- Cryptocurrencies are decentralized digital money.
- Cryptocurrencies are created by blockchain.
- They make money transfers cheaper and faster.
- Their value is driven by supply, demand, utility and speculation.
Everyone likes to discover new worlds. It’s exciting! Especially if these worlds promise nice profits and investment returns.
But if you are new to crypto, it’s useful to get equipped with the cryptocurrency basics at first. The fundamentals of what is crypto will help you to understand cryptocurrencies better and deal with them confidently.
What Is Crypto?
In general, cryptocurrency is digital and decentralized money.
Digital, because it has no physical shape and only exists over the internet. Decentralized, because it is not issued by any governmental authority, thus free from national monetary policies and immune to inflation, deflation or bank collapses.
Cryptocurrencies are the first alternative to our traditional money, which is called fiat currency. Despite their different form, cryptocurrencies can also be used to pay for purchases or as an investment.
What Is The Point Of Cryptocurrency?
Freedom from banks and governments is the main reason why the first cryptocurrency, Bitcoin, was created in 2009.
Central institutions have power over official currencies. Banks and governments can affect the supply and prices of coins, they can also seize bank accounts and confiscate money.
Decentralized currencies enable direct cross-border transactions, remove intermediaries and thus make wealth transfer cheaper and faster.
How Do Cryptocurrencies Work?
Cryptocurrencies are created by the blockchain, a revolutionary technology changing the ways we transact with one another.
Blockchain works as an open, public and immutable database – a digital ledger. The data here is distributed across the decentralized peer-to-peer (P2P) network, which makes it unbiased and trustworthy.
Data are valid only if they are verified by the network. This is where cryptocurrencies come into play. Primarily, they are generated as a reward for those who verify transactions on the blockchain (miners). Miners use powerful computers to verify transactions, these computers use enormous amounts of energy, which certainly costs. Cryptocurrencies act as a motivation and compensation for them.
Why Do They Have Value?
By their nature cryptocurrencies have no underlying value. Their prices are driven by three key factors that determine value: supply, demand and utility.
This stands for the amount of coins that will be issued. Coins with a finite supply are scarce assets, whose amount is limited. This means their value tends to rise over time. On the contrary, cryptocurrencies with an infinite supply are meant to decrease in value with every inflow of newly issued coins.
Like anywhere else, demand for the product raises its value. The more people are in need and want of a certain cryptocurrency, the more they are able to pay, the more value a certain digital asset can gain.
To have value, cryptocurrency has to be somehow useful and usable. What real-life problems do they solve? What is their function? What creates their intrinsic value? Can coins be used for voting rights or dividend payments?
There might be successful coins (like DogeCoin or Shiba Inu), that have no utility but their value is built upon speculation. Usually, this is not sustainable in the long term.
Tokens vs Coins: are they different or the same?
There are thousands of cryptocurrencies today; actually, over 5,800 according to CoinMarketCap and the numbers keep growing. Each serves different purposes and can be classified by different methods. However, on a basic level it is important to understand the difference between coins and tokens.
Coins are virtual currencies based on a native blockchain, just like Bitcoin or Ether. They operate independently and can be used to pay for purchases, as an investment or for staking to generate dividends. You may use coins to buy tokens, but not the other way around.
Tokens, meanwhile, are built on the existing blockchain like all the custom DeFi tokens built on the Ethereum network. This is one of their key differences from coins. Beyond that, tokens can be used for more purposes than coins; they can represent a company’s share, give rights to the governance of the network or even act as a tip for a nice comment.
What Can You Do With Cryptocurrency?
Most people use cryptocurrency as a form of investment. However, there are many other real-life use cases of what you can do with digital currencies. Here are some of them:
Make low-cost international transfers
Cryptocurrencies are one of the cheapest ways to send money internationally. Direct (P2P) crypto transactions eliminate third parties like banks or other transfer service providers that charge high fees. Crypto transactions are much faster without intermediaries as well.
Cryptocurrencies are volatile assets. Their prices are highly driven by market sentiments and fluctuate more compared to stocks, bonds, or commodities. This allows opportunities to generate bigger gains by trading.
Store funds free from financial censorship
Cryptocurrencies give freedom from financial repression, be it governmental or household. They rely on a decentralized blockchain and only the private key holder has access to their cryptocurrency wallets.
Stake for rewards
Besides simply holding their digital currency, crypto holders may now employ them. This method, called staking or yield farming, allows you to earn interest for locking your coins for an agreed period of time.
Why Are Cryptos So Trendy?
For the last few years, cryptocurrency mass adoption is growing worldwide; Wall Street accepted cryptos as a legitimate asset class; Bitcoin became a hedge against the inflation of the fiat currencies in the time of the pandemic.
Here are the various arguments why cryptos became a popular form of investment:
- Cryptocurrencies have high growth potential.
- They are easy to get.
- They are good investment portfolio diversifiers.
- They are related to the technology of the future.
- They are decentralized, thus free from governmental control.
How Can You Buy Cryptocurrency?
The easiest way to buy digital currencies is via a cryptocurrency exchange.
There are multiple crypto exchanges, from centralized ones like Coinbase or Binance, to decentralized exchanges like Uniswap, Curve or SushiSwap. Most of them allow buying cryptos with traditional money, while others only support trading amongst cryptocurrency pairs. You may read our detailed instructions on how to choose an exchange and buy your first cryptocurrency here.
Since there are thousands of cryptocurrencies on the market, it may be a challenge to find the right one. This is why it is always helpful to start your crypto investments by reading cryptocurrency white papers.
On The Flipside
- Cryptocurrencies are risky investments. They are highly volatile, prices may fluctuate in double digits within a day as cryptos are still highly dependent on market sentiments and speculation.
- Crypto space is still widely unregulated, although the landscape is changing. The lack of regulatory oversight means the lack of legal protection, thus the less safe market.