Oct 5, 2023
So, you’re watching the news or scrolling through social media, and you keep seeing one word: cryptocurrency. Naturally, it made you curious about what this word means and how it relates to finance and the economy.
Luckily, you found our post.
Today, we’re talking about everything you need to learn about cryptocurrency—what it is, how it works, types of cryptocurrency, how to acquire it, and how to earn from it.
In short, we’re breaking down cryptocurrency for beginners, so keep reading!
Cryptocurrency: What Is It?
A cryptocurrency is a digital currency existing only in the digital or virtual world. People use it for decentralized exchanges or trades that exclude central authority institutions like banks and the government.
In short, cryptocurrencies are digital money. And while most use it for digital assets, you can also use crypto for purchasing services and physical objects, from small products like smartphones to large goods like cars and real estate.
The idea of cryptocurrencies started in 2009 when Satoshi Nakamoto, a pseudonym for a group of unknown programmers, introduced the Bitcoin software.
How Do Cryptocurrencies Work
Crypto exchanges are made possible through decentralized networks. They use blockchain technology, a public ledger of transactions distributed between users.
What makes this transaction ledger valuable is the range of assets related to it. It can carry the value of fiat money, real estate, and even intellectual property.
How Are Cryptocurrencies Created?
But how are these currencies created?
A crypto coin typically comes from “cryptocurrency mining.” Every transaction made with cryptos needs validation, and mining performs the verification process that creates a new unit.
We call individual units of crypto a coin or token, depending on their use. And some coins and tokens serve specific purposes, such as goods exchange, value storing, and software participation.
However, not all cryptocurrencies come from mining. Cryptos you can’t use for purchases and other transactions other than investments are examples of unmined currencies.
How Do Cryptocurrencies Gain Value?
Cryptocurrencies gain value similar to other goods: through supply and demand in the cryptocurrency market. Basically, an increase in demand or a decrease in supply result in an increased value.
For example, when a particular crypto is useful, more people want it, which pushes the demand. High demand means fewer people selling, which translates to a value increase.
You can argue that crypto’s value is similar to precious metals. Both resources are limited in number and have only selected practical use.
Cryptocurrency vs. Fiat Money
How are cryptos different from fiat money if you can use it as a form of payment? Aren’t they practically the same?
The answer is yes and no.
Despite their similarities, fiat money and cryptocurrency have essential differences. And one of these distinctions lies in where they get their value as a medium of exchange.
Fiat money is a legally proclaimed currency used in a centralized exchange backed by the government. In other words, its inherent worth comes from the state assigning value to it.
Crypto, on the other hand, has no government backing. Because of this, cryptocurrency exchange doesn’t rely on third-party authorities like the central bank for any of its processes.
Nevertheless, this digital currency does exhibit the six attributes enabling an item’s economic use: scarcity, divisibility, portability, acceptability, durability, and resistance.
Types of Cryptocurrency
There’s a wide variety of cryptocurrencies available on the market. And many of these currencies serve exclusive purposes for the blockchain network they originated.
Ethereum’s ether, for example, was only used as a payment method for validating transactions within the network. It also acts as the blockchain’s staking mechanism when locking crypto assets.
That said, here are some of the most popular cryptocurrencies circulating the crypto market:
Transactional Tokens
Cryptos used for purchasing services and products are transactional tokens. Bitcoin, one of the largest cryptocurrencies worldwide, is a prime example of this type.
Utility Tokens
Cryptocurrencies with exclusive functionality on blockchain technology are utility tokens. Examples of these are Ethereum’s ether (ETH) and Ripple Labs’ XRP.
Governance Tokens
A governance token is exactly as it sounds: which are crypto tokens used for governing decentralized protocols. Holders of this token can vote on and propose changes within the network.
Platform Tokens
Cryptos for facilitating interactions and transactions in a blockchain are called platform tokens. Cardano’s ADA, Polygon’s MATIC, and Solana’s SOL are examples of this crypto.
Security Tokens
A security token represents assets with real-world value, such as equity, company share, real estate, and more. Polymath, Harbor, tZero, and MS Token are examples of this crypto category.
Non-fungible tokens (NFTs) are similar to security tokens. However, instead of real-world assets, NFTs represent ownership of digital items like artwork, music, and film.
How To Acquire Cryptocurrency
Aside from mining, there are several ways users can acquire cryptocurrencies. One popular method is buying from brokers, people who own a currency, and exchange websites.
Purchasing coins and tokens requires a crypto wallet for storing your cryptocurrencies—much like a physical wallet for your cash and cards, but a digital version.
Cryptocurrency wallets can either be a device (cold wallet) or a program (hot wallet). And the level of your crypto security heavily depends on your wallet choice.
Pros and Cons of Cryptocurrency
After knowing what cryptocurrencies are, we’re sure you’re raring to start your journey in this digital trade. But before that, below are some pros and cons you should consider.
Pros:
Cost-effective transactions
Faster fund transfers
Secure and transparent
Accessible for everyone
The scarcity of cryptocurrencies also makes them inflation-proof. Because of limited supply and high demand, digital currencies exhibit the lowest inflation rates.
Cons:
Carries cybersecurity issues
Lack of policies for transactions
The lack of understanding surrounding the principles and concepts of this new virtual currency can be a significant drawback. So, if you’re a newbie, wrapping your head around this trade can take a while.
Final Word
People call cryptocurrency “digital gold” because it presents many financial opportunities for everyone. And since 2009, we’ve seen countless people succeeding through crypto trades.
Still, as with other investment ventures, crypto requires deliberate financial decisions. So, consider your investment goals, risk tolerance, and time horizon.
Nevertheless, cryptocurrencies can be a good investment with higher returns than the stock market. It’s all a matter of resourcefulness and knowing your trade.