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The Basics Of Cryptocurrency: The Virtual Currency

Illustration of popular crypto coins

Invented in 2008 and implemented in 2009, cryptocurrency quickly took the financial world by storm changing how people invest and spend their money. Bitcoin, what investors consider to be the original cryptocurrency, is one of the most known cryptos that functions on its own blockchain, verifies transactions, offers a fixed cap of Bitcoins created, and as of 2022 was the crypto with the largest market cap at $896 billion. Usually when you ask anyone about cryptocurrency, their knowledge starts with Bitcoin.

Expanding from Bitcoin, we have been introduced to other popular types of cryptocurrencies that operate in different ways and offer their own benefits. As of 2022, the most common cryptos are:

  • Ether (ETH) – an uncapped, meaning that theoretically an infinite number of coins can be created, cryptocurrency that runs on its own Ethereum blockchain.
  • Binance Coin (BNB) – BNB is native to Binance, the world’s largest cryptocurrency exchange, this crypto offers reduced transaction fees to people who pay in BNB. Binance Coin also offers a capped coin rate and burns a fixed percentage of coins in circulation.
  • Tether (USDT) – a type of stablecoin that is backed by an equivalent dollar amount that is designed to have a less-volatile price by being linked to an external asset.
  • Solana (SOL) – one of the fastest cryptocurrency and native coin of the Solana platform, SOL runs on its own blockchain system and can complete around 50,000 transactions per second.
  • XRP (XRP) – this cryptocurrency is often referred to as the “cryptocurrency for banks” because it runs on the Ripple network and is made specifically to serve the needs of the financial service industries to facilitate international payments and faster global transfers.
  • Cardano (ADA) – ADA is the native coin to the Cardano blockchain this crypto was dubbed a “third-generation” cryptocurrency because it splits the blockchain into two separate layers to aid in increasing transaction speeds.
  • USD Coin (USDC) – another stablecoin that is backed by the equivalent dollar. USD can be compared to Tether in many ways, but the main difference is USD coin is known for having more transparent funding and betting auditing processes.
  • Avalanche (AVAX) – AVAX, the native coin of Avalanche, is used to pay transaction fees on the Avalanche platform and always allows developers to create new custom blockchains referred to as “subnets” on the platform.

So, what exactly is cryptocurrency and how does it work?

Cryptocurrency is an alternative form of payment that is a digital or virtual currency that is impossible to counterfeit or double-spend due to being secured by cryptography.

These digital assets are created using encryption algorithms meaning that these assets function not only as a currency but as a virtual accounting system. To access these digital assets, you will need a cryptocurrency wallet, a tool to store your encryption keys that are used to confirm your identity and link you to your cryptocurrency. This wallet is a cloud-based software that is stored on either your computer or mobile device.

Collection of gold bitcoins with stock market display in background

All cryptocurrencies are based on blockchain technology, which is a distributed database that is shared among the nodes of a computer network that also stores information in a digital format and maintains security. Since most cryptos utilize blockchain technology, there are two different defining categories of cryptocurrency which are coins and tokens.

Coins is any cryptocurrency that uses an independent blockchain. Examples of cryptos that use coins are Bitcoin, Ether, and Solana.

  • Stablecoins are a cryptocurrency that has value that is tied to another currency, commodity or financial instrument helping combat high volatility.

Tokens are also digital assets, but they are non-native which means that they can be used on a different blockchain infrastructure. Examples of cryptos that utilize tokens are Tether and USD Coin.

Another defining characteristic of cryptocurrencies is that they are typically not issued by any central authority or government. They also do not need any banks or third-parties to regulate them. This can lead to both advantages and disadvantages. The advantages are that cryptos usually offer cheaper, faster money transfers, are immune to government interference, and with their decentralized systems they will not collapse at a single point of failure. Disadvantages can lead to issues such as price volatility, high energy consumption for mining activities and use in criminal activities.

Taking Risks For Reward

With investments, there is always risk, but some investment experts say that there is a much higher rate of risk with cryptocurrency. For starters, compared to a lot of internet exchanges, there is a risk of fraud and scams. With cryptocurrency crime on the rise, examples of these include fake websites, hacking, fake apps, cloud mining scams, virtual Ponzi schemes, “celebrity endorsements,” online dating scams, or fraudulent sellers. To put the impact of these scams in perspective:

  • A scam operation labeled “BitClub Network” used a virtual Ponzi scheme and raised more than $700 million before its perpetrators were caught
  • The FBI’s Internet Crime Complaint Center received more than 1,800 reports of cryptocurrency romance scams with losses totaling $133 million
  • The 2022 Crypto Crime Report also reported that 2021 was a record breaking year for cryptocurrency crime with scammers stealing $14 billion in digital assets
  • Hackers were able to steal $534 million from Coincheck and $195 million BitGrail, the two of the biggest cryptocurrency hacks of 2018

While nothing is unhackable and crypto crime on the rise, there is still a decent amount of security surrounding cryptocurrency. Since cryptocurrencies are built with blockchain technology, where transactions are recorded into blocks and time stamped, they are complex and difficult to be tampered with. Also, most transactions require two-factor authentication processes.

Ethereum crypto currency

Cryptocurrency is still relatively new, its future and stability remain unclear but the rising popularity of crypto cannot be ignored by investors, brands, or businesses, especially with experts valuing the global cryptocurrency market to more than triple by 2030. There are also plenty of ways to help make smart crypto investments such as:

1. Research and learn about cryptocurrency exchanges. It is estimated to be around two hundred exchanges to select from. Talk to investors, if able, do thorough research, and read reviews before choosing one.

2. If you are buying cryptocurrency, you must store it. Choose between keeping it on an exchange or digital wallet and choose which works for you based on benefits, technical requirements, and security needs.

3. Diversity your investments. Since there are numerous options in an unstable market, it is better to spread your investments across multiple currencies instead of investing everything into one.

4. Prepare for the fall out and volatility since cryptocurrency is a supply and demand system, there will be ups and downs and dramatic swings in prices. Be sure your investments can handle these swings as they come.

5. Have a backup strategy when it comes to your computer or mobile device since that is where your wallet is stored. If your device is lost or stolen and that is your only access to it, you will have no way to access your cryptocurrency and could lose your investment.

Cryptocurrency is a huge trend right now, has incredible confidence with experts, and shows little sign of losing traction with the younger generations – it can be exciting to dive right into something that is steadily thriving, especially with everyone talking about it. It is key to remember when beginning cryptocurrency, just like any investment, to be prepared to face challenges, assess risks, and choose investments that work for you, not for everyone around you.