Cryptocurrency is a virtual or digital asset used as a medium of exchange of coins or tokens. It is based on strong cryptography (specialized coding techniques), blockchain (distributed ledger), and peer-to-peer review to ensure transactions are secure, control the creation of new currency, and verify the transfer of ownership of the currency. Cryptocurrencies do not exist in physical form like paper money and are not typically issued or regulated by a Central Authority or Government, instead of using decentralized control. They became popular because they are safe and secure, offer anonymity in transactions, minimal processing fees and fund transfer are easy without the need of third parties like banks.
As of February 2022, 10,000 cryptocurrencies exist, though many may have little to zero trading volume or following. There are several ways to own cryptocurrency – buying it on an exchange, trading it for other cryptocurrency or blockchain services, or mining, which is an expensive and complicated process to earn them on the blockchain.
There are two types of cryptocurrencies based on their function- coins and tokens. They may be used interchangeably, but are fundamentally different. The basic function of crypto coins is a form of digital currency. All crypto coins are built on their blockchain. Crypto coins are further of two types – Bitcoin and Altcoin. Bitcoin(BTC) was the first digital currency ever launched in 2009. An altcoin is any crypto coin that is not Bitcoin, like Ether(ETH) which uses the Ethereum blockchain. Some cryptocurrencies coins have a limited supply. BTC has 21 million coins, decided by its creator, which creates demand and reinforces perceived value. Many Altcoins are based on the same framework as Bitcoin and have a lot of common characteristics. But each coin offers something different to make it lucrative for investors. Some may use different processes to validate transactions, offer new features, or lower price volatility.
A brief history of the evolution of cryptocurrencies
The first cryptocurrency Bitcoin was launched in 2009 by Satoshi Nakamoto (pseudonym) and relies on a decentralized public ledger that contains a digital record of every Bitcoin transaction. By 2011 newer types of cryptocurrencies based on their separate blockchain platforms began to surface in the market. Ethereum is a blockchain network not created to support a currency but to create and monetize applications, and Ether was developed as a form of payment on the platform. It has helped start many ICOs and has been behind the boom of NFTs. Cardano is a platform with great potential for sustainability as it doesn’t have high electricity usage typical of mining, as well as prevention of fraud and counterfeit goods. Binance is one of the world’s biggest cryptocurrency exchanges which is also used for payments, book travel, entertainment, online services, and financial services.
Other examples of cryptocurrencies are Tether, Solana, XRP. Dogecoin is the first joke cryptocurrency, made to poke fun at Bitcoin but after a tweet from Elon Musk who viewed it positively, its profile rose to a legitimate cryptocurrency. Tokens are constructed within the blockchain of an existing coin like Bitcoin or Ethereum but they are not currency. They are programmable assets that are used to create unique smart contracts which create ownership of assets outside the digital blockchain network in the real world. They represent units of value like electricity, coins, digital assets which can be sent and received, used for investment or economic purposes. For instance, a token can be issued as a part of an initial coin offering(ICO) representing a stake in a blockchain like a stock offering or a decentralized finance (Defi) project. Utility tokens like Namecoin provide decentralized DNS service for internet addresses, while another, Storj, allows file sharing.