What Are Cryptocurrencies?

Key Points: 

• Cryptocurrency is a digital asset class secured by cryptography.
• Cryptocurrencies are built on blockchains– distributed, decentralized, and accessible public ledgers.
• Bitcoin was the first cryptocurrency (and is still the dominant crypto to this day), introduced in 2008 by Satoshi Nakamoto.
• Cryptocurrency is used both as a form of payment and a store of value.

Defining Crypto

We've defined cryptocurrency as a digital asset or currency, secured by cryptography and used as a medium of exchange in a peer-to-peer network. This essentially means that it is a cryptographically secure digital token, which people often use to transfer value. Let’s break this down. 

While the concept of digital money itself is not new, the ability to conduct online transactions without going through a third party is relatively recent. This was made possible by cryptocurrency. Bitcoin, the first cryptocurrency, was created precisely to address this limitation. As stated by pseudonymous creator Satoshi Nakamoto in the 2008 Bitcoin whitepaper: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Cryptocurrency transactions don't get approval from an intermediary 3rd-party, but rather from a distributed network of users, using cryptographic functions. This is possible because of the underlying technology supporting cryptocurrencies: blockchain. Transactions sent over a blockchain are verified and organized into blocks that are then linked together, forming the blockchain ledger.

How Cryptocurrencies Work

To understand cryptocurrencies and how they work, let’s do a quick recap of blockchain basics!  

Blockchain

Cryptocurrencies are powered by blockchain technology, which originated in the 90s as a means of securing digital files. Each transaction with a crypto asset includes a timestamp and gets permanently inscribed on a block, which has a specified storage capacity. Once a block fills up, its contents are verified by the entire network and secured by cryptography, before being added to the chain. It's that simple.

A key feature of blockchain is that it is decentralized, meaning that it is not maintained by a central authority. Instead, a distributed network of users across the globe manages the blockchain. As a result, there is no single point of failure because the majority of nodes need to verify the blocks. The network achieves this through the use of consensus algorithms, which allow it to unanimously decide on the validity of new transactions. 

The larger crypto protocols, like Bitcoin, are virtually impossible to hack due to the sheer amount of computing power required to control the majority. Other blockchains, however, have fallen victim to security exploits, such as Ethereum Classic (ETC) and Verge (XVG).

What Are Cryptos Usually Used For?

If you tune into mainstream media, chances are that you have heard about cryptocurrency. This is not a coincidence, and maybe not for all the reasons you would suspect. 

The highly profitable price action on Bitcoin, Ethereum, Dogecoin, and thousands of other coins has drawn the attention of media outlets. Yet before the 2020-2021 bullrun (or even the 2017-2018 bullrun), organic industrial adoption of blockchain and cryptocurrency technology made headlines of their own in the down markets.

Retail merchants increasingly accept cryptocurrency as payment for goods and services across the world.  Local economies have piloted incentivized payments programs with cryptocurrency. Applications with supply chain have emerged as viable solutions as well.

You can't deny that the main use for crypto assets today is as an investment tool. Some people make long-term investments in Bitcoin. Others invest for short-term gains on any number of different altcoins. Timing your entry into a position is almost as crucial as knowing when to exit, since this asset class tends to display volatile swings in price. This is also why accurate, fast, and reliable crypto price search is so important.

How to Invest In Cryptocurrencies

Cryptocurrencies are unique as an asset class because they offer peer-to-peer, decentralized, and private transactions. There are different ways of investing in the crypto market - some riskier than others - so make sure you DYOR before you start!

HODL

HODL was originally a misspelling of ‘hold,’ and refers to just that: buying your asset and holding onto it. This strategy is well-suited to committed investors with a sure belief in a project and its potential ROI. It requires discipline and the ability to stomach the inevitable bear markets and slumps. The longer you HODL, and the more the value of the asset goes up, the more it acts as a hedge against market volatility from FOMO or FUD.

Trading

Trading is exactly what it sounds like: trading one currency for another with the expectation of turning a profit. Highly active traders must have tremendous focus and ice water in their veins. Even the subtlest shifts in price on the coins they watch can cause major fluctuations in their portfolio or strategy execution.

Cryptocurrency day traders tend to resemble stock day traders in several ways: they spend most of their time analyzing the market on behemoth computer set-ups, and they accept the high risk of their activities. This precarious situation in which they put themselves has real potential to bear fortuitous profits. Some of the best traders with a public persona can be found on Twitter, and various online communities, sharing trade tips. They also use TA to predict future market behavior. 

Trading is not for the faint of heart. Anyone looking to become a trader of even moderate activity should train their emotions as much as their technical capabilities. Volatile price action can have severe adverse effects on one’s mental state; the inability to properly execute a trade at the right time due to technical unfamiliarity will also cause undue stress.

Staking 

With the emergence of DeFi platforms, cryptocurrency staking has become a popular and profitable way to use and earn cryptocurrency. In short, an investor stakes cryptos on a platform in order to earn interest. In DeFi, APY can range well into the thousands of percent for a time.

The dangers of staking include rug pulls, and the rapid depreciation of the price of coins earned as rewards. Staking on DeFi falls into the traders’ realm and is not recommended for those who cannot act quickly on the fast shifts in circumstances of staking pools.

On the other hand, many CEX such as Coinbase, Binance, and FTX, offer safe staking options, albeit at much lower APY than on DeFi platforms. Yet compared to tradfi interest at a local bank, the APY at a CEX is excellent.

Takeaways

Cryptocurrency is one of the most interesting fields to be involved in right now. Aside from the obvious monetary profits you can make from trading crypto assets, a wide array of industrial applications is also currently being developed. 

Furthermore, the world of finance is poised to make a major sea change as cryptocurrency disrupts the existing order. Merchants across the world welcome digital money, sometimes preferring cryptos over cash, and huge public companies keep Bitcoin and others in their vaults.

Definitely look to see cryptocurrency become a common dinnertime conversation topic, and a regular holding in your investment portfolio!