What Is Crypto? An Introduction to Cryptocurrencies
It’s official. Cryptocurrency is impossible to ignore.
Over the past several years, you’ve probably heard the word ‘crypto’ creep into more and more conversations. Perhaps you have friends who use Bitcoin to buy things online. Or maybe you know someone who went all-in on Dogecoin on the back of an Elon Musk tweet and gained (or lost) a fortune.
Now, even governments are getting serious about cryptocurrency. For example, El Salvador recently became the world’s first country to make Bitcoin legal tender. It appears that other nations might soon follow suit.
But cryptocurrency is more than just an investment asset or a way to send digital money. It’s used to power a rapidly growing ecosystem of platforms and applications that will likely change the face of every global industry in the years to come. There are so many different use cases and variations that it can be hard to truly comprehend the world of crypto as a whole.
If you feel like you never quite understood the idea of cryptocurrency or why it’s important, this article is for you. This is your guide to understanding cryptocurrency, blockchain, the pros and cons of each, and much more.
What is cryptocurrency?
First, let’s talk cryptocurrency basics, starting with the definition of cryptocurrency. Essentially, cryptocurrency is digital money. You can use it as a medium of exchange for goods or services.
Cryptocurrencies work similarly to digital payment systems that you’re already familiar with, like PayPal. But instead of transferring fiat currency, you’re exchanging digital assets.
For example, suppose you want to send a remittance to a relative in another country. In that case, you can deposit the money into their personal crypto wallet within seconds or minutes. You’ll only have to pay a minimal transaction fee that goes directly towards maintaining the network. This is an advantage over most money remittance providers who charge high fees, have strict requirements, and could take days to transfer the money.
But cryptocurrency goes far beyond simply buying or selling things online. The most well-known cryptocurrency, Bitcoin, started as a means of payment but has become more broadly used as a digital store of value. Some people compare it to a form of digital gold.
The second-largest cryptocurrency by market cap, Ethereum, is a blockchain platform that hosts a massive ecosystem of decentralized applications. These dApps, as they’re called, can be used for anything from decentralized lending platforms to trading collectible in-game assets.
Cryptocurrency can be used for an almost infinite number of applications. Since the industry is so young, there’s still enormous potential for growth and development. The exciting projects on the market today are already disrupting global industries. Still, perhaps the most innovative concepts are yet to come.
Why were cryptocurrencies created?
Cryptocurrency was born from a similar but not equal idea – the concept of digital cash. In 2008, Bitcoin’s unknown creator, Satoshi Nakomoto, released a whitepaper titled Bitcoin: A Peer-to-peer Electronic Cash System. The technology described in this paper became Bitcoin, the precursor to all other cryptocurrencies on the market today.
Satoshi envisioned a financial system that was free from the influence of centralized authorities. It would enable direct transactions between peers without any intermediaries.
Though many people had tried to create such a system before, Satoshi was the first to solve the ‘double-spend problem. In other words, how could you prevent someone from spending the same digital token twice? Previously, such a problem would have required oversight from a governing body.
The solution was blockchain – a revolutionary system that could achieve consensus about the validity of information without supervision from a centralized authority. We’ll go further into detail about blockchain later. For now, know that it’s a way to establish a permanent, unchangeable ledger of data.
Disadvantages of traditional fiat currency
There’s a reason why people like Satoshi were attempting to find an alternative to traditional money systems. Fiat currency has many disadvantages, and most of us have just accepted these pain points as a part of daily life.
Cryptocurrency was created in direct response to the drawbacks of fiat money, which include:
● High fees associated with sending or receiving payments.
● Slow transfer speeds, especially when sending across borders.
● Currency exchange rates result in losses for the individual.
● Risk of inflation due to its unlimited supply.
● Centralization of fiat results in a small group of institutions controlling the way people use their money.
● Devaluation over time as inflation rates rise and governments print more money.
Advantages of cryptocurrency
Cryptocurrency isn’t just a pipe dream. It offers many practical ways to improve the current financial system. We’ve listed just some of these benefits below.
Every cryptocurrency transaction is published on the public blockchain. Anyone can access the information, and there’s no risk of past records being manipulated. Furthermore, the technology is open-source. It’s able to be continually reviewed by computer scientists and network validators.
Cryptocurrency transactions aren’t tied to your identity. While some crypto exchanges may require KYC verification to use their platform, this is different from the information shared during transactions.
For example, when you use crypto to pay a merchant, they won’t receive your personal information. As a result, your private data won’t be shared or sold to banks, advertisers, or credit agencies. It also dramatically reduces the risk of identity theft or personal data leaks.
Cryptocurrency networks are secured by the blockchain. We’ll explain more on this below, but the blockchain essentially acts as an unchangeable record of information constantly verified by an extensive network of independent actors.
To even attempt an attack on Bitcoin’s blockchain would cost over $5.4 billion in computer hardware alone. This isn’t even taking into account the enormous energy costs associated with such a feat.
Cryptocurrency isn’t tied to any centralized institution. It doesn’t require visits to a bank or calling customer support during certain hours. Whether you’re travelling or at home, you don’t need anyone’s permission to send or receive crypto. All you need is an internet connection.
Once a cryptocurrency transaction is made, it can’t be reversed. This simple feature nearly eliminates the risk of credit card fraud for sellers. Since fraud is one of the main justifications that credit card companies use for charging their high fees, crypto bypasses this issue. Instead, it presents a cheaper alternative for customers looking to buy or sell things online.
Cryptocurrency makes it easier than ever to transfer money or other digital assets. Since it’s a peer-to-peer (P2P) transfer, it goes directly to the recipient without the need for intermediaries. As a result, it can take as little as a few seconds to make a transfer to someone on the other side of the globe.
The technology that secures cryptocurrency from manipulation and attacks extends to individuals as well. Private wallets are guarded by strong cryptography and are incredibly safe from hackers. And since no one can reverse a crypto transaction once it has been made, not even banks or governments, individuals can conduct transactions confidently.
Disadvantages of cryptocurrency
No technology is perfect. In terms of cryptocurrency, the industry is still in its infancy stage compared to the traditional financial system it is meant to disrupt.
Here are some of crypto’s potential drawbacks:
● Price volatility of many cryptocurrencies can weaken confidence in the industry as a whole and hinder further adoption. Moreover, since crypto isn’t tied to a physical asset, some suggest this indicates a lack of inherent value.
● High energy usage is a concern for proof-of-work cryptocurrency protocols like Bitcoin. Mining and maintaining the blockchain network can have high electricity requirements.
● Scalability and public adoption continue to be a challenge for most crypto projects. Traditional payment systems like VISA still process most digital financial transactions globally.
● Potential for illegal activities due to the privacy and anonymity offered by crypto.
● Regulation around cryptocurrencies is constantly changing and is potentially a hindrance to the greater adoption of blockchain technology. Governments and traditional financial institutions can often be opposed to the new structures created by cryptocurrency.
Main use cases for cryptocurrency
The world of cryptocurrency is vast and ever-evolving. While new applications for crypto pop up every day, here are some of the most popular use cases:
Cryptocurrency vastly improves the way we make online transactions. Buyers are charged lower fees, sellers receive their payments in seconds instead of days, and there aren’t any restrictions on sending payments across borders.
Decentralized finance (DeFi)
Decentralized finance is an umbrella term for financial products or services that exist on the blockchain. DeFi predominately seeks to remove the intermediaries that currently exist in the financial system. It shouldn’t be thought of as a subcategory of cryptocurrency. Rather, cryptocurrency is often used to power DeFi applications.
There’s a massive, growing ecosystem of DeFi apps, most of which are built on the Ethereum blockchain. These apps offer lending or borrowing services, platforms for earning interest, smart contract facilitation, and much more.
Lending and borrowing
DeFi has transformed the lending and borrowing space. Instead of navigating lengthy approval processes and strict regulations, you can now lend or borrow crypto almost instantly. Some platforms require cryptocurrency collateral, while other flash-loan applications are experimental approaches that offer borrowers no-collateral loans.
Store of value
Fiat currency is unlimited, inflationary, and usually becomes devalued over time. On the other hand, cryptocurrency offers an alternative way to store value. In addition, many popular cryptocurrencies have built-in measures against inflation.
Blockchain allows real-world assets to be tokenized with cryptocurrency. For example, an art piece valued at $1 million could be tokenized as a million crypto tokens worth $1 each. The same concept could be applied to real estate, automobiles, or other assets.
Tokenization creates an easier, more transparent way of buying, selling, or transferring high-value non-liquid assets. In addition, both parties can verify all sales and ownership records via blockchain records, reducing the possibility of legal disputes.
How does cryptocurrency work?
By now, you know that cryptocurrency can be used like other digital payment systems. However, the use cases go far beyond transferring money.
But how does the system actually work? Who runs it, and how do they record all of the information? How does the network protect itself from fraud or hacking attempts?
It all comes down to revolutionary technology called blockchain.
What is blockchain?
Blockchain is a digital ledger that stores information. It’s similar to a traditional payment ledger but is much more secure, transparent, and accurate.
For instance, after a piece of information is added to the blockchain, it can’t be tampered with. Not by anyone, including a government or bank. Going back to the first transaction, all the information is public and stored across a decentralized network.
Since no single party controls the ledger, blockchains are verifiable by anyone and create a record of information that all can trust.
Here’s how blockchain works in regards to cryptocurrency:
- When you initiate a transaction, that information is distributed to a network of independent validators, called nodes.
- The network uses complex algorithms to reach a consensus about the validity of your transaction.
- Then, it’s grouped with other verified transactions. These groups are called blocks.
- Each new block is added to the end of the chain, establishing it as a permanent public record. No one can go back and alter any information once it has been added to the blockchain.
Why is cryptocurrency built on blockchain technology? Because it replaces trust in third parties, making every transaction more secure, more accurate, and more efficient.
Another advantage of blockchain is its flexibility. It isn’t just limited to financial transactions. Blockchain can be used to track anything from supply chains to voting records. Its adaptability is what makes it so attractive to different crypto projects.
There are so many other benefits of blockchain technology. It has an unlimited range of applications that are already disrupting global industries. We don’t have the room to go in-depth here, but if you’d like to take a deep dive into the world of blockchain, this is a great place to start.
How are cryptocurrencies valued?
Before answering this one, let’s ask a different question. Why does any currency have value?
In the past, currency was tied to the value of underlying assets, like gold or silver. Precious metals have intrinsic properties that give them value, such as scarcity and the costs of extraction. However, money today is no longer backed by these value-preserving assets. In 1971, the U.S. de-coupled the dollar from the gold in its reserves. The world has been using fiat currency ever since.
Without the backing of the gold standard, central banks can print an unlimited supply of banknotes.
So how do fiat currencies hold value? Essentially, because people have faith that their money possesses the value that their government claims it does. This is a precarious position, and global events can cause this perception to shift very quickly.
● Value of cryptocurrency: Cryptocurrency derives its value from both intrinsic and external factors. It has characteristics like scarcity that make it similar to gold and other valuable assets. But like fiat, it’s also influenced by trust and demand in the market.
Unlike fiat money, it isn’t directly tied to any country’s legal policies, inflation rate, or economic performance. While these factors do play a part in the performance of the crypto market overall, it is more affected by global, not national, trends.
Here are a few factors that influence the perceived value of cryptocurrencies.
● Utility, adoption, and exchange: Demand is a primary driver of value. Without users, cryptocurrency is practically worthless. Crypto is valuable because people believe it is, and data shows a booming demand for it. In 2021, the global crypto adoption rate jumped 880% over the previous year.
As more cryptocurrencies are developed to suit different use cases, the demand should only increase. Crypto is not only limited to finance and smart contracts. There are already tokens for cloud storage, music streaming, and in-game purchases. With each application, the more crypto’s value is tied to practical, real-world assets.
Another influential factor is the role that crypto exchanges have on demand and value. When a token is listed on a major exchange, it almost always experiences an increase in price and demand. This is because these exchanges enable a broader base of users to access new tokens, which drives up the value of the crypto market as a whole.
● Coin scarcity: Most cryptocurrencies have inbuilt mechanisms for regulating their token supply. For instance, there’s a reason why Bitcoin is often referred to as ‘digital gold.’ It has a supply cap of 21 million bitcoins, and over 90% of its tokens are already in circulation. To ensure a decreasing rate of token supply, the mining rate is halved every four years.
Ethereum, the second-largest cryptocurrency, has recently introduced measures for ‘burning’ tokens. This process could lead to ETH being a deflationary cryptocurrency. At the time of writing, over $1 billion in ETH has already been burned.
● Market competition: There are thousands of different cryptocurrencies. Each one is competing to gain traction in the market. Just like the stock market, robust competition is key to maintaining demand and value.
Many large cryptocurrency projects, such as Bitcoin, Ethereum, and Cardano, have growing ecosystems that rely on these base currencies for operation and support. Whether they’re needed as trading pairs or to secure the native blockchain, leading cryptocurrencies enable smaller projects to gain a foothold in the market.
● Regulatory clarity: While governments cannot manipulate the technology behind cryptocurrency, they can still regulate usage and infrastructure. China’s recent ban on bitcoin mining and the subsequent drop in global hash rates is a prime example of what can happen when a country takes an opposing stance to crypto.
On the other hand, an increasing number of countries are setting up regulatory frameworks around cryptocurrency. In June 2021, El Salvador became the first nation to officially adopt Bitcoin as legal tender. Other countries may soon follow suit, and with more regulatory approval, the demand for cryptocurrency will only increase.
Different types of cryptocurrencies
There are over 10,000 different cryptocurrencies on the public market, according to CoinMarketCap. All of these crypto projects and tokens represent enormous value. While the valuation can fluctuate, the market cap of the whole crypto industry at the time of writing exceeded $1.9 trillion. At various points in 2021, this number was over $2.4 trillion.
Why were so many cryptocurrencies created? Unfortunately, it’s difficult to give a one size fits all answer. Each coin or crypto platform has different features that make it unique.
Some facilitate smart contracts or are used as collateral for digital loans. Others are used in mobile games or for collecting digital art. Some tokens don’t have any utility at all and are simply ‘meme coins’ that ride the waves of popularity and hype.
What are the most popular cryptocurrencies?
Here are the five most popular cryptocurrencies at the time of writing:
Category: Blockchain network
Market Cap: $830,002,605,003
Category: Blockchain network
Market Cap: $365,115,630,287
Category: Blockchain network
Market Cap: $69,462,357,250
Market Cap: $68,307,287,027
Binance Coin (BNB)
Category: Exchange token
Market Cap: $62,917,616,851
Will cryptocurrency see global adoption?
El Salvador recently became the first country to adopt Bitcoin as legal tender. A recent report points to high adoption rates in other developing economies as well. Vietnam, India, and Pakistan top the list.
Could cryptocurrencies replace national currencies? It’s unlikely at the moment. Instead, many countries seem to be going the route of Central Bank Digital Currencies (CBDC). A CBDC is a tokenized digital version of a country’s national currency.
China has already experimented with the Digital Yuan, and other countries are in the process of developing similar digital currencies. Governments view CBDCs as having some of the technological benefits of cryptocurrency while still enabling them to retain control over its usage.
Critics of CBDCs will point out that they go against many of the fundamental principles of cryptocurrency, such as decentralization and anonymity.
Other regulatory actions threaten to stifle growth in the cryptocurrency sphere as well. It’s no secret that governments and the traditional finance sector are wary of cryptocurrency’s increasing popularity. It’s difficult to say where it will all lead. Many banks are taking a positive angle towards cryptocurrency use in an attempt to capture some value from the crypto market. Others are banning it altogether.
Despite the threat of intervention and regulation, the decentralized technology behind cryptocurrency all but ensures its survival. We’re still in the infancy stages of crypto development, but the future is bright.
Should you invest in cryptocurrencies?
Before you dive into the world of cryptocurrency, it’s essential to do your research. Choose projects that you understand and believe in, not just those with the most vocal support.
Always remember this crucial rule: never invest more money than you can afford to lose. The crypto market can be very volatile and unforgiving to those who enter without doing their research first.
Reasons to buy crypto
● You support the idea of a decentralized financial system where you have complete control over your money.
● Many cryptocurrencies are deflationary assets, increasing in value over time and offering a hedge against fiat inflation.
● Cryptocurrencies can generate very high returns on investment, depending on your investment strategy.
● It’s a transparent, secure system that protects your identity and private data.
● It offers a flexible, mobile way to conduct payments, transfer money, and invest – no matter where you are in the world, 24/7.
● You want to use a platform’s native token to perform actions like acquiring a loan, generate interest, or participate in liquidity pools.
● You want to use a decentralized app or develop one of your own.
● Demand is only increasing, and it might be a good idea to enter the market early.
|● It could be a good way to diversify your existing investment portfolio.
Reasons not to buy crypto
● The crypto market can be very volatile, and there’s a chance you could lose money.
● It requires some technical knowledge. If you don’t do your research and follow the correct protocols, you could lose your tokens or fall prey to scammers.
● Your country may have specific laws against some or all types of cryptocurrency. Always research your local laws before buying crypto.
● Regulations are changing all the time and can impact the crypto market negatively.
● Since it’s decentralized, no governing body can help you if you lose your investment through a mistake or a scam.
Beginner’s Guide to Cryptocurrency: Start Buying & Trading
To buy crypto on the NDAX exchange, follow these simple steps:
- Log in or sign up for an NDAX account
- Fund your account with CAD
- Buy BTC (or crypto of your choice)
- Click trade on the left-hand side of the screen. On the trade page, click buy (green button) on the right side of the screen
- Click the small grey arrow in the upper left corner of the screen to select the BTC/CAD pair
- Click on market
- Enter order size (the amount you want to buy) either in BTC or CADClick place buy order