What is Cryptocurrency?

The ultimate guide For Beginners

Perhaps the very first thing that comes to mind is Bitcoin. This is understandable as Bitcoin is the first and most famous cryptocurrency that has captured the minds and hearts of many people. However, there is a proper definition of cryptocurrency.

This article is our attempt to demystify this often misunderstood asset class and try to clarify most of the misconceptions about what it is and what it is for.

Topics You'll Learn in This Guide

Introduction

Let us begin by dissecting the word “Cryptocurrency.” It is the combination of the words Crypto and Currency. “Crypto” is the short word for cryptography, a practice of securing sensitive information from unintended parties. While “Currency” is a medium of exchange, commonly known as money and circulated as banknotes and coins. Therefore we can deduce cryptocurrency as cryptographically secure money. Of course, this is an oversimplification and we will add on this definition through the course of this article.

It must be noted that cryptocurrencies are not tangible. Unlike banknotes and coins, cryptocurrencies do not have a physical form. They are represented by account balances and addresses, transactions and their own native networks. Cryptocurrencies only exist within the digital realm and oftentimes represent real-world objects like money. This is the very reason why they are cryptographically secured, to make sure they are not being reproduced arbitrarily.

People who are new to cryptocurrencies may think that this new asset type is easily reproduced since they are digital. They often times liken it to a piece of data that can be replicated with simple keystrokes similar to copying computer files. However, there is nothing further from the truth as developers of cryptocurrencies have created highly sophisticated mechanisms that can secure data stored within its network.

The First Cryptocurrency: Bitcoin

What makes Bitcoin so intriguing and perhaps where it primarily derives its value is the technology behind it— Blockchain technology. It is defined as a list of records called blocks that are cryptographically linked to each other. This technological concept is nothing new and was first described in 1991 by Stuart Haber and W. Scott Stornetta. When it was implemented in Bitcoin it was improved with Proof-of-Work as a decentralized way of writing new blocks.

Blockchain technology serves as the “trust layer” that made it possible for Bitcoin users to transact securely without the various risks associated with peer-to-peer transactions. Through this technology, all transactions are guaranteed to be immutable, irreversible and final. Most important of all transactions are not dependent on any centralized organization or entity and thus becoming immune to any centralized related risk that might arise from this.

Through the power of blockchain technology Bitcoin has become an unstoppable force of social, economic and financial change throughout the world. This technology enables true ownership of money which cannot be censored or stopped. It represents the emancipation of money from being a tool of coercion or oppression. Because of blockchain technology, it has become a symbol of hope, equality, and freedom.

The Underlying Technology of Bitcoin: Blockchain

Evolution of Blockchain Technology: Smart Contracts

Bitcoin was built on top of what the cryptocurrency community called Blockchain 1.0. This represents the first generation of Blockchain technology. Due to the immense success of Bitcoin, other visionaries saw the application of blockchain technology in other use cases. One of which is Vitalik Buterin who proposed scripting language to be integrated into Bitcoin for application development. However, his idea was turned down by the bitcoin community leading him to create his own blockchain platform called Ethereum.

Ethereum represents the next iteration of the emerging technology which many now calls Blockchain 2.0. Ethereum uses the same consensus protocol as Bitcoin with some modification as well as, adding scripting functionality commonly referred to as Smart Contracts. The Ethereum network has its own cryptocurrency called Ether that is used to pay for transactions within its ecosystem. With its smart contract capabilities, Ethereum opened a whole new world of blockchain-based use cases that goes beyond payment systems.

If Bitcoin is programmable money then you can liken Ethereum to be programmable blockchain giving blockchain developers the necessary tools to allow them to create decentralized applications. The creation of Ethereum served as a catalyst that led to the creation of some of the most important decentralized applications we have today. In fact, many prominent cryptocurrency projects started as Ethereum-based tokens which later migrated into its own mainnet network. These include EOS, TRON, USDT, and Binance Coin.

Newer Generation Blockchains

Previously we talked about Ethereum-based tokens that have migrated into its own blockchain or main network and cited EOS and TRON as prime examples. Strictly speaking, when these tokens migrated into its own network they are not anymore considered Tokens but are now Coins as they do not rely on another platform to issue its tokens. Moreover, the strong focus of these coins to solve the many challenges of the previous generation blockchain (Blockchain 1.0 and Blockchain 2.0) led many to describe them as the third iteration of this emerging technology.

Blockchain 1.0 and 2.0 share the same consensus protocol, Proof-of-Work (PoW). Therefore they share the same advantages and disadvantages. Cryptocurrencies that use this consensus protocol are widely considered the most decentralized and most secure in the crypto space. However, it has major issues in scalability, transaction fees, and energy costs. These concerns gave birth to a new type of consensus mechanism that does not rely on easily outdated and expensive mining equipment and an enormous amount of energy resources— Proof of Stake.

Proof of Stake (PoS)

This consensus mechanism has proven to be a viable alternative to PoW. Unlike its predecessor, it does not require sophisticated mining devices that are not only hard to set up but are expensive and easily outdated. Instead of “miners” what we have in PoS are “stakers.” Stakers are those who hold tokens in a specified wallet or special staking mechanism. Stakers takes on the role of miners as they are the one given the task to write the next block and validate transactions. Instead of computational power, the chance of getting selected to write the next block depends on the amount PoS coins the participants are holding.

This mechanism was first introduced in a paper by Sunny King and Scott Nadal in 2012. The following year Sunny created Peercoin (PPC). However this not a pure Proof of Stake coin as it depended on PoW for the initial distribution of its coins. This title fell to NXT coin (NXT), a cryptocurrency and payment network was launched the same year as PPC. It was created by an anonymous software developer BCNext and widely criticized for its initial distribution phase where all its initial coins were distributed to 73 people through a fundraiser using bitcoins that was conducted in a BitcoinTalk forum thread.

Despite its advantages, the PoS consensus protocol has its fair share of disadvantages. PoS is generally considered less decentralized as powers to generate and validates blocks gravitates towards those with more coin holdings. There is a greater tendency of monopolization of the network where most of the influence and power will be held by a few participants with the greatest number of “staked” coins. In addition to this, some crypto community members are unconvinced that simply holding tokens are enough to disincentivized bad behavior citing the “nothing at stake problem” that might arise.

Delegated Proof of Stake (DPoS)

PoS was created to address the energy consumption problem of PoW and another associated cost that served as major barriers to entry of new participants in the consensus activity. However, as stated above, the new consensus protocol is at risk of monopolization of a few participants with a greater number of tokens. To address this concern another blockchain visionary created a variant of PoS and called it Delegated Proof of Stake (DPoS). It is a more democratic way of achieving consensus as it combines real-time voting which serves as a deterrent in hoarding staking coins and a system based on reputation.

DPoS was invented by American computer scientist, Daniel Larimer. It was first implemented in Bitshares which was launched in 2015. The most successful and famous implementation of this protocol is EOS whose mainnet launched in 2018 and has become one of the leading cryptocurrencies in the world. It is currently the 7th highest-ranking cryptocurrency in terms of market capitalization and one of the primary contenders to become the leading smart contract issuance platform. It features a more scalable blockchain that can process several hundred times faster Ethereum without transaction fees.

Like many other consensus protocols, DPoS has its share of flaws and disadvantages. First is the formation of cartel-like delegates which hoard all block producing activities as well as the validation process. Moreover, most of the governance structure of DPoS-based blockchains relies on these votes giving significant influence to delegates which most likely remain the same. Another concern is the scenario where coin holders do not vote, then the consensus mechanism fails to become a proper democracy. Finally, there are also concerns about the vote-buying of candidates giving the advantage to candidates with more resources to win.

Blockless Chains: Directed Acyclic Graph

Blockchain has become a household name of the underlying technology that powers cryptocurrencies, however, it is not the proper name for such technology as there are other “blockchains” that are essentially block-less. We have used blockchain throughout this article for convenience and familiarity, but the more accurate term that we should use is Distributed Ledger Technology (DLT). One of these “block less” DLT is what we call Directed Acyclic Graph (DAG). Like blockchain, it is a method on how data are stored and retrieved in a distributed ledger to achieve consensus.

A DAG does not use blocks, and transactions are added directly on the distributed ledger. Instead of using blocks it uses a group of nodes that can exist simultaneously. These nodes are connected like branches of trees which enables it to have more than one parent node. This means that the system can start processing other transactions without having to wait for the previous transaction to finish. We can think of it as a more efficient way of storing data where more transactions can be validated at the same time. This makes this technology more scalable compared to blockchain.

Some members in the crypto community believe that this is the next evolutionary step of Blockchain technology calling it the “true” Blockchain 3.0. However, this is a misnomer since there are no blocks involved in DAG. Nonetheless, there have been many successful cryptocurrencies that are using this technology. They are among the fastest cryptocurrencies that exist today. Three of the most popular DAG-based cryptocurrencies are IOTA, NANO and Obyte. They are able to process up to a whopping 10K Transaction per second (TPS). A whole lot faster than Bitcoin and Ethereum that can process only 7 & 15 TPS respectively.

Different Types of Blockchains

There are many types of Blockchain Technology or rather Distributed Ledger Technology (DLT). The most famous is the one implemented by the Bitcoin Network. Given the number of Blockchain projects that have been created throughout the years, there are many different types and configurations of Blockchain. However, there are two types of blockchain that we think people should be aware of. “Permissioned” and “Permissionless” Blockchains. An easier translation of these terms is “Private” and “Public” Blockchains.

Private Blockchains

Permissioned or Private Blockchains are a specialized blockchain that is primarily used by big institutions or governments who wants to leverage the advantages of distributed ledger technology but do not want other entities peering into its transactions. One good example of this is the Quorum Blockchain which is based on the Ethereum Network. This was used by JP Morgan Chase to create JPM Coin. it is a digital coin that is designed to serve as an institution-to-institution service payment. This means that only banks will be able to use this under a private network.

This type of blockchain gives a strong emphasis on the privacy of the network from outside intervention. Quorum for example does not allow any other entity to look into its transactions and there are only a limited number of trusted nodes that can participate in its consensus mechanism. Permissioned blockchains are highly centralized and sometimes brings into question if they can be considered blockchains at all. Nonetheless, most of these private blockchains borrow concepts and designs from permissionless blockchains qualifying them as such.

Public Blockchains

Permissionless or Public blockchains are the kinds that we have been talking about in this article. There is no need to reiterate its qualities and advantages here. However, it is interesting to note that there are some blockchain-based projects that combine permissionless and public blockchains They are called hybrid-blockchains. A good example of this is the Klaytn Blockchain by South Korean internet giant Kakao through its blockchain startup GroundX. It is a hybrid public/private enterprise-focused blockchain. It puts it in a prime position the be a platform for client-facing dApps as well as private blockchain-based apps for enterprises.

How are Cryptocurrencies Created?

Bitcoin was created from the ground up by borrowing many of the concepts from earlier attempts to create digital currencies. Since it was released, many other cryptocurrency projects based their code on bitcoin. They differentiated their project by using different types of consensus mechanisms, different mining algorithms, and revisions in the economic aspects of the coin. However, there have been other ways cryptocurrencies are created. Let’s consider Bitcoin Cash, it was created in a process called forking, a contentious hard fork to be exact. Basically, it means it was a result of a disagreement of the Bitcoin devs in how the next version of the project will be.

Contentious Hard Fork

This disagreement creates two new versions of a blockchain, the version that gets the majority support from the community will retain the name of the cryptocurrency. The other version can continue on as a totally different chain or stop and reintegrate with the incumbent chain. If they chose the former and continue as another chain then they have to declare another name for their chain and give instructions to supporters on how to claim the forked tokens. If they decided to reintegrate with the incumbent chain there is nothing else to do.

Fork-Merge

Instead of forking which literally means splitting two versions of a blockchain, one can create a cryptocurrency by merging them. Fork-Merge means you take two different blockchains and combine some of its features together. A good example of this is Bitcoin Private (BTCP). The developers of Bitcoin Private combined Bitcoin and ZClassic by combining the addresses and amounts of Bitcoin and ZClassic into a new cryptocurrency. Therefore, the circulating supply of BTCP was the combined circulating supply of Bitcoin and ZClassic. However, total supply remained at 21 Million and the difference between it and the circulating supply was the minable Bitcoin Private.

Smart Contract

Perhaps the easiest way of creating new cryptocurrencies is through the use of Smart Contracts. The two leading smart contract platforms are Ethereum and EOS. Creating cryptocurrencies on these platforms is so easy that you don’t really need any coding experience to do so. Just recently even Bitcoin Cash has released the Simple Ledger Protocol making it even easier to create a token based on the Bitcoin Cash protocol. More importantly with smart contracts blockchain, devs were able to create cryptocurrencies that go beyond payment use cases.

Where do Cryptocurrencies get Their Value?

Before we can answer this question we need to understand what is the meaning of value. Contextually it may carry different meanings depending on how it relates to the circumstances surrounding an event, statement, idea or how it is used. Since the very first cryptocurrency is Bitcoin and the most valuable in terms of market capitalization, we look at its history and find out what was the primary reason behinds its invention and what are the problems it wanted to address when it was released.

Bitcoin Was a Result of Monetary Policy Discontent

The very first block of Bitcoin was mined on January 3, 2009, and within the codebase of this block was an embedded message “The Times 03/Jan/2009 Chancellor on brink of second bailout banks.” This message and the timing of its release seems to point that Bitcoin’s creation was a reaction to the failing and unsustainable fractional-reserve banking system. We can deduce then that the value of cryptocurrencies comes in the form of an alternative monetary system that is not subject to institutional failures.

The Intrinsic Value of Cryptocurrencies

Many believe that the intrinsic value of cryptocurrencies, particularly bitcoin comes from its decentralization feature that makes it secure, immutable and unstoppable. Unlike money held in banks and other centralized financial institution, no single entity can stop bitcoin transactions as well as other similar cryptocurrencies. There are no banks that can stop transactions, no payment processors that can decline processing payments or governments to stop the movement of money. Since it cannot be controlled by any single entity it cannot be weaponized to force one’s own agenda towards an unwilling party.

Its intrinsic value may also come from its increasing utility as a “Safe Haven Asset” or “ Store of Value” that can be used as a hedge to an increasing macroeconomic uncertainty across the world. The persistent trade war between China and the U.S., the on and off social unrest in Hong Kong and the prevailing economic woes of Venezuela and Iran due to economic sanctions instigated by foreign powers demonstrates how bitcoin and cryptocurrencies can serve as a lifeline of citizens who have become collateral damage on socio-economic and political warfare or who fell victim to tyranny or oppression.

Another source of intrinsic value of cryptocurrencies depends on what type of cryptocurrencies they are. Some cryptocurrencies represent the tokenization of commodities, stocks, and real estate. Thus its intrinsic value originates from the assets they represent. One good example of this type of crypto is PAX Gold (PAXG) which is backed by one fine troy ounce of a 400 oz London Good Delivery gold bar that has been physically stored in Brink’s gold vault. Many of these types are being developed as we speak with a growing interest in applying tokenization in luxury real estate.

How are the prices of cryptos determined?

Prices of cryptocurrencies are determined by the economic law of supply and demand. This basically means that the value of cryptocurrencies typically increases when the supply is less. The opposite is true when the supply is greater. Just take a look at what happened to the prices of Stellar Lumens when it decided to burn more than 55 billion XLM tokens effectively cutting its supply into half. Its market price jumped 15-20%. This is the reason why most traders always take into consideration the total supply, circulating supply as well as inflation rates when investing in cryptocurrencies.

The act of burning is a common practice in the crypto space as a mechanism to control the circulating supply of their crypto. Binance conducts quarterly burning of its tokens to permanently remove some of its coins from circulation reducing total supply. It plans to burn 100M Binance Coin (BNB) which represents half of its total supply. The number of tokens burned depends on the number of trades performed on its exchange within a 3-month period. Since cryptos don’t have physical form the act of burning is typically a transaction that sends the tokens to on an unrecoverable address.

Everyone can participate in determining the price of cryptocurrencies by trading online. This is one of the benefits of cryptocurrencies. It has lowered the barrier to entry of people to participate in money markets. Through the use of cryptocurrencies, people can trade online for as low as 10 USD or even less. More importantly, through the power of blockchain technology participants can do this without having to rely on any third party or intermediary to ensure that trades push through. Inclusivity is one of the many benefits cryptos bring to the table.

Why are Bitcoin and Ethereum so Slow?

Despite being the top two cryptocurrencies in the world Bitcoin and Etherum suffer the same problem. They do not scale effectively. This has something to do with the limitations of the Proof-of-Work they both use. To make things even worse, Transaction fees on both of these networks exponential increases when the network is congested as they follow the Highest-Fee-First-Service transaction scheduling order. This means that transactions with higher fees attached to it will be processed first. People have been known to wait up to more than 24 hours for their transaction to push through because of this.

While there are available technologies that can be implemented to address this problem, striking a balance for a network that is secure, scalable and decentralized is easier said than done. This is known as the Scalability Trilemma coined by Vitalik Buterin. It explains the extreme difficulty to achieve a scalable and secure blockchain in a decentralized environment. Moreover, it is the primary reason why it is taking both Bitcoin and Ethereum developers years to develop and implement scalability solutions, as they do not want to lose the decentralization aspect of their network where many believe its best value emanates from.

Things Needed to Start Using Cryptocurrencies

Cryptocurrencies and its underlying technology blockchain have many moving and fluid parts. It is oftentimes overwhelming even just to begin. To help new users to hit the ground running we will share with you several things they need to know about this nascent industry. We will begin with the things we need to know about using the Bitcoin Network then move towards the many other use cases cryptocurrencies are used outside the realm of the finance sector. Let’s start by doing our own due diligence.

Know What You Are Getting Into

DYOR is one of the most important activities when you enter the crypto space. This means “Do your own research.” There are many legitimate resources out there about cryptocurrencies. Do not limit yourself to using only one source of information. Be aware that there are many who are SHILLING and FUDDING cryptocurrencies. These are tantamount to spreading fake news. Shilling is the act of promoting a project for the sole purpose of profiting from new investors. Fudding, on the other hand, is spreading fear, uncertainty, and doubt without proper evidence of their claim.

Check Regulatory Environment

Before you dive into cryptocurrencies it is prudent to understand what is the current regulatory environment you are in. It is important that you are aware if there are any restrictions in your country to avoid a whole lot of headaches later on. We are glad to say that in most countries participating in cryptocurrency activities is legal and sometimes encouraged. Most countries have already declared their stance on cryptocurrencies and should be searchable in the various search engines online.

Create Your First Crypto Wallet

Now that you are ready and clear to join the cryptocurrency revolution the very first thing you might want to do is to create your first wallet. There are many types of crypto wallets you can choose from. However, for beginners, we recommend a custodial wallet service provider that has on-ramp and off-ramp services for fiat currencies. This means these wallets support depositing fiat money and converting them into Crypto as well as the feature to convert them back to fiat This is one of the easiest ways to get a wallet. One good example of this type of wallet is the custodial wallet service of Coinbase.com.

Custodial wallet service providers that have fiat currency conversion features vary from one country to another due to regulatory concerns. For this reason that we leave it up to the users to decide which one is the best choice for themselves. They may ask the local cryptocurrency community through the various social media networks online for available options. If fiat on-ramp and off-ramp features are not important (yet), then we suggest getting those non-custodial wallets. Coinbase has a non-custodial wallet also, but we recommend getting non-custodial universal wallets which usually support the top blockchains.

Non-custodial wallets are cryptocurrency wallets that you have access to its private keys. This means you yourself are solely responsible for the security of your wallet. So long as nobody knows your private key or passphrase seeds your crypto assets will be safe. These types of wallets are highly secure, however, if by any chance you lose your private key or passphrase seeds it is impossible to regain access to these wallets. Despite this risk, we highly recommend users to get used to this type of wallet.

Register On A Cryptocurrency Exchange

There are many cryptocurrency exchanges out there and the best one for you depends on where you are located. Asking around local cryptocurrency communities online is an effective way to familiarize yourself with the many options available. Due to referral programs, there will always be a helping hand around. However, if need be, you can always join Binance, Coinbase Pro, Bittrex, OKEx, Huobi, and Kucoin as they are proven international

Decentralized Exchanges

There is a special kind of exchange where you can trade right off your non-custodial wallets. These are what you call decentralized exchanges or DEX. They are deemed safer than centralized exchanges since you never lose custody of your cryptocurrencies not until the moment you execute a trade. On top of this DEX is executed on-chain which means trades are governed by smart contracts on blockchain technology, making them unstoppable, irreversible and immutable. DEX is also generally less susceptible to hacking attempts.

Familiarize Yourself With Crypto Information Sites

Due to the velocity by which cryptocurrencies evolve you have to stay updated with current developments of cryptocurrencies. You can get this information from crypto information sites. Coinmarkecap, Coingecko, and Messari are some of the most respected and well-recognized sites out there. They provide daily updates on crypto markets, social media updates and relevant developments in the crypto space. They also provide basic but essential information about cryptocurrencies such as total market cap, official websites and block explorers.

Block Explorer

One of the tools that new cryptocurrency users should learn how to use are block explorers. As the name implies these are tools that enable users to explore the transactions of the different blockchains. The more popular blockchain explorers out there are blockchain explorers of Btc.com, Blockchair, Etherscan, Bloks.io, and Tronscan. Some of these explorers support multiple chains some support specific chains. You can always get the proper explorer from the official websites of the projects or at cryptocurrency information sites.

How to Acquire Cryptocurrencies

Free cryptocurrency giveaways

There are many ways to acquire cryptocurrencies. In fact, you can acquire them without spending a dime. You can participate in free giveaways like crypto faucets, airdrops, social media awareness campaigns or other creative ways developers and issuers concocted for distribution or marketing their projects. This kind of distribution is nothing new in the crypto space and we have seen many projects successfully launched using this method. One good example of this is the distribution of Raiblocks (XRB) which later rebranded into Nano (NANO).

Faucets

Nano was distributed through Captcha faucets through the distribution algorithm they call proof-of-human-work. Participants were tasked to accomplish as much captcha as they can in a specified time frame. Top performers are rewarded with Nano (Raiblocks) for each round. Those who did not make the cut will keep their balance going into the next distribution round giving them the higher chance they will be rewarded next.

Airdrops

Airdrops is another type of free giveaway where issuers ask participants to do some pre-airdrop tasks to qualify. ByteBall (GBYTE) which rebranded to Obyte recently distributed its cryptocurrencies through airdrops. Those who wanted to participate just needed to verify ownership of their BTC wallet addresses through an attestation bot within the ByteBall wallet. The amount received depends on the amount of BTC you hold on that said wallet. Those to attest their BTC wallets are airdropped GBYTEs every distribution cycle, which is every full moon.

Twitter Giveaway

Twitter crypto giveaways are also gaining ground. Twitter accounts can participate by liking, retweeting and commenting on certain tweets and they automatically qualify for some airdrops. The South Korean blockchain project, Klaytn recently did a Twitter giveaway in partnership with Singapore-based Upbit Global. They just have to spread awareness about the giveaway and have a verified account in the Upbit account to receive it. Other projects also launch airdrops via Twitter giveaways, like Klaytn they just have to spread awareness about Twitter and drop their crypto wallets to receive the airdrop.

Purchase

Those who do have the means to join or simply do not have the time to participate can just purchase cryptocurrencies off their wallets or crypto exchanges. Depending on where you are located there are a variety of ways to buy cryptocurrencies. From convenience stores, ATMs, automated kiosks, airports, remittance centers, and even banks. Finding where to buy cryptocurrencies nowadays is just a simple stroke of fingers in Google search. Better yet, you can join a local online cryptocurrency community to ask where are the best places and get the best rates to buy.

Work for it

If you want to get substantial amounts of cryptocurrencies for upcoming projects instead of investing in them you can participate in Bounty Programs. It is a new type of social media marketing where developers encourage the participation of the cryptocurrency community. There are several types of bounties usually done in the different social media channels in the crypto space. These include, but not limited to, blog-posts in Medium, tweets, sharing and liking Reddit posts, Facebook commenting, BitcoinTalk signature campaigns, Youtube videos, and other social media mar

Different Types of Cryptocurrencies

As we have said earlier there many types of cryptocurrencies. There are however several categories they can be categorized. But before we delve into this, let us go over some of the terms that have been thrown around and used to refer cryptocurrencies. First, are “digital currencies” which was first coined in a research paper by David Chaum back in 1983 and later in the 1990s implemented in a now-defunct private digital money issuer Digicash which spur its other name “Digital Money”. This is a term generally used to describe all forms of electronic money such as cryptocurrencies and virtual currencies.

Cryptocurrencies vs Virtual Currencies

Over the years digital currencies evolved into digital assets which is a better term to describe the different types of cryptocurrencies. This will be clearer when we discuss fungible and non-fungible cryptocurrencies later on. Cryptocurrencies and virtual currencies are terms that are used interchangeably. While this is generally accepted crypto purest will always prefer the usage of cryptocurrencies over Virtual currencies (VC). VC, on the other hand, is often used by international monetary organizations, government agencies, and central banks.

The European Central Bank defined cryptocurrencies in 2012 as virtual currencies or digital money in an unregulated environment, issued and controlled by its developers and used as a payment method among members of a specific virtual community. Of course much has changed then as more and more regulations are taking shape as we speak but gives us important insight on how terms evolved overtime. It is important to note that they only exist in digital and electronic form, unlike a dollar bill or coin that is tangible.

Cryptocurrencies have gained the attention of many big companies including traditional financial institutions. Some of them wanted to take some piece of action by developing their own digital currencies. Good examples of these are JPMorgan Chase’s JPM coin and Facebook’s future stablecoin Libra. However, some members in the cryptocurrency community do not want to refer to them as cryptocurrencies but virtual currencies since they are issued by a centralized organization such as companies and banks.

Bitcoin vs Altcoins

The highest categorization for cryptocurrencies is perhaps Bitcoin and Altcoins. This stems from the fact that for the longest time Bitcoin has stayed on top of the cryptocurrency market. It is the most popular, liquid and dominant cryptocurrency in the world. If a government is considering regulating cryptocurrencies this is the crypto they regulate first. Furthermore, almost all the cryptocurrency exchange support bitcoin making is the reserve currency of the industry. This categorization is commonly used when considering substantial investment in crypto. Many believe bitcoin is a class of its own and the success of the industry depends on its success.

As a rule of thumb, all other cryptocurrencies are Altcoins, even those cryptocurrencies that have totally different use cases. Ether is considered an Altcoin despite its primary function as protocol coins for transaction fees in the Ethereum Network. Other popular Altcoins include Litecoin (LTC), Bitcoin Cash (BCH), XRP, Tether (USDT), Monero (XMR), EOS, and Binance Coin (BNB) and. Many of these cryptocurrencies serve specialized functions or feature unique properties for a specific purpose.

Litecoin (LTC)

Let us take for example Litecoin. It was created by a computer scientist who used to work at Google, Charlie Lee. It was created using the same codebase of Bitcoin with some modification that allows it to be more user-friendly, faster, cheaper to transact and more resistant to specialized mining equipment. In addition to this, it positioned itself as a test chain as it often implements new technologies ahead of bitcoin. This includes SegWit2 and the Lightning Network.

Bitcoin Cash (BCH)

Bitcoin Cash is very similar to Bitcoin, so similar that some of its supporters are claiming that it is the real Bitcoin that Satoshi Nakamoto envisioned. Bitcoin Cash (BCH) was not created by anyone, it was a result of a contentious hard fork. In layman’s terms, it was a result of a disagreement within the Bitcoin developer community on how to upgrade the Bitcoin protocol. This resulted in two persisting versions of the Bitcoin blockchain. Bitcoin Cash adopted its name when it did not get majority support from the wider bitcoin community.

Ripple (XRP)

XRP can be considered the “Dark Horse” among the Altcoins due to Ripple Lab’s strong ties with traditional financial institutions. This is aggravated by the organization’s huge influence on XRP with regards to its distribution, development and consensus creation. Nonetheless, it is still considered an Altcoin which at one time ranked no. 2 in terms of market capitalization. What it lacks in decentralization it makes up by offering ultra-fast transaction times, low transaction fees and a number of relevant high profile partnerships in the finance industry.

Tether (USDT)

Many would-be cryptocurrency users have expressed concerns about the wild volatility of cryptocurrencies. While this characteristic can be a boon or a bane for the emerging asset class, there are inherent advantages if there is a cryptocurrency have a more stable value. Tether is exactly that. It is a Stablecoin whose value is pegged to the value of the USD dollar. In order to do this each of the coins or tokens are backed by real USD, as claimed by its issuer. While there are some concerns about this claim Tether has the biggest market share in terms of stablecoins.

Monero (XMR)

XMR is a specialized cryptocurrency that focuses on privacy, anonymity, and untraceability. It is so good with these characteristics that it has been linked to many illicit activities in the past, such as cryptojacking which involves secretly installing crypto mining to unsuspecting users. Regulators and governments looks down upon privacy coins as they are allegedly used in money laundering activities and terrorism financing. Several governments have already restricted regulated exchanges from supported them, notably Japan and South Korea.

EOS

EOS is a smart contract platform like Ethereum but features a strong focus on addressing the scalability needs of decentralized applications. Its advanced design enables it to perform fee-less transactions. EOS coins are used in its network to represent part ownership of operating system-like resources that enables transactions within the network. Unlike Ethereum EOS can process several hundred times more transactions per second making it a more scalable alternative for Smart contracts implementations. It was once considered an ERC20 token under the Ethereum Network but later on migrated to its own Blockchain becoming a full pledge coin.

Binance Coin (BNB)

Binance is another Ethereum token that has migrated into its own blockchain-base network, BInance Chain. Hence it is now considered a coin. It was a utility token when it was as an ERC20 token, mainly used for paying trading fees and other value-add services in Binance Exchange.Now it is a protocol coin for the Binance Chain but retains all the use cases of its previous version.

Coins vs Tokens

Cryptocurrencies can be coins or tokens. There are many differentiating factors that determine if a certain cryptocurrency is a coin or a token. Coins generally have their own blockchain while Tokens requires another blockchain for it to function properly. Coins are said to have the properties of money which mean they are fungible, divisible, portable and of limited supply. On the other hand, tokens can be fungible or non-fungible and have a wide variety of functions such as utility tokens, Security tokens, and commodity tokens.

Properties of a Crypto Coin

Fungible is the property of cryptocurrency coin that enables it to be interchanged for another coin of the same type and value. This implies that the two are identical in specification and can be mutually substituted with each other. Take for example 1 Bitcoin (BTC), it doesn’t matter who owns it or where it is stored or located, 1 BTC is worth the same amount. Another example of fungibility is when using it as a medium of exchange. For example, two buyers are purchasing the same item valued at 1 BTC, one purchaser paid for the item by sending 1 whole BTC to the merchant, the other buyer paid for it by sending two 0.5 BTCs from two different wallets.

Fungibility

Crypto coins are also said to be divisible. This simply means that they can be broken down into smaller units to facilitate a transaction. Take for example Bitcoin. The smallest denomination of BTC is called Satoshis which is exactly equivalent to 0.00000001 BTC. The smallest unit of ETHER is called Wei. 1 ETHER is equivalent to 1,000,000,000,000,000,000 Wei. This is important since crypto coins are functioning as a medium of exchange. This enables the exchanging parties to transact the exact amount needed to consummate a transaction.

Limited supply

Crypto coins are typically limited in supply. For Bitcoin, the maximum supply that will ever exist is 21M BTCs. This is usually set by the developers. How this number is determined depends on the use case and purpose of the specific cryptocurrency. Interestingly Ether, the protocol cryptocurrency of the Ethereum network is also considered a coin despite it not having a limited supply. This only means that so long as cryptocurrencies possess some of the properties of money they can be categorized as crypto coins. That being said, it must be noted that not everything is set in stone, definitions and categorizations might overtime.

Portability

Coins also portable which basically means they can be carried along and exchanged. Bitcoin is the same, albeit virtually in cryptocurrency wallets. There are however options to carry them physically by using paper wallets and hardware wallets. Paper wallets are just a piece of paper with where your private keys or recovery mnemonic phrase is written. A hardware wallet, on the other hand, is just a piece of storage device that stores private keys or mnemonic phrase and often times have physical mechanisms to initiate or approve transactions.

Four common types of Tokens

The inception of the Ethereum platform enabled blockchain developers infinite opportunities to create decentralized applications. By leveraging the power of distributed ledger technology (DLT) or commonly known as blockchain technology, innovators and visionaries were able to apply them to various use cases that have the potential to disrupt whole industries, create new ones or basically change our way of living. To get a better sense of its applications we have identified Four types of tokens.

Utility tokens

These types of tokens only hold value within the ecosystem they originate from. Most of the time, they act as a type of payment for a service or product within a project. Take for example LINK tokens. This token is used to pay LINK node operators to pass or retrieve data for blockchain-based data systems. Other good examples of this type of tokens are those being used in Crypto exchanges such as Houbi Tokens and Kucoins tokens which serve as exchange fees as well as payments for other value-added services. Binance Coin was once a utility token but has since migrated into its own blockchain making is a utility coin.

Security tokens

These tokens represent an ownership or stake in a company or decentralized autonomous organization (DAO). Holders of these type tokens expect to profit from the value of the company or from future revenues generated by the token issuer. One good example of this type of tokens is tZero (TZROP), which is a majority-owned subsidiary of Overstock.com. It is an ERC20 compliant token. Holders will receive 10% of the adjusted gross revenue from its securities exchange platform. It can be likened to Binance but for digital securities that are fully compliant to U.S. SEC rules.

Commodity tokens

These tokens are digital representations of commodities. The prices of this type of tokens are pegged to the prices of real-world commodities such as gold, oil, and sovereign currency. PAX Gold (PAXG) and Tether (USDT) are excellent examples of commodity tokens that are backed by gold and currency respectively. Petro and PetroDollar are two examples of oil-backed commodity tokens. Petro is a bit of a dark horse in the crypto community since it is issued by the Venezuela government but it is still considered commodity token by definition. On the other hand, Petrodollar has rebranded into PDX coin and will be relaunching soon.

Non-fungible Tokens

There is another type of crypto tokens that is fundamentally different from the other tokens we have discussed so far. These are the Non-fungible Tokens (NFT). Unlike fungible tokens which are interchangeable and uniform, NFTs are not interchangeable and unique, holding not only value but also information. Moreover, NFTs are issued in a totally different Ethereum token standard called ERC721. NFTs can be used in digital identities, educational certificates and diploma, collectible, unique digital assets, in-game items, supply chain tracking, all types of licenses, legal documents and more.

One of the most common applications of Non-fungible tokens in crypto space right now is its application in in-game items. Enjin is one of the leading platforms for in-game NFTs. They have been partnering with many game developers to introduce blockchain technology and how it could benefit the wider industry. NFT represents true digital ownership and the interoperability of gaming items. They have been very active in developing this niche that the Ethereum community has approved its Ethereum Improvement proposal (EIP) to improve the ERC721. This was dubbed as ERC1150.

Who can use Cryptocurrencies?

One of the most important and beloved characteristics of cryptocurrencies is the fact that everyone can use them. It does not discriminate on one’s social or financial status, religious affiliation or where you live. You do not even need the internet to be able to use them. So long as you have access to the many ways it can be traded or exchanged then you can use them. In fact citizens, companies, governments and different types of organizations from around the world use them.

Cryptocurrencies are so free to use that during its early days a lot of secret transactions in the dark web were executed using cryptocurrencies. This resulted in the common, but false notion that most cryptocurrency transactions come from illicit activities. While there is no denying that some transactions might indeed be, the same can be said with other government-issued currencies. Commercial usage of cryptocurrencies has been increasing throughout the years as more government discovers the many benefits of its underlying technology. More than ever, governments are now looking into leveraging this new asset type and its technology.

How are Cryptocurrencies Being Used?

The very first cryptocurrency was Bitcoin and it was initially positioned as peer-to-peer electronic cash. Thus it was meant to be a medium of exchange. However, it evolved to became a store of value when experts realized that bitcoin’s price generally increases over time. Some even believe that the emerging asset class can serve as a safe-haven asset as its value increases when there are macro socio-economic uncertainties.

Moreover, it has become an alternative investment vehicle with the advent of Initial Coin Offering (ICO), giving investors other means to participate in capital raising. Due to the many innovations in the blockhain space, the uses of cryptocurrencies expanded greatly. From digital certificates, identity, digital ownerships, supply chains, tokenized real-world assets and more.

When is the Best Time to get Into Cryptocurrencies?

Cryptocurrencies are perhaps the most volatile asset class in the world. However, using the many crypto financial instruments, that are increasingly available, one can make a profit whatever the price movements might be. No one really knows when is the best time to get into cryptocurrencies. Nonetheless, almost all cryptocurrency experts believe that we have just started to scratch the surface of the potential of blockchain and cryptocurrencies. Therefore we can infer that the industry is still relatively young and people entering this space now are still considered first movers.

Why Hasn't it Gone Mainstream?

With all the advantages of cryptocurrencies and blockchain technology, one would ask why this new emerging asset class and technology have not reached the mainstream audience. There many valid reasons why this has not yet happened and we will discuss some of the more relevant reasons why. First, cryptocurrencies and their underlying technology are incredibly hard to understand. This makes it very difficult to onboard users as well as explain the new technology to regulators.

Second, there is a lack of awareness and understanding of this nascent industry. This is the direct result of the first reason which resulted in the lack of people who are fully qualified to explain would-be users and regulators what cryptocurrencies are and what it is aiming to accomplish. This, in turn, resulted in another major barrier for mass adoption and the third reason why it has not gone mainstream, no regulatory clarity. Many experts believe that for this industry to grow and attain mass adoption it needs to have regulatory clarity. However, achieving this is very difficult for reasons cited earlier, more so for the next.

It is no secret that cryptocurrencies are in a unique position to disrupt the status quo in finance. Through technology, many of the existing financial-related organizations and structures may become irrelevant. This existential threat compelled many of them to make it increasingly difficult for the mass adoption of cryptocurrencies. Some Central banks restricted servicing crypto-related businesses. Private financial institutions began prohibiting its customers from cryptocurrency transactions.

Why Should you Care About Cryptocurrencies?

If you value freedom then cryptocurrencies should matter. For the first time in human history, we have created a technology that encapsulates “Truth,” a system that cannot be adulterated, altered or change in any way. Something that is persistent, cannot be censored and unstoppable. In a way, it emancipates us from the control, manipulation, and subjugation of the powerful few who do not usually hold the best interest of the many. Furthermore, it empowered the vast majority who are less influential to participate and create a more egalitarian society.

So, What are Cryptocurrencies?

Cryptocurrencies are basically Digital Assets of Trust where truth is established not by a single authority but through a consensus of all stakeholders. It is an asset that is immutable, incorruptible, unstoppable and transparent. More importantly, it imbues inclusivity, equality, and freedom for all. Its utility is not limited to financial transactions but for anything that involves truth and act of trust.

Cryptocurrency Myths

Cryptocurrencies can be replicated by a simple cut and paste like any other digital data. This is absolutely not true. Cryptos are highly secure and are carefully tracked and accounted for which everyone can inspect and audit using a block explorer.
Bitcoin is an original concept invented by Satoshi Nakamoto. This is not necessarily true. Most of the underlying technology and concepts used in bitcoin have been invented or conceptualized several years or decades ahead of its time.
Cryptocurrencies are mostly used for illicit activities. This is outdated information. It was once the preferred choice for transacting secret trades in the dark web but never reached the same levels of illicit transactions using the US fiat currency.
Bitcoin and Blockchain are the same. This is absolutely false. Blockchain is the underlying technology the powers the Bitcoin network. Bitcoin is the first use case for applied blockchain technology and focuses on the financial sector.
The majority of Bitcoin mining farms are located in China which predominantly uses fossil fuel. This makes Bitcoin a major contributor to Climate Change. “Non sequitur!” The latest study shows 75% of the energy sources used in Bitcoin mining comes from renewable energy sources.
Cryptocurrencies are only used for payments.False! The integration of Smart Contract functionality in Blockchain-enabled developers to create different types of cryptocurrencies that cater to a wide variety of industries and use cases.
Crypto and blockchain-based Apps are for highly technical people. This is not necessarily true. While there might be a steep learning curve, developers have been designing blockchains and applications that are easier to use. Some dApps did is so well that you wouldn’t know that you are using a blockchain-based application.
All cryptocurrencies use Blockchain Technology. Not true. Blockchain has become a household name to describe distributed networks that power most cryptocurrencies. However, a better term for it is Distributed Ledger Technology (DLT). Directed Acyclic Graph is an alternative to Blockchain.
Crypto transactions are anonymous and untraceable. This is not entirely correct. There are some cryptocurrencies that have Confidential Transaction functionality but a great majority are transparent and can easily be monitored using blockchain explorers.
Cryptocurrencies are Ponzi schemes, scams and do not hold real value. Absolutely not. Throughout the years cryptocurrencies have proven to be an effective medium of exchange, store of value, investment vehicle, safe-haven assets, and utility token for various industrial, institutional and government applications.
Cryptocurrencies are considered currency. Not yet. While some cryptocurrencies act and position themselves as currency, generally, they are not yet considered legal tender around the world. More often than not they are considered property which holds value.
Cryptocurrencies are not regulated. False. Cryptocurrencies are increasingly being regulated around the world. The convoluted nature of Cryptos and its underlying technology is making it hard for government agents to regulate the space. IT often time calls for the creation of new laws and agencies just to cater to them.
You don’t need to pay tax on Crypto. Not entirely true. This is not universally true in all jurisdictions. Some parts of the world have already existing tax guidelines on how to treat this emerging asset class. This is not considered bad as it is an indication of increasing adoption and recognition.
It is too late to get into Cryptocurrencies. False. It is never too late to get into cryptocurrencies. Most pundits believe that we hardly scratched the surface of the potential cryptocurrencies and its technologies. Innovation will keep the industry fresh and replete with opportunities.
Cryptocurrencies are easy money. Generally not true. Like any other asset type, there is always some degree of risk when participating in the crypto industry. The very volatile nature of cryptocurrencies makes it possible to make massive profits in a very short period of time, but the same is also true in getting rekt in it.
Cryptocurrencies are too volatile to worth with. No. There are many ways to work around the volatility of cryptocurrencies. Crypto payment gateways have automatic convert features that will immediately convert cryptocurrencies into fiat. Moreover, there are Stablecoins pegged in fiat currencies and Gold-pegged cryptos.
Cryptocurrencies can’t be spent on anything. False. Cryptos have been increasingly been accepted as a form of payment. It some states in the U.S. taxpayers are able to pay their taxes using bitcoin via crypto payment processors.
Cryptocurrencies are illegal. Simply not true. Very few countries in the world have classified them illegal and the international community especially those that deal with global monetary policy have started to provide guidelines on cryptocurrencies.
Cryptocurrencies are all the same. Incorrect. They have various use cases and blockchain implementations. They are not only used as currency but in a wide variety of applications that go beyond the financial sector.
You have to own them to make a profit from them. No. There are many ways to earn crypto even without owning them. One good example of this are Bitcoin Futures, this type of financial mechanism leverages the volatility of Cryptos like Bitcoin but are settled in cash.
The government can stop cryptocurrencies. Not completely true. Decentralization ensures that this will never happen. China, Russia, and India to some degree have tried to stop crypto but have failed.
Cryptocurrencies are made out of nothing. False. Cryptocurrencies are made out of electricity from where its scarcity is derived; its technology where its unique value proposition emanate from; and the intellectual capital of innovators where new solutions to modern-day problems might be discovered.
Cryptocurrencies can only be transacted using the internet. Not true. There are ways to transaction them without the use of the internet. Transactions can be made manually through paper wallets or brain wallets. Some crypto can be transacting using SMS, Satellite transmission and even RFIDs.

About The Author

Jesus Cedeño

Jesus Cedeño is a certified doctor turned cryptocurrency expert, writer, and investor who lives in New York City. Jesús specializes in cryptocurrency product reviews, tutorials & technical analysis. Follow him on LinkedIn to stay up to date on his latest work on blockchain, decentralization and crypto investments.