El Salvador became the first country to accept cryptocurrency as legal tender in September 2021. As we enter 2022, Pakistan is on the brink of banning cryptocurrencies. Kim Kardashian is all over the news over an alleged “pump and dump.” If you don’t understand how these headlines are connected, keep reading. Yet what is cryptocurrency?
Since the first whispers of Bitcoin way back in 2008, cryptocurrency has become a vast financial market with a global valuation of over $2 trillion. Yet few people truly understand it. Wallets, whales, and whitepapers – welcome to the world of cryptocurrency. In this crypto 101, we will answer all your questions and get you ready to enter the world of cryptocurrency trading.
What Is Cryptocurrency?
Since Bitcoin rocked the financial markets in 2008, the world has undergone a major economic crash and a global pandemic with unforeseen impacts on the worldwide economy. As we enter a post-industrial, pre-AI, an understanding of the concept of electronic cash is ever more important.
Cryptocurrency is a reaction to traditional finance. The idea behind Bitcoin, the original cryptocurrency (and still the most powerful), was to offer an alternative to the banking sector. Founded by “Satoshi Nakamoto” (an individual or group whose exact identity has not been confirmed), the Bitcoin whitepaper announced the need for “an electronic payment system based on cryptographic proof instead of trust.”
Many of the original crypto-enthusiasts claimed that this “electronic cash” offered a means of making fast and affordable online transactions without the interference (or fees) of a third party such as a central bank. Unlike fiat money (e.g., the US dollar), cryptocurrency is not tied to any government. A future financed by cryptocurrency promised financial autonomy, transparency, and the possibility of sending and receiving money online to the estimated 1.7 billion people worldwide without access to a bank account.
Cryptocurrency is still making waves in the financial industry about two decades later. Bitcoin has inspired tens of thousands of cryptocurrencies in its wake (“altcoins”). Some of the biggest include Ethereum, Ripple, and Dogecoin – more on these below.
Yet cryptocurrency’s primary use has diverted from the original ideal: most cryptocurrency transactions are an investment. According to a CNBC survey, over 1 in 10 Americans bought or traded cryptocurrency in 2021. This same year, Bitcoin hit an all-time high, reaching over $68,000 in value in November.
No other financial market experiences the same dramatic peaks and slumps as cryptocurrency. The hyper volatility of coins such as Bitcoin makes crypto trading highly attractive to traders and investors alike. Yet how does crypto actually work?
Most cryptocurrencies copied Bitcoin’s architecture and are built using “blockchain” technology. Blockchains are essentially a network of computers that together make up a Fortknox of financial data. Every time Bitcoin is sent between two users, a new “block” of data is added to the “chain.” Each transaction is made using cryptography, complex mathematical puzzles that transform financial information into infrangible code.
The idea behind the blockchain algorithm is to keep the transactions on a public ledger, thus eliminating the need for a central database. Also, cryptography is touted as being ultras secure and protecting users from having their Bitcoin stolen. Bitcoin is both transparent and private – the public ledger system means all the transactions can be viewed; however, the individual identity of the account holder is hidden.
Coins vs Tokens
The world of cryptocurrency can be confusing at first. Your Bitcoin is stored on an “address,” you keep your crypto assets in a “wallet,” and a “whale” is an investor with enough cryptocurrency to manipulate market prices with strategic trades. (For more on crypto terms, check out our cryptocurrency glossary). One common mistake when talking about crypto is mixing up “coin” and “token.” These two terms are often used interchangeably, but they are not the same thing.
A digital “coin” is the correct way to describe a whole cryptocurrency. Bitcoin and Litecoin are examples of coins. Coins operate similarly to traditional fiat currencies, and each coin is built on an individual blockchain. Coins are primarily created and distributed using “mining” (the concept of cryptography where complex puzzles must be solved along with the blockchain).
A “token,” however, is more flexible than money. Similar to the tokens you may have exchanged in a video game, tokens can be used to represent a digital asset, verify your ID, or track an online product. Tokens are easier to create than coins and sometimes offered in the ICO (“initial coin offering”) used to launch a new altcoin. A new term, “NFT,” is becoming more popular in crypto circles. NFTs or “non-fungible tokens” can be used to represent the value of digital art, real estate, and more.
Crypto 101 – 10 Top Altcoins
So, once you have a handle on “what is cryptocurrency,” you may want to start trading altcoins yourself. When it comes to crypto investments, you have ample choice: according to Statista, there are over 7,500 altcoins in circulation.
Bitcoin: The grandfather of all cryptocurrencies, Bitcoin remains the biggest coin to date. Bitcoin was the first cryptocurrency, using a blockchain algorithm built on a decentralized public ledger. Many of the features of Bitcoin have been replicated in subsequent coins, including the peer-to-peer transactions, mining, and having a finite number of total Bitcoin (Bitcoin’s total supply is capped at 21 million BTC, of which around 90% have already been mined.)
Ethereum: Ethereum is arguably the most successful fork from the Bitcoin model. Ether (ETH) is the token used on the Ethereum platform. More than just a cryptocurrency, Ethereum claims to be “the world’s computer.” The major difference between Bitcoin and Ethereum is the use of “smart contracts.” Ethereum, together with several other altcoins, offers the possibility of building smart contracts on its blockchain. The idea is to have an alternative to exchanges such as Google Play Store or the Apple app store. Theoretically, anyone can build apps on the Ethereum network using its own language.
Cardano: Cardano was founded by one of the men who created Ethereum: Charles Hoskinson. Perhaps, for this reason, the two coins share several attributes; both use a “proof-of-stake” consensus algorithm whereby the holding of tokens entitles a user to create more.
Dogecoin: Dogecoin was created as a joke by engineers Billy Markus and Jackson Palmer. The pair were trying to make fun of the wild swings of the incredibly volatile crypto market with the world’s first “meme coin” or “dog coin.”
IOTA: The IOTA project capitalizes on the emerging “internet of things” (IoT). Essentially, IOTA is creating an economy for the IoT by enabling transactions between smart devices. MIOTA is the token used on its network. It has not adopted the blockchain model, using instead what is known as a directed acrylic graph to store transactions, more commonly referred to as the IOTA “Tangle.”
XRP: A semi-autonomous fork of Ripple, XRP is the digital currency used to make payments on its parent platform. Unlike many other cryptocurrencies, Ripple advocated for less of an alternative to the traditional banking sector and proposed merging the two. Using XRP and the Ripple platform, large-scale financial institutions such as banks can make faster and cheaper online transactions.
Bitcoin Cash: Another fork of the alma mater Bitcoin; Bitcoin Cash has since split again, this time with another subsidiary cryptocurrency: Bitcoin SV. Bitcoin Cash offers faster transactions with lower processing fees than Bitcoin. The founder of Bitcoin SV, Craig Wright, claims to be the original Nakamoto (who allegedly created Bitcoin).
Tether: Tether is a digital coin backed by the US dollar. For this reason, it is called a “stable coin,” in other words, a cryptocurrency tied to a fiat currency. The idea behind Tether is to capitalize on the improvements of cryptocurrency without losing the government’s financial backing.
Binance Coin: Binance is a cryptocurrency exchange platform for trading altcoins. They have their coin, which can both be used for online payments and in the form of a token for paying fees on the exchange itself. Users can also build apps on the Binance DEX (the decentralized exchange).
Litecoin: The Litecoin project was born in 2011 as a fork to Bitcoin. The later cryptocurrency is nearly identical to the first. Like Bitcoin, the total number of Litecoin is capped at a maximum supply of 84 million LTC.
Once you have done ample research and found the altcoins you wish to invest in or trade, you will need the right platform. Here at TradeOr, we offer swift and straightforward access to the crypto market, alongside many other financial assets (metals, stocks, forex, and more). You can trade BTC, ETH, and more using our user-friendly and feature-rich platform. Best of all, TradeOr charges zero commission or hidden fees, and our clients gain premium access to the best charting software available.
- What is cryptocurrency
Cryptocurrency is a form of digital money or "electronic cash" secured by complex computer code known as "cryptography." Many cryptocurrencies are built on blockchain networks using mining to create new tokens and approve transactions.
- How does crypto work?
Cryptocurrencies are a "peer-to-peer" technology that uses a decentralized network to store transactions (instead of going through a central third party). All transactions are recorded and held on a public ledger called the blockchain and viewable by all. For more on cryptocurrency explained head to the TradeOr Academy.
- What are the best ways to trade crypto?
There are two main avenues of crypto trading: using leveraged trading such as CFDs or investing in cryptocurrencies for the long term. For the first option, you will need an appropriate broker or trading platform such as TradeOr.