What is a Cryptocurrency?

What is a Cryptocurrency?
Photo by Kanchanara / Unsplash

A cryptocurrency is a type of virtual currency that uses cryptography for ownership, security and consensus. A lot of people have been talking about cryptocurrencies because they are so popular and they have generated a huge amount of wealth in a short period of time and given rise to a new type of internet with tokenized ownership capability. This is known as Web 3.0.

As of this post, cryptocurrencies have a $1.293 USD market cap. This is due to the recent slump in all markets as the overall market cap has been over 2 trillion in the past.

But not all virtual currencies use cryptography, which means not all virtual currencies are cryptocurrencies. In this blog post, we will be discussing what a cryptocurrency is, how they're built on top of blockchains and how you can start investing in them!

Virtual currency vs Cryptocurrency

All cryptocurrencies are virtual money but not the other way around. For instance, an Amazon gift card is a form of a digital currency because it has a one-to-one value associated with the currency of the country it was purchased in (meaning a $100 gift card is worth $100) but it’s not backed by cryptography of any kind; therefore it’s not a cryptocurrency.

Bitcoin, Ethereum and the 19,420 other cryptocurrencies listed on CoinMarketCap are backed by cryptographic blockchain tech and therefore ARE considered cryptocurrencies.

What is Bitcoin?

Bitcoin is the first and most well-known cryptocurrency, usually maintaining a mid 40s percentage in market cap of all cryptocurrencies. It was created in 2009 by an anonymous person or group of people using the alias Satoshi Nakamoto. Bitcoin is a decentralized currency, meaning it isn’t regulated by any government or financial institution, only by the underlying code that runs the Bitcoin network.

Ether is another popular cryptocurrency that was launched in 2015. Ether, commonly known as Ethereum is different from Bitcoin because it has programmable smart contracts. Smart contracts are programs that run on the Ethereum global computer, known as the Ethereum Virtual Machine (EVM).

This means that developers, engineers and smart product folks can build applications on top of the Ethereum blockchain. These include games like Axie Infinity and Otherside as well as Metaverse ecosystems such as Decentraland and Sandbox.

Technically speaking, every public blockchain that runs reliably (cough** Solana) is a Turing Complete world computer or a global computer handling transactions in real time.

How this happens and what Turing Completeness means, is a large topic that warrants several posts, so we'll cover that separately.

What is a Blockchain?

A blockchain is a distributed ledger that contains a list of all cryptocurrency transactions up until a given point in time (usually the present moment) such that modifying one block involves modifying the entire chain due to how the underlying cryptography works. This ensures that the actual blockchain is immutable. It can't be changed after the fact and therefore makes it a reliable and trusted way to transact upon.

Cryptocurrencies are built on top of blockchains. A chain of blocks is distributed because it is spread across many computers around the world. Bitcoin and Ether both have their own blockchains.

Blockchains can both be public and private. So be aware of which ones you invest in and the underlying company/legal entity behind them. There are plenty of scammy blockchains out there created by unknown/malicious entities.

How to Invest in Cryptocurrencies

If you’re interested in investing in cryptocurrencies, there are a few things you should know.

First, you need to find a reputable exchange to buy and sell cryptocurrencies on as you need to convert fiat money (rupees, dollars etc.) into crypto. Some popular exchanges include Coinbase, Voyager, Robinhood and BlockFi. These are what we call centralized exchanges. There's also decentralized exchanges. We'll cover the difference between centralized and decentralized exchanges separately as well.

Second, you need to make sure you have a secure wallet to store your cryptocurrencies in. Popular software wallets include MetaMask, Coinbase Wallet and Phantom. Popular hardware wallets include products from Ledger or Trezor.

What's the difference between hardware and software wallets?

That concept has to do with "custody" of private keys, which are essentially the keys that "lock" your funds on the blockchain under a specific wallet account address. We'll explore that in a separate post as wallet custody is a large topic of it's own!

Third, you need to diversify your portfolio by investing in different types of cryptocurrencies. Don’t put all your eggs in one basket! And lastly, don’t forget to do your own research before investing in any cryptocurrency. This includes reading the underlying academic papers (usually known as white papers), and vetting team and developer backgrounds.

Digital assets such as cryptocurrencies and NFTs can be volatile and should be invested in carefully. Only you know your risk tolerance, so beware! Never invest money you absolutely need to pay bills and day to day expenses.

Cryptocurrencies are a new and exciting asset class with a lot of potential. We hope this blog post has helped you understand what cryptocurrencies are and how you can start investing in them!

We'll dive into deeper topics such as consensus, security, interoperatability, wallets and the concept of wallet custody etc. in separate posts.

Stay tuned and thanks for reading!

farezv.com is for informational and educational purposes. It's not investment or financial advice. Please do your own research before investing in any companies, securities or digital assets discussed here.