.
In the world of cryptocurrencies, Tether additionally provides a unique proposition as it connects the external traditional economy with the internal ecosystem existing within the digital visual assets. Regardless if you have an intention of trading, investing or interested in cryptocurrencies only for fun you will suddely understand why Tether is such an important component and helps to ease the complexity of the space.
Binance Coin (BNB)
Binance Coin (BNB) is the native cryptocurrency of the Binance exchange, which is one of the largest and most popular cryptocurrency trading platforms in the world. First launched as a utility token for discounting transaction fees on Binance, BnB has evolved into a versatile digital asset.
One unique feature of BnB is its ability to reduce business fees. Users can save money on transactions by using BNB instead of fiat currency. These incentives have helped BNB gain popularity among traders and investors.
In addition to trading discounts, BNB is used in the ecosystem. Binance's Decentralized Finance (DeFi) powers a wide range of applications. Including token sales on Binance Launchpad and liquidity pools on Binance Smart Chain, this versatility has contributed to BNB's growth and usefulness in the broader crypto landscape.
Another interesting aspect of BNB is the regular token burning that Binance does, which reduces the total supply over time. This collapse mechanism may increase the value of the remaining tokens.
Binance Coin has become more than just a tool to reduce trading fees. It's a key player in the burgeoning world of DeFi and beyond. Whether you're a trader or just exploring the crypto space, BNB is worth keeping an eye on!
Solana Crypto
Solana is an innovative blockchain platform that is quickly gaining traction in the cryptocurrency space. Solana is known for its fast transaction speeds and low fees. Its goal is to provide a scalable solution for decentralized applications (dApps) and crypto projects.
What sets Solana apart is its unique consensus mechanism called Proof of History (PoH), which can process thousands of transactions per second. This performance makes it an attractive option for developers looking to build high-performance applications. From DeFi platforms to NFT markets
Solana's ecosystem has grown significantly. It has a vibrant community and many projects built on the blockchain. It includes everything from decentralized financial services (DeFi) to gaming applications. which shows flexibility
Another interesting aspect of Solana is its commitment to affordability. with minimal transaction fees It will open the door for more users and developers to participate in the blockchain space without worrying about higher costs.
Solana has established itself as a formidable player in the cryptocurrency space. By offering speed Scalability and cost-effectiveness If you are looking for new opportunities in the blockchain world, Solana is worth a close look!
Ripple's XRP, a solution for international payments
XRP is a cryptocurrency created by the company Ripple Labs in 2012. Unlike Bitcoin, Ripple does not only offer a digital currency, but it also has in common with it that it offers a global payment network powered by its crypto.
Offering an alternative to international payment systems, XRP is however dependent on a high level of centralization since the Ripple network is mainly intended for institutions (large companies, banks, states, etc.). For example, the Ripple network has been adopted by Crédit Agricole, Bank of America and Bank of England.
Thus, Ripple presents through its crypto XRP an alternative to already established payment systems such as the SWIFT network for example, and this with many advantages, including transactions carried out almost instantly (around 8 seconds for a transaction) and almost zero fees (a fraction of a cent per transaction).
It is worth highlighting the legal challenges that Ripple Labs is currently facing. Since December 2020, the company has been the subject of proceedings by the Securities and Exchange Commission (SEC) due to an alleged sale of unregistered securities worth $1.38 billion through its cryptocurrency XRP.
Also, since this event, each new evidence brought to this investigation has an impact on the value of the cryptocurrency, whether upwards or downwards.
Is It Good to Invest in Cryptocurrency?
Investing in cryptocurrencies has an impact on your finances in ways you might not expect. Cryptocurrency prices change fast and without warning. Some people have made a lot of money from crypto investments, while others have lost big time.
Before you put your money into cryptocurrencies, do your homework and get to know the risks. It's smart to invest what you can lose without breaking the bank.
To cut down on some of the dangers that come with crypto investing, you might want to spread your money around and talk to a money expert. In the end, whether crypto investment makes sense depends on how much risk you're okay with and what you want your money to do for you.
How do Cryptocurrencies work?
To grasp how cryptocurrencies work let's look at Ethereum and Bitcoin. These two cryptocurrencies follow similar rules, but we need to keep a few differences in mind.
Blockchain technology forms the heart of cryptocurrencies. Picture blockchain as a digital record book, a spread-out database that many people worldwide share. This database logs all the cryptocurrency transactions making sure everything stays open and safe.
Bitcoin has a system called proof of work to protect its network. Miners, which are computers or machines for this job, figure out tough math problems to add new transactions to the blockchain. They get new BTC as a reward for their work. People often criticize mining, whether it's for BTC or other cryptocurrencies, because it uses a lot of energy, though some argue about this point.
Ethereum however, has changed to a proof-of-stake system to check its transactions. Instead of solving math problems, people who own Ether lock up some money as a guarantee to process transactions.
When users behave , they lose some of their staked ETH. People call this slashing. Most blockchains now use proof of stake. This method cuts down on energy use compared to mining. It also speeds up transactions.
You need a digital wallet to use these cryptocurrencies. Think of it as a bank account for your BTC, ETH, or other crypto. You can set one up to keep your cryptocurrencies off centralized exchanges. Rabby and MetaMask are two options.
The safest way to store your cryptocurrencies is on a hardware device. The Ledger Nano S Plus made by the French company Ledger, is a popular choice for this.
What Is a Crypto Used for?
Today, there are many concrete use cases for cryptocurrencies: firstly, and this is their natural interest, cryptocurrencies can be exchanged across the world peer to peer without any trusted third party. This is as true for cryptocurrencies designed for this particular use case like XRP as for any other cryptocurrency.
Furthermore, cryptocurrencies can be used to finance associations (humanitarian for example), the blockchain offering both total traceability and drastically reduced transaction fees.
Secondly, and this is now an established fact, Bitcoin has gradually established itself as a real store of value, a utility that has now earned it the name of digital gold. This is also why in many countries facing significant inflation, cryptocurrencies are used as a bulwark against the devaluation of local currencies and serve as a currency of exchange.
Also, El Salvador and the Central African Republic have decided to make Bitcoin legal tender in their countries. According to them, BTC should not be considered a parallel currency, but rather a complementary currency. Moreover, since Nayib Bukele took over as president of El Salvador, the country has invested massively in Bitcoin as a long-term bet, just as the majority of countries in the world invest in gold for varying periods of time.
Next, cryptocurrencies can be invested in the short, medium or long term. For many years, more and more people have been investing in cryptocurrencies to diversify their portfolios, just like gold, real estate or stocks. Moreover, Bitcoin and Ether are offered for trading for companies and large portfolios through ETFs.
Today, cryptocurrencies offer many use cases, including:
- Active participation in the governance of decentralized projects.
- Payment of transaction fees (ETH, BTC, AVAX, etc.).
- Utility aspect on crypto exchanges, especially to collect bonuses (discounts on trading fees, etc.).
- Use of advanced protocols within decentralized finance.
- Deployment of blockchain applications.
- Concrete means of payment in some countries (El Salvador).
- and many more.
What Are The Different Types of Cryptos?
Stablecoins
Altcoins
- Ethereum (ETH): A platform for decentralized applications and smart contracts.
- Litecoin (LTC): Created as a "lighter" version of Bitcoin with faster transaction times.
Tokens
- Utility Tokens: Used to access services within a platform (e.g., Binance Coin).
- Security Tokens: Represent ownership in an asset or company and are subject to securities regulations.
DeFi Tokens
- Uniswap (UNI)
- Aave (AAVE)
Utility crypto
These cryptos are relatively common today, since they are in essence a means of maintaining a community spirit around the projects to which they belong.
Governance cryptocurrencies
Cryptocurrencies to pay transaction fees
Finally, note that some cryptocurrencies allow you to pay the transaction fees of their respective blockchain, as is the case for ETH with Ethereum. Other blockchains work in this way, such as the Avalanche ecosystem with the AVAX crypto, the Binance Smart Chain with BNB, Polkadot with DOT, Tezos with XTZ and so on.In general, cryptocurrencies used for transaction fees are usually burned in order to reduce the number of units in circulation over time. In other cases, they can be redistributed into the treasury of certain decentralized projects or to network participants, as is the case with Bitcoin miners.
Conclusion
The concept of cryptocurrency is a paradigm shift in how we view money and finance. With blockchain as its foundational technology, it opens up new possibilities for safe, decentralized transactions. However, users and potential investors should carefully assess the dangers and obstacles that come with it.