What Is Crypto currency?
It’s easy to get lost in the weeds when it comes to the finer points of crypto currency, so we’ll begin with the fundamentals to help you get your feet wet.
Crypto currency is digital money.
There are no physical coins or bills involved because it is purely digital.
Crypto currencies are not tied to valuable assets — As you may have noticed, their value fluctuates wildly because it is not pegged to anything of substance in the real world.
The year 2022 was the second year of Bitcoin’s existence in which investors were understandably concerned about the currency’s long-term viability.
Just like in the second quarter of 2011, Bitcoin’s value dropped significantly, losing around 58% of its value.
It’s the worst month ever for Bitcoin, and it’s the second time there’s been serious worry about the cryptocurrency.
To put that in perspective, that’s the equivalent of more than a trillion dollars’ worth of Bitcoin disappearing from circulation.
Bitcoin holders have been selling their holdings in record numbers as a result of the current economic climate and inflationary pressures on the cryptocurrency market.
What Makes Cryptocurrency Valuable?
Because cryptocurrencies are not backed by anything tangible like stocks, bonds, artwork, real estate, or precious metals, their price is highly susceptible to market forces and fluctuations.
Mike Maloney, founder of Goldsilver, often makes the analogy between crypto and gold, with the main difference being that gold can be used for things besides just exchanging value.
Because of its widespread use in electronics and jewelry, gold’s worth is not just tied to its scarcity.
But cryptocurrency only costs money because someone else has some and is willing to exchange it for yours.
In general, there are two issues that currencies have had to deal with since the beginning:
- There must be some sort of governing body with jurisdiction over their worth, creation, and authenticity.
- They end up as victims of bogus production.
One type of cryptocurrency, bitcoin, was developed with this very issue in mind.
Both issues can be solved by combining the blockchain system (which we’ll discuss in a moment) with strong encryption.
Bitcoin is decentralized, self-regulating, and immune to fraud because of its automated and highly encrypted nature.
How Crypto currency Works
The following technologies and principles are helpful for comprehending cryptocurrency:
Cryptography, the process of secretly encoding and decoding information, is used by cryptocurrencies to guarantee the safety of user data and transactions.
Distributed ledger technology (DLT) includes blockchain, which is essentially a decentralized database managed by a network of computers (nodes, computing devices, etc.)
One could say that this is the technology behind a cryptocurrency. In essence, it is a digital ledger that can be used to confirm financial transactions and account balances.
Outside of finance, blockchain has many applications, such as in supply chain management, art ownership tracking, and even digital collectibles.
The term “node” will recur as a blockchain-related concept used throughout this piece. A node is a node in a blockchain, which is a distributed ledger of all transactions that have ever taken place in that particular chain. The network would collapse without the nodes that hold it together.
Using cryptography and a distributed ledger called a blockchain, cryptocurrencies can issue new coins, verify the legitimacy of financial transactions, and establish a safe and reliable infrastructure
When a network is decentralized, like the one Bitcoin creates, all the peers share in the authority, and there is no single point of failure.
To “hack” Bitcoin, for instance, one would have to compromise 51% of the vast network of computers that manages Bitcoin, which is an impossible task.
In the case of cryptocurrency, a middleman is unnecessary for the transfer of funds between two individuals. Users can avoid the high transaction fees associated with more conventional payment transfer services because these transfers are processed with very low processing fees that go to compensate the network.
The Different Forms of Crypto currencies
Almost everyone probably thinks of Bitcoin when they hear the term “cryptocurrency” (BTC). Bitcoin is widely hailed as the leading cryptocurrency, the “mother coin” from which many other cryptocurrencies have since been spawned.
Statista estimates that by February 2022, there will be over 10,000 different cryptocurrencies, a 3.7-fold increase from the number of coins in circulation at the end of 2019.
The good news is that you don’t have to learn every cryptocurrency right away if you’re just starting out with cryptocurrency, and that’s exactly what this article is for.
Instead, let’s look at a small subset of the most common varieties.
Bitcoin, which debuted in 2009, has been the undisputed king of all cryptocurrencies since its inception. It has been called “digital gold” and is considered the “gold standard” for digital currency.
Bitcoin’s $900 billion in market cap puts it far ahead of all other cryptocurrencies combined.
It’s not cheap to buy just one Bitcoin to invest in it, especially when compared to other options. To give you an idea, the value of one bitcoin is currently around $48,920.30.
Silver to Bitcoin’s gold, Litecoin was released in 2011 as a fork (or split) from Bitcoin.
Compared to Bitcoin, Litecoin transactions can be processed quickly and at a lower cost. At the current exchange rate, 1 LTC is equivalent to $178.93 USD.
Ethereum is another major cryptocurrency, but unlike Bitcoin, it isn’t designed to function as a decentralized, peer-to-peer payment system.
In 2015, a platform called Ethereum was released to support distributed applications (also called “decentralized” apps or dApps) and smart contracts (contracts that are enforced by code).
The success of USDT as a stable coin can be attributed to its high demand. Holders of USDT tokens have a secure means of value storage and transaction by virtue of the token’s peg to the US dollar.
With a market cap of over $66 billion, the token has quickly risen to prominence as one of the leading cryptocurrencies.
Since the introduction of USDT, other stable coins like TrueUSD (TUSD) and Pax Dollar have emerged.
Tokens are backed by the US dollar, giving their owners a reliable medium of exchange.
The rising interest in stable coins demonstrates the industry’s pressing need for a secure medium of exchange.
U.S. Dollar Coin (USDC)
A second successful stable coin is the United States Dollar Coin (USDC).
Circle, a startup based in Boston, launched USDC, a digital currency pegged to the dollar.
With a market cap of over $55 billion, it is one of the most valuable stable coins.
Interestingly, traders aren’t the only ones who use USDC; businesses do as well.
Following an announcement of a partnership with Coinbase in 2019, Circle began providing USDC to its institutional clients.
Binance USD (BUSD)
Another stable coin tied to the dollar is Binance USD (BUSD) from the exchange Binance.
Together with Paxos, a New York-based trust company, Binance introduced BUSD.
Trading pairs for BUSD include Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), and Tether (USDT) on Binance’s spot exchange.
Types of Crypto currency
Let’s talk about a subtle distinction that many people have trouble grasping when first learning about cryptocurrency. Coins and tokens are two examples of cryptocurrencies.
Any digital currency with its own blockchain, like Bitcoin, Ethereum, Litecoin, or Ripple, is considered a coin.
When people talk about having “bought cryptocurrency,” they mean that they have invested in coins.
Tokens are digital currencies that are created on top of other blockchains, like the Ethereum blockchain for decentralized applications.
Tokens are distributed (or sold) during a project’s first public sale, known as an Initial Coin Offering (ICO), which is analogous to a company’s Initial Public Offering (IPO) on the stock market.
The United States government has been cracking down on scam initial coin offerings (ICOs), but more on that later.
Tokens also differ significantly in another crucial way. Tokens can be classified as either “utility” or “security.”
Utility tokens can only be used to purchase goods and services directly from the platform or company that created them.
Similarly to how owning AAPL gives you a piece of Apple, a security token is a digital representation of a financial security that represents a share of the value of an enterprise.
Token holders can expect to receive dividends, shares of profits, interest, or investments in other tokens or assets if the token is a security.
If three conditions are met, a digital asset is classified as a security token.
- It requires a monetary investment.
- The collected funding goes to a single enterprise.
- Investors part with their cash in the hopes of reaping the rewards of someone else’s labor
Compliance with and adherence to these standards are also required of security tokens.
- Regulation D: The issuer of the security may only solicit funding from accredited investors, and all materials provided to those investors must be “Free from false or misleading statements.”
- Regulation A+: A loophole that enables the originator to raise up to $50 million from non-accredited investors by offering them securities registered with the SEC. This method is the most time-consuming and costly option for issuing.
- Regulation S: This rule describes foreign security offerings that are exempt from the registration requirements of section 5 of the 1993 Act because they are made in a country other than the United States. The issuers of the securities are still obligated to comply with the security laws of any nations from which they seek funding.