What is cryptocurrency, and why is it so important for the future of finance? Many have believed that cryptocurrencies are imaginary and valueless money limited to the corners of the internet, but that could not be farther from the truth.
As of 2021, the cryptocurrency market is valued at $2 trillion. Institutions and corporations own assets like Bitcoin and Ethereum on their official account balances, and retail investors have latched onto the hype as well. Yet again, cryptocurrency slowly leaks into everyday life, and according to some, crypto is here to stay this time around.
But what are these virtual coins, and what makes cryptocurrencies so special? In this article, we will reveal everything that you should know about decentralized crypto assets.
Cryptocurrency, alternatively called crypto or crypto asset, is a digital currency based on blockchain technology that can be used to exchange value online. Their defining feature is decentralization, which means that they are (unlike fiat currencies) not controlled by a central authority. This provides crypto holders with more freedom and control over their money.
Bitcoin is the first cryptocurrency to arrive on the scene. Anonymous developer Satoshi Nakamoto outlined the principles of Bitcoin for the first time in 2008, only to launch it a year later. It is believed that Nakamoto created blockchain technology as a reaction to the great financial crisis of that time period, which was caused by corruption and greed.
Cryptocurrencies derive their value from the trustless, decentralized, secure, and cryptographic features of blockchain technology. Each blockchain network is effectively a distributed ledger that contains records of all its transactions. Being immutable, these transactions cannot be changed or removed from the blockchain.
Blockchains are incorruptible systems tracking financial activity while ensuring that all participants act in good faith. Cryptocurrencies are, before all, backed by immense technological innovation.
The ability to transact money on your own is what makes cryptocurrencies popular. Each holder is under the spell of the beauty of being your own bank. If it were not for issues related to scalability, blockchain technology would be the perfect financial environment for using money.
By now, there are as many cryptocurrencies as there are grains of sand on a beach. While that may be a joke currently, we are actually not far from reaching that point. There were only a dozen cryptocurrencies a few years after Bitcoin’s launch, but in 2021 their number is immeasurable.
The practical answer is that more than 4,000 cryptocurrencies exist. Those are the cryptocurrencies that are actually traded or used by at least a small number of people. Due to the rise of decentralized exchanges, everyone can now list a digital asset which means that there are far more tokens and coins in circulation, but there is no point in counting them.
Any investment is created on the presumption that the asset in question will rise in value. We can certainly apply the same notion to cryptocurrencies, which can be invested in as long as there are good arguments for them to continue rising.
Most crypto assets are valued high because they offer a utility.
For example, leading DeFi lending protocol AAVE enables users to borrow funds without any approval from a financial entity. Moreover, there are no background checks, identity verifications, credit scores, and any other bureaucratic technicality that is commonly found in traditional finance.
On the other side, users with capital can loan their funds to other members and earn interest. Interest rates go anywhere from 5% to 20%. Considering that banks hardly reward customers with anything higher than 2%, it is no wonder why Aave is popular among the crypto community.
Other cryptocurrencies have different benefits and advantages. Bitcoin notably derives its value from being secure and imposing a limited supply of coins. Only 21 million coins will ever exist. This feature alone turns Bitcoin into a store-of-value asset which allows it to maintain its value even in times of crisis.
Are cryptocurrencies a good investment? It depends on the asset. Some projects are backed by great fundamentals, while others are nothing more than vaporwave.
Cryptocurrencies are legal in the United States. Their regulatory status varies from country to country. Some consider them to be legal tender, some ban crypto payments, while others ban cryptocurrencies from being mined.
Ultimately, no written law prevents a user from transferring wealth via cryptocurrencies as blockchain networks themselves cannot be banned. This is made possible by the fact that thousands of users power blockchain networks and that there is no single entity controlling the network.
Cryptocurrencies are standardly bought on cryptocurrency exchanges. They are also available on modern financial services like PayPal and Revolut. However, buying an asset like Bitcoin on PayPal is similar to investing into CFDs rather than the actual stock. Remember: not your keys, not your coins.
We recommend reading our guides on “How to buy Bitcoin” and “How to buy Ethereum” for the best results. In these articles, we offer a step-by-step tutorial on how to buy the two most popular cryptocurrencies.
Choosing the right place to buy cryptocurrencies from is equally as important as choosing the right cryptocurrency. After more than a decade of working 24/7, the market has matured to a point where deciding between exchanges boils down to preferences. Most popular trading platforms are completely secure, and there are almost no risks of being scammed by an official exchange.
As for which exchanges to use for buying cryptocurrencies, we recommend:
It is also possible to buy digital assets on decentralized exchanges. We recommend reading our guide to decentralized exchanges to find the best trading platforms.
Cryptocurrencies are the next step in the evolution of finance. They provide us with the only thing that we do not currently have with currency issuers: trust.
The power of blockchain technology makes it possible for crypto users to own their money and decide on their own how to manage their money. No other entity or individual can decide, ban, or restrict you from using cryptocurrencies within the blockchain ecosystem.
Naturally, cryptocurrencies are far from being perfect. They have yet to reach a stage of development where crypto assets can offer what developers promise to deliver. Moreover, many believe them to be overvalued due to a possible speculative bubble.
With this simple guide, we hope that you finally understand what cryptocurrency is. If not, we recommend reading our other articles on blockchain networks, proof of work, and Bitcoin.
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