If you’ve heard about cryptocurrencies, perhaps at a party or from a friend, you might think that cryptocurrencies are either an overly high-level concept that you can’t understand or a mystery. In reality, of course, this is not the case at all. You might as well imagine a world after the ubiquity of the technology – a picture in which cash is just a sputtering electric current, transmitted at any time to anyone and most anywhere in the world. After all, it turns out that’s exactly how cryptocurrencies work. This time we will enter the world of cryptocurrencies and take a look at what cryptocurrency is and what it looks like.
What is Cryptocurrency?
So, what is cryptocurrency anyway? Think of it as money living solely on the internet. Unlike traditional currencies like dollars or euros, cryptocurrencies are not controlled by any bank or government. Instead, they are created by a decentralized network called the blockchain. Now, I bet you’re wondering: What is cryptocurrency in the blockchain world?
Imagine a gigantic digital ledger, such as a notebook visible to all but which nobody may alter. Every time you send or receive cryptocurrency, the transaction is recorded in there. It’s reliable, transparent, and once things are etched into this book of history, you cannot go back and change them back to what they used to be. But in some tales, their permanence has become a great test case for fraudsters.
To make it even clearer, how about a more graphic example: Imagine keeping track of who owes whom money with a group of all your friends. Rather than using paper and pencil, you use a digital notebook which everybody can access and update. But, once somebody writes down in that book that you paid $10 to him, then that entry cannot be changed by any means. This is how blockchain guarantees trust and safety in cryptocurrency transactions.
Cryptocurrency meaning can be complex, but it’s essential to grasp its fundamental concept: digital, decentralized money. When discussing how cryptocurrency works for beginners, it’s important to emphasize that all transactions are stored on a blockchain, making it secure and immutable.
To give you a better idea of how cryptocurrencies differ from traditional currencies, here’s a quick comparison:
| Feature | Traditional Currency (e.g., USD) | Cryptocurrency (e.g., Bitcoin) |
|---|---|---|
| Control | Central Banks | Decentralized (Blockchain) |
| Physical Form | Bills, Coins | Digital Only |
| Transaction Speed | Days (especially for cross-border) | Minutes (or less) |
| Transparency | Limited | Full (All transactions are public) |
| Inflation Risk | High (can be printed at will) | Low (fixed supply) |
Main Types of Cryptocurrencies
Though bitcoin seems to be the superstar of the cryptocurrency world, other players also are well known. Below, let’s analyze the main types of cryptocurrencies along with what makes them unique.
Bitcoin
For cryptocurrencies, Bitcoin is like the “gold”. The first digital currency was created in 2009. A man (or organization) who goes by the name “Satoshi Nakamoto” released this type of currency, and it was quite revolutionary but very simple indeed. Its ultimate goal: completely eliminate the need for banks or governments in establishing any money at all.
Suppose you and a friend each have a ledger, you write down every transaction between yourselves. That’s how Bitcoin operates–only on a global scale. The enormous number of computers (“miners”) check transactions. The first one to solve a problem gets to add the transaction onto the blockchain and also receives some Bitcoin for their trouble.
Bitcoin doesn’t just have 21 million coins. By limiting the number of coins it makes money valuable. This is no different from the way gold becomes valuable because there’s little left to find. Often now, bitcoin is called a store of value.
Ethereum
If Bitcoin is the digital gold, then Ethereum is like a “world computer” built up from bits of digital wood and silicon wonders. Launched in 2015 by an outstanding young man named Vitalik Buterin, Ethereum is more than just a currency-it’s a complete platform where developers can create and run applications, rather much like setting an app for your cell phone.
The real breakthrough here is what’s called smart contracts. Take a vending machine: you put in cash, choose your drink and the machine serves it up to you automatically. A smart contract is like that vending machine, but for every kind of agreement. For example, if you use a smart contract to rent a car, only after your payment is received does the car open–no need then for any rental agency.
The currency driving this platform is Ethereum (ETH). It’s what you pay to use a transaction or service on the Ethereum network. That’s why these days, Ethereum is the foundation for many other digital currencies and blockchain projects.
Ripple
Ripple (XRP) differs somewhat from Bitcoin and Ethereum. It’s not simply a coin, but a digital payment network designed to move money quickly and inexpensively across borders. Try to pay money from US$ to Japan. Normally, it may last several days and require various fees. Ripple can accomplish that transfer almost instantaneously and at a cost of only approximately one-tenth what you would normally pay.
Surely, Ripple is liked by banks and other financial institutions because it enables them to transmit money quickly and cheaply across boundaries. In the Ripple network, XRP serves as the digital currency used to perform these transfers.
Litecoin
Litecoin is sometimes known as the “silver to Bitcoin’s gold.” Charlie Lee, a former Google engineer, invented it in 2011. Litecoin’s design was meant to correct Bitcoin’s faults, most particularly in terms of velocity and cost of transactions.
Litecoin is like a faster version of Bitcoin. While Bitcoin transactions may take 10 minutes to confirm, Litecoin goes through the process in just 2.5 minutes. This makes it usable for daily purchases like coffee. It is also less expensive to operate, so many people who make small payments select Litecoin.
If you’re interested in exploring more about cryptocurrency and which crypto currencies might be the best to buy right now, you can check out guide to the best crypto to buy now.
How Does Cryptocurrency Work?
Let’s take a look at blockchain, the engine powering many a cryptocurrency. Imagine a chain of blocks-one-page ledger. Each time a transaction occurs, this is written into a block, and then when the block fills up with transactions, it gets connected to the previous block in this chain of blocks at a set sequence. Everyone on a network of machines is responsible for keeping an identical copy of this chain of blocks or blockchain at any given time.
Also, once a block of transactions has been added onto the chain, no one can change what’s written in it again. This makes blockchain extremely secure and reliable. Because the network takes care of all transactions, there is no need for any middlemen like banks or clearinghouses. Cryptocurrencies use PoW and PoS to keep things secure in between.
Cryptocurrencies use two main methods to keep things secure: Proof of Work (PoW) and Proof of Stake (PoS).
- Proof of Work (PoW): is the best-known and most widely used method at present, computers (miners) race to solve complex puzzles-just like it’s a race. The person who completes this puzzle first adds another transaction block onto our blockchain. In addition, he earns a reward of some cryptocurrency coins as luck. If PoW is followed, it’s generally very secure but also quite energy-intensive. As can be seen from the example of Bitcoin, a similar electricity supply to many small countries.
- Proof of Stake (PoS): locks up some of his coins as “stake” instead of racing with others to solve puzzles. The greater amount you lock up, the better your chances. This method uses less electricity and is faster. Ethereum recently switched out of PoW and became PoS to reduce its energy consumption by more than 99%..
Here’s a comparison of these two methods:
| Feature | Proof of Work (PoW) | Proof of Stake (PoS) |
|---|---|---|
| Energy Usage | Very High | Low |
| Speed | Slower | Faster |
| Security | Very Secure | Secure |
| Environmental Impact | Significant | Minimal |
| Example | Bitcoin | Ethereum (post-transition) |
How Can You Use Cryptocurrency?
So, what is cryptocurrency good for? What can you do with cryptocurrencies? The following are what many people do with them nowadays:
More and more online stores take Bitcoin and other digital cash for payment. Indeed, it’s like handing over dollar bills but in a virtual form that is not issued by the bank or credit card company. For instance, on sites like Bitrefill or Overstock you can buy experience days or retail cards using bitcoins.
Many people buy cryptocurrencies and hope they increase in value. Like gold, bitcoin is popularly called “digital gold” because it stores value too. In 2010, one could buy for less than a dollar; now (2021) it hits an all-time high and has surpassed 69,000 yuan per unit, providing enormous profits for these early investors.
Sending money across international borders is slow and expensive. With cryptocurrencies, you can send money to your family or friends abroad almost instantly, with much lower fees. For example, sending $100 from the U.S. to Nigeria using Bitcoin might cost just a few cents and take minutes; traditional remittance services could charge 5-10% of this transaction on average and even need days to complete it.
DeFi is similar in many ways to traditional finance (lending, borrowing, trading) except there are no banks involved. Everything happens on decentralized platforms using cryptocurrencies. Think about earning interest on your savings without needing a bank – you lend money to others on these DeFi services and earn profits that way.
Do you remember Ethereum? It lets developers programmatically create contracts, so that when certain conditions are met those contracts will automatically execute. This cuts out the need for a middleman and saves costs. For example, a farmer could use smart contracts to get paid automatically without needing an insurance policy if a weather condition (such as rain) is met.
Some charities accept cryptocurrency donations. It’s a fast, secure means of giving and can be done from anywhere in the world. For instance, Save the Children and The Water Project welcome bitcoin among other alternative monetary units as their appropriate gift products.
Is Cryptocurrency Legal?
The legality of cryptocurrency varies by country. It is important to understand the rules of internet life in your own country.
Countries Where Cryptocurrency is Legal
The truth is that in many countries cryptocurrencies are entirely legal. Governments have set regulations to make sure they are used safely and transparently. For example, in the United States of America, cryptocurrencies are simply classified as property and so are subject to taxes like any other asset. The United States Securities and Exchange Commission (SEC) also takes care of some aspects of the cryptocurrency market so as to protect investors.
In the European Union, countries like Germany, Switzerland, and the UK have each put in place their own set of laws regulating the use and transfer of virtual currencies with an eye to stopping unlawful activities such as money laundering.
Countries Where Cryptocurrency is Restricted or Banned
Nevertheless, not all states take such an accommodating viewpoint. For instance, the Chinese government has deployed severe measures to curtail cryptocurrency activities. They have banned initial coin offerings (ICOs) and closed down local cryptocurrency exchanges, citing financial stability issues and illegal activities.
India
In India, the standing of cryptocurrency has been a bit like a roller coaster ride. In 2018, the Reserve Bank of India (RBI) banned banks from handling cryptocurrencies, seriously damaging the market. But in 2020, India’s Supreme Court lifted this ban; people are once again free to trade and invest in digital currencies.
Yet still, the Indian authorities are watching closely. There’s been talk of tight regulation, which could see the use of non-government-backed cryptocurrencies severely restricted, or even government-backed digital money in its own right. The Central Bank Digital Currency (CBDC) to use its acronym as it is called here. So if you are in India, keep abreast of things.
Brazil
Brazil, on the other hand, is being a little more lenient. Cryptocurrencies are still not official money but they have been recognized as a financial asset. This means that you may trade them and use them, just like any other currency or commodity for that matter provided certain regulations apply. Anti Money laundering (AML) and Know-Your-Customer (KYC) rules are two examples of such requirements from now on.
Cryptocurrency is catching on in Brazil, and many businesses around the nation now accept Bitcoin, Ethereum, and other digital assets. The Brazilian Securities and Exchange Commission (CVM) is even looking at using blockchain technology to strengthen financial markets, which means Brazil definitely has gone astray on this trend of digital revolution.
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The Bottom Line
Cryptocurrency is changing the way we think about money. It’s decentralized, secure, and offers new forms of transactions or investment; but at the same time there are still many challenges to face ahead. It’s a relatively new space. The laws that govern it are constantly changing and evolving. From multitasking so you can use cryptocurrency as cash for everyday purchases, or to invest money into something new down through developing financial technologies of tomorrow: get your foundations right now!
