What is Cryptocurrency?

Key Takeaways

Cryptocurrency has become a buzzword in the financial world, promising decentralized control, borderless transactions, and a potential hedge against inflation. These new digital assets utilize blockchain technology to offer higher security and an alternative to traditional banking. As of 2024, the cryptocurrency market continues to evolve with thousands of different cryptocurrencies popping up regularly. 

But what exactly is cryptocurrency? For many, the fundamental elements of crypto remain unclear – in this article, we’ll change that. Let’s explore cryptocurrency, how it works, and the best way to store it, so you can get involved.

What Is Cryptocurrency?

Cryptocurrency is a type of virtual or digital currency that uses blockchain technology and cryptography as its foundation. 

There are thousands of different cryptocurrencies in circulation, with a total market capitalization exceeding $1 trillion. This expansive ecosystem includes well-known currencies like Bitcoin and Ethereum, as well as a myriad of lesser-known tokens, each with its set of features and use cases.

Cryptocurrency Definition and Meaning

The term “crypto” refers to the complex cryptographic techniques that secure these assets, making them nearly impossible to counterfeit or double-spend. Through the use of blockchain technology, all transactions are recorded on a distributed ledger that’s transparent and accessible to anyone.

Cryptocurrencies are characterized by their decentralized nature. In contrast to traditional fiat currencies, which are issued by a central authority (the Federal Reserve, for example) and must use the centralized infrastructure of banks, cryptocurrencies are issued and managed via blockchain. No single entity, such as a government or central bank, can impact this.

Transactions don’t require a third party or any kind of banking infrastructure. Instead, you can send digital assets directly to another user via the blockchain network, with cryptography keeping everything secure.

How Does Cryptocurrency Work?

To understand how cryptocurrency operates, it’s important to grasp how its key underlying technologies interact. The defining characteristics of cryptocurrency include:

• Blockchain Technology
• Cryptography
• Consensus Mechanisms

Blockchain technology is the infrastructure that records and verifies all cryptocurrency transactions securely and transparently, ensuring that every transaction is traceable and immutable. You can think of blockchain as an infinite digital ledger, capable of storing digital value and tracking it as it moves around the network.

Crypto is far from the only use case for blockchain technology; it is also used for supply chain management, voting, digital identity, and more.

Consensus Mechanism

The way blockchains interact with their native cryptocurrency is governed by something called a consensus mechanism. A consensus mechanism – such as Proof of Work or Proof of Stake – is the set of rules that dictate how new blocks of trransactions are validated and added to the network.  They prevent double spending, and ensure the integrity and reliability of the entire system.

Not all cryptocurrencies have their own blockchain – for example, tokens are a type of crypto that use an existing blockchain as their base. Nonetheless, the integrity of every cryptocurrency will be garanteed by an underlying consensus mechanism.

Cryptography

If blockchain networks are open to anyone, how can you be sure nobody else can access your crypto? The answer lies in cryptography.

Asymmetric encryption uses cryptographic keys to encode and decode sensitive data, enabling it to be sent across a public network without a third party intercepting it. In the case of crypto, each time you send coins or tokens to someone else, you’ll encrypt the transaction with a public key, which prevents a third party intercepting it. At the other side, the recipient can decrypt the transaction – and access the crypto – with the corresponding private key. 

This system is the backbone of the crypto ecosystem, keeping your transactions safe without a middleman such as a bank.

Cryptocurrency vs Blockchain – What’s the Difference?

Cryptocurrency and blockchain are often used interchangeably, but in reality, they refer to different concepts. has applications that extend far beyond digital currencies.

Blockchain

Blockchain is a decentralized ledger technology that records transactions across multiple computers in a secure, transparent, and immutable way. The infrastructure of blockchain powers cryptocurrencies, but blockchain itself has no value.

You can think of blockchain as the railway tracks, and crypto as the train – it serves to facilitate the movement of value.

Cryptocurrency

A cryptocurrency is a digital currency that uses blockchain technology to operate. It serves as a medium of exchange, a store of value, or an investment asset. There are different types of cryptocurrency and each one has its own unique characteristics, utilities and protocol.

While all cryptocurrencies operate on blockchain technology, not all blockchain applications involve cryptocurrencies. Blockchain’s versatility makes it a valuable tool in numerous industries, while cryptocurrency is just one of its many use cases.

Cryptocurrency Examples

The cryptocurrency ecosystem is expansive and growing all the time. As of 2024, there are hundreds of thousands of cryptocurrencies in the world. Many of them are considered dead or no longer in development but others continue to thrive and innovate. 

Cryptocurrencies have a variety of use cases, from medium of exchange and store of value to speculative asset and governance token. The constant development of new use cases is what’s catalysed the vibrant ecosystem of coins, tokens and stablecoins we see today.

To give a flavour of that ecosystem, let’s take a look at some of the most widely used cryptocurrencies today.

Bitcoin

• Launch Date: 2009
• Max Supply: 21 million
• Current Market Cap: $1.1 trillion

Bitcoin (BTC) is the original cryptocurrency, created by an anonymous person or group known as Satoshi Nakamoto. It introduced the concept of a decentralized digital currency and laid the foundation for the entire cryptocurrency market. Bitcoin is often referred to as “digital gold” due to its limited supply and store of value properties. However, its potentially high transaction fees and slow processing times have led to the development of other cryptocurrencies.

Ether

• Launch Date: 2015
• Max Supply: Unlimited
• Current Market Cap: Over $320 billion

Ether (ETH) is the native cryptocurrency of the Ethereum network, a decentralized platform that enables smart contracts and decentralized applications (dApps). Ethereum’s ability to support programmable contracts has made it the backbone of many blockchain-based projects, including DeFi (decentralized finance) platforms and NFTs (non-fungible tokens). Ether is used to pay for transactions on the Ethereum network and as a form of investment. Holders can also stake ETH for an annual yield.

Tether

• Launch Date: 2014
• Max Supply: Varies (backed by reserves)
• Current Market Cap: Over $115 billion

Tether (USDT) is a stablecoin, a special type of cryptocurrency designed to maintain a constant value. This is achieved by pegging the stablecoin to an already existing asset (in most cases fiat) such as USD. In the case of Tether, each token is backed by an equivalent amount of fiat USD held in a safe reserve. This stability makes Tether a popular choice for traders looking to avoid the volatility of the market. However, Tether has faced scrutiny over its transparency and the adequacy of its reserves.

Solana

• Launch Date: 2020
• Max Supply: 489 million
• Current Market Cap: Over $70 billion

Solana (SOL) is a high-performance blockchain that aims to provide fast, secure, and scalable decentralized applications and cryptocurrencies. Its key innovation is the Proof of History consensus mechanism, which allows the network to process thousands of transactions per second at a low cost. Solana has quickly gained popularity due to its speed and efficiency, making it a strong competitor to Ethereum.

How To Buy Cryptocurrency

Today, buying cryptocurrency is easier than ever, thanks to the availability of online exchanges and user-friendly platforms. Here’s a quick guide on how you can buy your first cryptocurrency:

1. Choose an Exchange: The first choice you have to make is to select a crypto exchange. Some of the most popular exchanges on the market include Binance and Coinbase. On a crypto exchange, you can buy, sell, and trade different cryptocurrencies.
2. Create an Account: Start the account creation process on the exchange of your choice. You’ll need to provide some personal information and verify your identity, usually through a process called Know Your Customer (KYC).
3. Deposit Funds: Once your account is set up, deposit funds using a bank transfer, credit card, or other accepted payment methods.
4. Choose a Cryptocurrency to Buy: Browse the available cryptocurrencies and select the one you want to purchase. Enter the exact amount you want to buy and confirm the transaction. Your crypto will be added to your exchange wallet.
5. Secure Your Cryptocurrency: Transfer your purchased cryptocurrency to a secure wallet, either a hot wallet or a cold wallet.

KYC in Crypto Explained

Know Your Customer is a regulatory requirement that mandates financial institutions, including cryptocurrency exchanges, to verify the identity of their customers. KYC helps prevent illegal activities such as money laundering, fraud, and terrorism financing. 

In the crypto world, completing KYC typically involves providing a government-issued ID, proof of address, and sometimes a selfie or video verification. While KYC adds an extra step to the process of buying crypto, it enhances the security and legitimacy of the ecosystem.

How To Store Cryptocurrency

Storing cryptocurrency securely is crucial for protecting assets from theft, hacks, and other risks. Cryptocurrencies are stored in crypto wallets, allowing users to easily manage their digital assets. Each wallet has its own private key, allowing you to prove ownership, spend, and sign transactions.

When creating a new wallet, it will automatically generate a seed phrase. This seed phrase is also known as a secret recovery phrase. It allows you to regain access to your wallet should you ever lose it. To ensure maximum security, store your seed phrase in a safe place and never share it with anyone. Crypto wallets can be categorized into three types:

• Hot Wallet
• Cold Wallet
• Exchange Wallet

Hot Wallet

A hot wallet is a software crypto wallet that is always connected to the internet. It allows for easy access to your funds, making it convenient for daily transactions and trading. However, since it operates online, a hot wallet is more vulnerable to hacking and cyber threats. 

Examples of hot wallets include mobile wallets, desktop wallets, and web (browser extension) wallets.

Cold Wallet

A cold wallet, also known as a hardware wallet or offline wallet, is a type of wallet that is not connected to the internet. It stores your cryptocurrency in a secure offline environment, making it safer from hacks. 

Cold wallets are ideal for long-term storage of large amounts of cryptocurrency. Some of the most popular hardware wallets on the market are Ledger and Trezor. There are also paper wallets, which are simply printed copies of your keys.

Exchange Wallet

An exchange wallet is a type of wallet provided by cryptocurrency exchanges to store your funds on the platform. While exchange wallets are convenient for trading, they are less secure than hot or cold wallets because the exchange is in full control of your private keys. This means that if the exchange is ever hacked or goes bankrupt, you could completely lose your funds. In most cases, it’s recommended to transfer your cryptocurrency to a hot or cold wallet.

Advantages of Crypto

The rise of Bitcoin was a direct response to the 2008 financial crisis. As a result, the advantages of cryptocurrencies are somewhat opposed to what we’re used to seeing in traditional banking.

Self Custodial

One of the primary benefits of cryptocurrency is self-custody, meaning you have full control over your funds without the need for intermediaries like banks. With the right wallet and private keys, you can send, receive, and store your cryptocurrency independently.

Decentralized

Cryptocurrencies operate on decentralized blockchain networks, reducing the need for central authorities or intermediaries. This decentralization makes the system more resilient, transparent, and less susceptible to manipulation or censorship.

Borderless Payments

Cryptocurrencies enable borderless transactions, allowing users to send and receive funds anywhere in the world without the need for currency conversion or excessive fees. This feature is particularly beneficial for international trade and remittances.

Deflationary (sometimes)

Many cryptocurrencies, like Bitcoin, have a limited supply, making them deflationary by nature. This scarcity can lead to an increase in value over time, making cryptocurrencies an appealing investment option.

Transparent

All transactions on a blockchain are recorded in a transparent and immutable manner, meaning anyone can view the transaction history. This transparency helps build trust and accountability in the system. Should any wrongdoers commit a crime, in most cases, the process can be easily traced on the blockchain.

Disadvantages of Crypto

Despite its numerous advantages, cryptocurrencies also have their share of drawbacks.

Onboarding and Learning

Cryptocurrency is a relatively new and complex technology that requires a certain level of understanding to use effectively. Beginners may find the concepts of blockchain, private keys, and wallets challenging to grasp. This steep learning curve can prevent many users from ever entering the space.

Unregulated and Prone to Scams

The cryptocurrency market is still largely unregulated, which can make it a breeding ground for scams, fraud, and other illicit activities. Investors should exercise caution and do the necessary research before they consider funding. It ties to the previous point as new users can be especially vulnerable to attackers due to a lack of knowledge.

Volatile

Cryptocurrencies are known for their price volatility. While this can lead to significant gains, it can also result in substantial losses, making it a risky investment. Crypto volatility can stem from many different factors, including the performance of the stock market, global financial trends, upcoming regulations, and more.

What Can You Buy With Cryptocurrency?

As cryptocurrency adoption grows, so does the number of goods and services you can purchase with digital currencies. Today, you can use cryptocurrencies to buy a wide range of products, including electronics, real estate, travel services, and even luxury cars. You’ll also find cryptocurrency as an option in some online retailers and e-commerce platforms. However, the endorsement of crypto as a payment method is still not widespread, and its use is primarily concentrated in certain industries and regions.

Cryptocurrency Scam Examples

The decentralized nature of crypto and the lack of regulation make it a breeding ground for potential crypto scams. Some of the most common cryptocurrency scams include:

• Ponzi Schemes: Fraudsters promise high returns on investments but pay out returns from new investors’ funds rather than from profit.
• Phishing Scams: Scammers trick individuals into revealing their private keys or login information through fake websites or emails. These can be encountered on different social platforms.
• Pump and Dump Schemes: Coordinated efforts to artificially inflate the price of a cryptocurrency, only to sell off the assets at the peak. This leaves other investors with worthless tokens and significant losses.
• Fake ICOs (Initial Coin Offerings): Fake projects that collect funds from investors for a new cryptocurrency that never actually launches.

To avoid falling victim to these scams, it’s crucial to conduct thorough research, be skeptical of unrealistic promises, and use secure platforms.

Tips To Invest in Cryptocurrency Safely

If you’re interested in investing in cryptocurrency you should always be aware of the associated risks. Here are four tips to help you make a safer investment:

Understand Crypto Wallets

Before you start investing, it’s essential to understand the different types of crypto wallets and how to secure your funds. Set up a crypto wallet that suits your needs, whether it’s a hot wallet for daily transactions or a cold wallet for long-term storage.

Use Dollar Cost Averaging

Dollar-cost averaging is a popular strategy in the stock market that can also help you stay secure as you buy in to crypto. With it, you can invest a fixed amount of money at regular intervals, regardless of the price. This approach helps mitigate the impact of the crypto market’s volatility and reduces the risk of making large investments at unfavorable times.

Do Your Research

Before you consider investing in any cryptocurrency, conduct thorough research. Read the white paper, check the project’s roadmap and find out more about the team behind it. Explore platforms like Etherscan and CoinMarketCap to gather information on the coin’s history and market performance.

Define a Trading Strategy

Having a clear trading strategy can help you navigate the volatile cryptocurrency market. Whether you’re a long-term investor or a day trader, make sure you define your goals, set stop-loss orders, and stick to your plan. It’ll help you avoid emotional decision-making and fear of missing out (FOMO).

Closing Thoughts

Cryptocurrency represents a revolutionary shift in the way we think about money and finance. With its decentralized nature and the underlying blockchain technology, the crypto ecosystem offers both new opportunities and new challenges. Whether you’re looking to invest, buy, or simply understand more about cryptocurrencies, it’s important to master the basics first. Familiarize yourself with the security measures and the potential risks before you enter the world of crypto.

FAQs

Why Do We Have KYC in Crypto?

KYC (Know Your Customer) is a regulatory requirement that ensures financial institutions verify the identity of their customers. In crypto, KYC applies to centralized institutions like exchanges. It means showing some ID when you create your account, and  helps prevent illegal activities such as money laundering and fraud by linking all your crypto transactions to your real identity. KYC makes the ecosystem safer for all participants.

What Is Mining Cryptocurrency?

Mining is a crucial process in cryptocurrencies that are based on proof of work blockchain networks. It creates new cryptocurrency coins and verifies transactions on the blockchain. Individual miners use powerful hardware to solve mathematical problems and get rewarded with newly created coins.

How Do I Store Cryptocurrency?

Crypto is stored on the blockchain, and you interact with your blockchain assets using a blockchain wallet. There are different types of crypto wallet, and it’s important to choose the right one for your needs. Options include hot wallets (for easy access), cold wallets (for maximum security), and exchange wallets (for trading). Each type of wallet has its pros and cons, so it’s important to select the one that aligns with your goals and security needs.