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What is a cryptocurrency and how do you make sense of it?

Tendai ParksBy Tendai ParksJune 22, 202314 Mins Read
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What is cryptocurrency?
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What is cryptocurrency?

Cryptocurrency is a digital currency that is not controlled by central banks, the government, or other financial institutions.

The cryptocurrency idea was born from a desire to be free from the banking and monetary systems that have been ravaging economies for centuries and create simple, secure payments.

Some proponents love the thought that cryptocurrency restrains central banks from controlling the money supply because central banks tend to devalue money over time through inflation.

Decentralized finance system

DeFi is a decentralized financial system that is used as a measure to explore the future of what banking and fiat currencies could look like. A major component of the DeFi system is cryptocurrency.

DeFi is a term used to refer to financial applications powered by decentralized technologies. These are technologies that are not controlled by any entity, but rather run on top of the blockchain technology, leveraging them for their power instead of being subject to weaknesses.

DeFi is made up of a variety of financial products, services, and organizations that have been created by the blockchain community.

Terminology

The blockchain is the decentralized public ledger that records transactions in code.

Blockchain technology can be used in many different ways outside of cryptocurrency including in finance, law, healthcare, insurance, real estate, online voting, supply chain management systems to track goods as they are transported from one point to another, recording votes for elections or other types of votes, and to record any type of digital event.

Miners are the people who use their computers to verify transactions on the blockchain which they are rewarded for doing so with newly created cryptocurrencies or tokens.

Full nodes are essentially “clients” that store a full copy of the blockchain and currently, there is an ongoing debate in the cryptocurrency community about how many full nodes are needed to make a cryptocurrency decentralized.

The transactions that you make with cryptocurrency funds are recorded in a public ledger.

A digital wallet is where you keep your cryptocurrency.

The name cryptocurrency comes from the fact that it uses encryption to verify transactions.

This means that storing and sending cryptocurrency data between wallets and to public ledgers requires complex coding.

Bitcoin

What is bitcoin?
What is bitcoin?

Bitcoin is the most well-known digital asset and first cryptocurrency. It is decentralized, running on a distributed network of nodes (also known as the Bitcoin network) with no one in charge. The code was released in 2009 and is steadily increasing in popularity, slowly replacing conventional currency.

Satoshi Nakamoto is the name of the person who created Bitcoin. Satoshi is also a Japanese word that means “clear mind” or “wise person”.

Satoshi Nakamoto has never been found or identified, but people have speculated that he is either a group of people or just one man.

This speculation stemmed from the fact that he/they stopped contributing to Bitcoin development in December 2010 and disappeared completely by April 2011 causing many to believe that they were too busy to continue working on Bitcoin, which was making it difficult for them to maintain anonymity.

Cryptocurrencies can seem complicated but in general, there are three things you need to know:

  • How do these currencies get created?
  • How does it stay safe?
  • What can I do with them?

Let’s take a closer look at each of these questions so you can better understand this new form of money.

How cryptocurrency works

How does cryptocurrency get created?

The creation of new cryptocurrencies is controlled through cryptography (encryption techniques), which generates the units and allows them to be transferred securely between people.

Cryptocurrency transactions are stored in a blockchain ledger that keeps track of all units and allows anyone with access to see every transaction that has taken place.

To transmit coin ownership on a secure and distributed ledger technology, cryptocurrency uses a technology called public-private key cryptography.

Unlike fiat currency, which is minted or printed by a national bank, cryptocurrency assets (digital money) are not controlled by any government entity.

And unlike banks that use fiat money – currencies guaranteed by the legal tender of a country, cryptocurrency is created through solving complex mathematical problems.

What is a cryptocurrency mining

Cryptocurrency mining is the process where cryptocurrency transaction is verified and stored in a blockchain.

Mining is important because it keeps the system decentralized and authentic. When someone wants to send cryptocurrency to another person, their transaction is broadcast to other miners on the network.

The miners then add the transaction to the block they’re working on and then solve a math problem based on this block of transactions; we’ll call this a “block.” The miner who solves this puzzle first gets credit for solving the problem and receives cryptocurrency as a reward.

While it is theoretically conceivable for the common person to mine cryptocurrency, with proof-of-work systems like Bitcoin, it is becoming increasingly difficult.

How does cryptocurrency stay safe?

Cryptocurrencies are kept safe through cryptography.

Cryptography is the process of converting legible information into an almost uncrackable code, using complex mathematical equations. Cryptocurrencies use cryptographic signatures to ensure that only the owner of a particular cryptocurrency can spend it.

Digital signatures provide proof that transactions come from legitimate owners of cryptocurrency and blockchain technology helps keep everyone on the network up to date with transactions.

Is cryptocurrency completely anonymous?

Depending on the cryptocurrency, details like the transaction value and the sender’s and recipient’s wallet addresses may be uploaded to the blockchain.

A wallet address is a long string of numbers and letters that is associated with your electronic wallet. Even if you register your digital wallet under a false name, transaction and wallet information might be used to identify the user.

Because forensic analysis of the Bitcoin blockchain has assisted authorities in arresting and prosecuting criminals already, Bitcoin is a relatively poor choice for doing illegal business online.

What can I do with digital currency?

Cryptocurrency is used for various reasons, such as paying, trading, storing, etc.
Cryptocurrency is used for various reasons, such as paying, trading, storing, etc.

People use cryptocurrency for a variety of reasons, including fast payments, avoiding transaction fees charged by traditional institutions, and anonymity.

Pay for stuff

Cryptocurrencies can either be used as a form of payment or traded for other cryptocurrencies and traditional currency like dollars and euros on the cryptocurrency exchanges.

More and more merchants are also accepting cryptocurrency payments for products and services, including Overstock.com, Expedia, and Dish Network (especially payments in Bitcoin – the first cryptocurrency).

In fact, demand is growing so rapidly that some experts are predicting a “flippening” – where another cryptocurrency could replace Bitcoin as the number one cryptocurrency by market capitalization.

Trade

You can also buy and sell cryptocurrencies with traditional currency on cryptocurrency exchanges. A good example of this is Coinbase, a U.S.-based exchange, which offers a secure and easy way to buy cryptocurrencies.

Coinbase allows users from the USA, Canada, UK, Europe, Singapore, and Australia to purchase crypto via a credit card or debit card in all supported countries. The fees for buying with a credit or debit card are fairly low.

One of the biggest alternative cryptocurrency exchanges is Cex.io – and it works almost everywhere in the world.

Store

You can buy or mine digital assets, and then store cryptocurrency until the coin appreciates in value so you can sell it.

A digital wallet is the most secure way to store your cryptocurrencies and can be either hardware or software.

Hardware wallets provide physical security and portability, but trade that for some data security.

A digital wallet (also known as a software wallet) can be stored on a computer by using peer-to-peer programs like Jaxx, but they’re less secure than hardware wallets.

Invest

Investing in cryptocurrencies can be very lucrative if you know what you’re doing, but it could also lead to financial ruin if you don’t take the time to understand how trading works before jumping in headfirst. Luckily there are plenty of resources out there for beginner traders and crypto enthusiasts alike.

Initial coin offerings

Initial coin offerings are a way for more cryptocurrency startups to raise money for their projects.

ICOs are somewhat similar to initial public offerings of stocks, but with some notable differences.

ICOs are designed for the same purpose as IPOs, but ICOs generally don’t have regulatory oversight or investor protections.

And unlike stocks that can be bought through a broker, ICOs use cryptocurrencies that can be purchased through digital wallets like Coinbase on the crypto market or bought directly from an investment platform’s website.

The most popular types of ICOs offer digital tokens in exchange for cryptocurrencies like bitcoin and ether.

Ether is the internal digital asset of the Ethereum blockchain – one of the largest and most influential blockchain networks in the world today.

ICO creators usually sell-off tokens to the public in order to raise money.

Why use cryptocurrency over other forms of currency?

Cryptocurrency vs. fiat currency
Cryptocurrency vs. fiat currency.

Here are just a few reasons why using digital assets instead of fiat currency is better as a form of payment.

Crypto offers the benefits of:

Security

Crypto transactions are secure and the sender doesn’t need to know the recipient’s information. The overall system is peer-to-peer, meaning no government or institution controls anything. The sender doesn’t need to know the recipient’s information as these are anonymous transactions.

Crypto can’t be lost, stolen, or intercepted when transactions are sent because it uses blockchain technology, which is a digital ledger where all transactions are recorded. This creates an immutable record so if any changes are made they would immediately be visible.

Miners verify transactions by solving complex mathematical problems using computing power.

These are the same type of computers used in bitcoin mining. Miners are required so transactions are not done fraudulently, which would essentially defraud everyone holding cryptocurrency. This is one of the many ways defi has changed monetary systems for good.

Speed

Transactions made through crypto are automatically verified (less than 10 minutes), confirmed by many computers all at once, such that they’re irreversible to fraudsters. Furthermore, processing times for banks take 5-7 days but crypto usually takes 10 minutes max for weekly transfers and 1 hour for monthly ones to clear.

Lower fees

Bank wire transfers charge high fees and each bank has its own clauses making it difficult to send amounts over $10,000. In contrast, transactions on crypto platforms don’t have a limit on the number of funds sent and their cost is very low or even free.

Where can I get started?

There are many places to download cryptocurrency wallets, buy cryptocurrency or even purchase items with it. We’ve come up with a list of four top wallets (crypto exchanges) that will help you better understand how they work and which one is best for you.

Coinbase Wallet

Coinbase is the most popular U.S.-based wallet and cryptocurrency exchange. It allows you to both buy and sell cryptocurrency.

The company supports Bitcoin, Litecoin, Ethereum, Bitcoin Cash, and many other coins so you can buy crypto assets with conventional currency, such as U.S. dollars or euros, or trade them for other cryptocurrencies if you’re feeling adventurous!

Coinbase offers several security features, including multi-sig technology for its wallets, offline storage options, and insurance protection for cryptocurrency stored on its servers.

One of the key benefits of using Coinbase is that you can instantly buy or sell your holdings – whenever you want.

Mycelium Wallet

Mycelium offers several features not available in other mobile wallets, such as the ability to connect directly to another Mycelium user and trade Bitcoin for Bitcoin Cash with no fee.

Mycelium users can also take advantage of Local Trader – a feature that allows you to find others in your city who want to sell or buy Bitcoin and chat directly with them through the wallet.

This is great for finding sellers in your area to pick up crypto assets with cash.

Exodus Wallet

Exodus is another popular desktop wallet that supports multiple cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and more than 30 other coins – all in one secure location.

The interface is very easy to use – it’s similar to a conventional online banking account, which makes it appealing for users who are new to the world of cryptocurrency.

Exodus also offers in-wallet trading via Shapeshift – a tool that allows you to quickly convert your coins without leaving the wallet or creating an exchange account.

MyEtherWallet

MyEtherWallet is a free, open-source wallet that supports ether and Ethereum-based tokens.

The company has some big backers – including industry giant Fenbushi Capital.

It does not offer any other coins, so if you want to buy altcoins, you’ll need to look elsewhere.

MyEtherWallet is an open-source project that’s not run by a company – but the code is available for public audits via Github.

The wallet client itself supports not only Ether but also Bitcoin, Litecoin, Dash, and many other ERC20 tokens.

Can cryptocurrency be converted to cash at cryptocurrency exchanges?

One of the most common questions about cryptocurrencies is whether or not they can be converted to cash, and if so, how?

The good news is that cryptocurrency can indeed be exchanged for cash. However, there are two caveats associated with this option.

First, only a handful of platforms will allow you to sell your cryptocurrency directly at market price. Second, the exchange rate is heavily influenced by price fluctuations and can fluctuate quite a bit depending on timing. It’s not unheard of to see a BIG difference in sell and buy prices for Bitcoin (BTC).

One way around this dilemma is to use a cryptocurrency trading platform like eToro, which will allow you to sell your crypto holdings at market price. After selling your cryptocurrencies, you can then withdraw the funds to a bank account or PayPal.

How many types of cryptocurrency are there?

Currently, there are over 1,500 different cryptocurrencies and digital tokens on the cryptocurrency market trading on various platforms around the world.

Prices for cryptocurrencies vary depending on demand and supply. The two highest valued cryptocurrencies are Bitcoin and Ethereum.

Others that are not close but still valuable are:

  • Dash (DASH)
  • Ripple (XRP)
  • Litecoin (LTC)
  • Solana (SOL)
  • Cardano (ADA)
  • Polkadot (DOT)
  • … and others.

Potential cryptocurrency issues

Is cryptocurrency bad for the environment?

Cryptocurrency is the future of finance and it isn’t going anywhere anytime soon. If many people are switching to this new way of doing things, then there needs to be an understanding of how it works and what harm it may cause long-term.

One potential problem with cryptocurrency comes from the environmental cost of using so much electricity (carbon footprint) for mining. The more people who mine cryptocurrency, the more energy is used and it may eventually be too much for the Earth to handle.

Illegal activity

Another potential concern is that cryptocurrencies are not always completely transparent. This means they can be used for illegal purposes like money laundering and drug dealing more easily than with other forms of payment. This is a valid point of concern, but almost all large-scale illegal activity is currently done with fiat currencies.

Slow transactions processing for bigger coins

Also, some cryptocurrencies like Bitcoin Cash (BCH) claim to be fast but are actually just as slow as using a credit card with processing delays up to an hour.

Bitcoin, which is one of the major cryptocurrencies, has almost no cryptocurrency transactions per second (transaction capacity) and takes about an hour for a transaction to go through. Bitcoin cash transactions are faster but still limited at eight per second.

This is a lot slower than many of the most popular credit cards that have about 10,000 transactions per second with zero delays for processing.

Scam activity

Unfortunately, since cryptocurrency is still in its infancy, scam activity is very high. Scammers love new markets because they are easy targets and are more likely to believe the fake promises of quick riches if they don’t know about all the past scams.

For example, there have been several ICOs that people invested in but never saw their money again.

Many people have lost lots of money in the past few years by getting into cryptocurrency without doing sufficient research or due diligence about what they are investing in.

It is important to understand that while cryptocurrency can be very exciting, there are potential dangers involved with using this new form of the currency system. Research, due diligence, and asking questions are the best ways to protect yourself from scam artists.

The future of cryptocurrencies

…is hard to predict. Some experts believe that it may overtake fiat currency in the next few decades, while others think that it is a bubble waiting to burst. The only thing that we know for sure is that most cryptocurrencies are here to stay and will continue to evolve as time goes on.

People also viewed:

You've heard the buzz, but you're not sure if cryptocurrencies are right for you. Learn how to buy cryptocurrency in this guide, and discover the benefits of buying currency in digital crypto.Everything you need to know on how to buy cryptocurrency Bitcoin prices have been volatile in recent years. This volatility makes it difficult to predict the future value of bitcoin, but Bitcoin price history shows that they can go up and down over time.Bitcoin price history explained: How high can Bitcoin go? Learn what Ethereum is, how to buy it and how you can benefit from investing in this cryptocurrency.What is Ethereum? Everything you need to know about this cryptocurrency Bitcoin is a digital asset and a payment system invented by Satoshi Nakamoto. Transactions are verified by network nodes through cryptography and recorded in a public dispersed ledger.What is Bitcoin and how does it work? In this blog post, we take a look at the five most popular ASIC miners on the market today.The five most popular ASIC miners for cryptocurrency
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Tendai Parks

Tendai is a Nexym Finance writer. Having a knack for finance, he started investing at 21 growing his own wealth and that of his family's. After getting an MBA from the Wharton School of Business, he went on to work in high profile hedge funds in New York. He now runs his own financial management company from sunny Florida.

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