Understanding Cryptocurrency: A Beginner’s Guide
Cryptocurrency doesn’t have to be cryptic. If you’ve been wondering what cryptocurrency is and how it works, we are here to answer all your questions!
A cryptocurrency, or “crypto” for short, is a digital asset people can use as an investment or to make online purchases. A crypto user can exchange “real” currency, such as U.S. dollars, to buy digital coins or tokens. This currency is created using cryptographic techniques, or encryption, which means various coding techniques are applied to ensure their security, making it safe for people to buy, sell or trade it securely. Each coin of cryptocurrency is a unique line of code that cannot be copied, which makes it easy to track and identify as they’re traded.
Cryptocurrencies don’t have a central issuing or regulating authority, and use a decentralized system to record transactions and issue new units. Because of this, banks are not required to verify crypto transactions. Rather; a peer to peer system is used to send and receive digital payments, which are stored in digital wallets – there is no physical element to cryptocurrency. Units of cryptocurrency are created through a process called mining, which uses computers to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
While crypto relies on a peer to peer system, there are a growing number of financial institutions that have expanded their services to integrate blockchain and cryptocurrency.
What is Blockchain?
Blockchain is a type of technology that maintains a tamper-resistant record of transactions and keeps track of crypto ownership. Sometimes referred to as Distributed Ledger Technology (DLT), blockchain makes the history of any digital asset unalterable and transparent through the use of decentralization and hashing. A blockchain stores encrypted blocks of data, then chains them together to form a chronological “chain” of the data. Digital assets may be distributed from the blockchain, but cannot be copied or transferred.
Types of Cryptocurrency
Nearly 19,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com. The first and most valuable type of crypto, which you have already likely heard of, is Bitcoin. Bitcoin was created in 2009 and established the basic system of cryptography and peer-to-peer verification that is the foundation of most other forms of crypto today. The term “altcoin” is used to refer to alternative currencies to Bitcoin. Here are some of the most popular:
Litecoin is an adaptation of Bitcoin intended to make payments easier.
Ethereum is often used to carry out financial transactions more complex than those supported by Bitcoin.
Cardano is a competitor to Ethereum led by one of its co-founders.
Solana is another competitor to Ethereum whose differentiators include speed and cost-effectiveness.
Dogecoin, an open source peer-to-peer currency, began as a joke but has become one of the most valuable cryptocurrencies.
Stablecoins are a class of cryptocurrencies whose values are designed to stay stable relative to real-world assets such as the dollar.
So what is the difference between all of these types of currencies? Each type of currency is powered by its own network, with differences in how the currencies are created. And not all usage purposes are the same. Bitcoin is the most widely accepted currency among merchants and service providers, while daily spending is not the primary goal of other coins. However, transactions may be slower and less anonymous than some of its competitors.
In addition to cryptocurrencies, there are millions of NFTs (nonfungible tokens), which are based on similar technology but allow their owner to buy the original copy of the digital file it is based on.
Where Do I Buy Cryptocurrency?
There are dozens of cryptocurrency exchanges where you can buy, exchange and trade currency. Coinbase is the most popular platform, and allows you to purchase Bitcoin, Ethereum, Litecoin and more than 30 other coins and tokens in U.S. dollars. Competitors such as BlockFi may also allow you to borrow against your holdings. Voyager, Upholder and Kraken are all popular crypto trading platforms, with differences in the types of coins traded, and a range of fees.
Crypto vs. Traditional Money
You may be wondering what the point is of using cryptocurrency instead of traditional currencies. For many crypto users, security is a big factor, thanks to the unique coding of each unit of currency. Crypto’s decentralized system may make consumers feel like they are taking greater control over their finances and privacy. Cryptocurrencies can also potentially offer lower fees and more cost-efficient transactions when trading and investing.
Of course, there are cons associated with using cryptocurrency, including price volatility and higher likelihood of forgotten password and accidental loss due to lack of intermediaries; not to mention a complicated user experience. While the world of cryptocurrency is quickly evolving, we hope we have at least cleared up some of the confusion around it!