Simply put, cryptocurrency is digital money. Cryptocurrency is also referred to as tokens, altcoins or coins. You may wonder if digital money is safe. Effectively you already use digital money in the form of a credit or debit card. With printed money, there is special paper, ink, design and other features to ensure no one can make counterfeits but even with all that there are still counterfeit bills. Cryptocurrency is based on cryptography which is really complex math, and this is how cryptocurrency gets its name. Cryptography is the first security measure and the second is the large number of connected secure computers where the cryptocurrency’s blockchain information is stored and replicated. More than half of the computers, aka nodes, need to have the same blockchain information in order for the cryptocurrency unit to be considered valid. It extremely difficult for someone to simultaneously hack more than half of the computers so this provides allot of security.
The six key concepts of cryptocurrencies you need to know are
1) Cryptocurrencies have no intrinsic value nor any backing and have no centralized issuer or controller.
The US dollar is a FIAT currency issued by the US Government and it is backed by the “faith and trust” the world has in the US government. There are many factors that control the value of the US dollar. One of the main ways the US government controls the value of the US dollar relative to other countries is by controlling the interest rate. Modern FIAT currencies are issued by governments, but cryptocurrencies can be issued by anyone. The value of any cryptocurrency is based on supply and demand. Dollars have pennies. Cryptocurrencies do not have pennies, but you can buy a fraction of a Bitcoin or Ethereum if you cannot afford to buy an entire coin.
I think the following 5 cryptocurrencies have the best potential for appreciation in the next couple of years: Bitcoin (BTC), Ethereum (ETH), XRP (XRP), Stellar (XLM) and Cardano (ADA).
Bitcoin is considered to be the original and was created in 2009. It is the most popular but not very technologically advance. Of the top 3 it is purely a store of value with no other function. It is often reference as “digital gold”.
Ethereum is both a currency and it is the basis of smart contracts, apps and NFTs. Its advanced technology allows buyers and sellers to approve or delay transactions based on real world events. Its claim to fame is it ability to support smart contracts and the other application potentials of blockchain.
The next two are similar and provide the basis for the next generation of global banking. They are XRP and Stellar.
XRP was created by Ripple Labs and its main objective is to streamline, speedup and reduce the costs of inter bank transfers. XRP is currently involved in some legal issues with the SEC while the US decides how to move forward with crypto.
Stellar (XLM) is similar to XRP in that it facilitates low-cost cross boarder transactions. XPR’s legal troubles have allowed Stellar to gain allot of ground both in terms of total value and in customers.
Cardano (ADA) is the next generation of cryptocurrency. It combines the smart contract ability of Ethereum and improved transactional efficiency with its newer “proof of stake model”.
2) Mining cryptocurrencies is the process of creating new crypto coins. Only some cryptocurrencies like Bitcoin allow people to create or mine new units by solving cryptographic equations. It takes allot of computing power and electricity to mine a Bitcoin.
3) Crypto Wallets do not actually hold your cryptocurrency. Crypto wallets keep your private keys or passwords safe and accessible. Your digital money lives on the blockchain and your private keys prove your ownership and allows access to your cryptocurrency address to make transactions.
Wallets can be a piece a paper with a code written out, a physical electronic wallet like a PC, smartphone or USB key, or an online wallet.
The main hardware wallet vendors are Ledger and Trezor.
Using an app like Coinbase Wallet allows you to:
- Manage all your digital assets in one secure place
- Control your own private keys
- Send and receive cryptocurrency to and from anywhere in the world
- Interact with usernames rather than long, hexadecimal “public key” addresses
- Browse DApps (decentralized finance apps)
- Shop at stores that accept cryptocurrency
If you lose your keys you lose access to your money. That is why it is important to use a trusted wallet provider like Coinbase.
4. Exchanges allow you to buy and sell cryptocurrencies. Exchanges operate pretty much the same way the stock exchange works. You open an account, you put money into it and then you can buy and sell cryptocurrencies. It is worth noting that most exchanges will also provide wallet services. To buy cryptocurrencies, you place either a market order, and the exchange buys it for you from the person providing the best price. You can place an order to buy at a specific price, also known as a limit order, and then you order gets filled when someone is willing to sell it at that price.
There are 2 types of exchanges. There are centralized and decentralized exchanges. Centralized exchanges have a centralized authority vs decentralized does not and operates at more of a peer to peer level. The majority of exchanges with any trade volume are Centralized exchanges. There are pros can cons to both models but that will have to be covered in a future post. The main takeaway is to select an exchange with a rock solid reputation like Coinbase.
5) Cryptocurrencies are built on blockchain technology. To keep track of regular money, you track it in a check book or your online bank account. Banks keep track of money on a balance sheet. If you pull a dollar out of your wallet, you may remember who or where you got it from, but you have no idea who had the dollar bill before them. With cryptocurrency, all the information and the entire history of who owned it are recorded in a type of database called a blockchain. Blockchain is built by putting information into blocks and once a block is filled a new one is added to the previous one which eventually creates a chain of blocks aka “blockchain”. The blocks are linked in chronological order. The token’s blockchain is replicated across a network of computers which ensures its security. This is why blockchain is also called a distributed ledger. This means that as the network gets larger the more secure it becomes.
Modern blockchain like Ethereum’s allows for not only the storage of information but the ability to create smart contracts, Decentralized Applications or DApps and Non-Fungible Tokens of NFTs.
6) DeFi is short for Decentralized Finance. Cryptocurrency technologies are taking the traditional banking functions and making them faster, more accessible, more transparent and is providing a variety of new options. The decentralized nature of the peer to peer computers managing the transactions means that no government or central authority can control it. At the same time, it also means anyone can participate. Much of the recent development in crypto has been centered on advancing blockchain technology, Decentralized Applications or DApps, and other technologies to facilitate the next generation of finance.
Cryptocurrency’s blockchain technology will revolutionize how we approach finance, contracts, art, music and a variety of other things.