What Is A Cryptocurrency & How Does It Work? Everything You Need To Know
Cryptocurrencies, also known as a form of digital money, have attained a popular global status. They’re now used in a wide array of industries, ranging from money transfers to gaming, healthcare, fashion, banking and so much more. Their proven use cases and worldwide popularity has helped propagate their fast-growing widespread acceptance and beyond just a tool for making payments for products or services, they’re now well known as an asset class, as their values jump sporadically over time, in the process, changing the lives of many of the holders.
If you want to learn everything about cryptocurrencies and how they work, here’s everything you need to know.
What Is A Cryptocurrency?
A cryptocurrency is a type of virtual or digital currency that is stored on a blockchain network on encrypted or secured by cryptography which makes it almost impossible to duplicate or create a counterfeit copy.
A lot of cryptocurrencies are made and stored on a decentralised network using blockchain technology, making the transactions public and almost impossible to manipulate by a government or private entity.
Types of Cryptocurrencies
There are three different types of cryptocurrencies. They are:
Bitcoins was the first cryptocurrency to not just enter the cryptocurrency space but also become a major success. Its widespread adoption and successful proof of concept created a great foundation for other cryptocurrencies to launch and thrive, and as a result, there are over 13,000 cryptocurrencies in the world today.
Altcoins are all other coins that are not bitcoin. They are also called alternative coins, and the first successful altcoin is Ethereum, which is also the second largest cryptocurrency and built on its own blockchain network in which many other cryptocurrencies have launched. Some of the most popular altcoins in the world are:
- Ethereum (ETH)
- Binance Coin (BNB)
- Solana (SOL)
- Cardano (ADA)
- VeChain (VET)
- XRP (XRP)
- Polkadot (DOT)
- Dogecoin (DOGE)
- Avalanche (AVAX)
- Shiba inu (SHIB)
And thousands more.
3). Stable Coins:
Stable coins, unlike traditional altcoins, are cryptocurrencies whose prices are stable and do not easily fluctuate. They are usually pegged against a fiat currency like the US dollar or against other units of financial measures, and as such, their prices are mostly always pegged at $1 for each.
The implication of this is when the market is crashing, a cryptocurrency trader could quickly sell their cryptos and receive a stable coin in return, so that they can then repurchase the cryptocurrency at a lower price later by using the stable coin value they bought earlier.
In simple terms, buying a stable coin is like buying the digital version of the US dollar.
If you’re going to purchase cryptocurrencies on an exchange, you’d need to purchase a stable coin or use Bitcoin or Etherum to purchase the coin.
Some of the top stable coins available are:
- Tether (USDT)
- USD Coin (USDC)
- Binance USD (BUSD)
- TerraUSD (UST)
- Dai (DAI)
- TrueUSD (TUSD)
- HUSD (HUSD)
And several others
Some benefits of cryptocurrencies are:
1). Cryptocurrencies Are Mostly Independent:
Unlike other fiat currencies like the US Dollar or Nigerian Naira that are subject to government restrictions, control, and economic risks, cryptocurrencies are mostly independent and their price is not controlled by the government. The cryptocurrencies that are not independent are those that are issued by Central Banks, just like the e-Naira issued by the Nigerian government.
6). Cryptocurrency Transactions Are Very Secure:
Without the private keys of your cryptocurrency wallet, it is virtually impossible to have your cryptocurrencies stolen, unlike physical cash that can be taken. Also, anytime a cryptocurrency transaction happens on the blockchain network, it has to be confirmed by several independent decentralised computers through a complex process called mining to verify it is a valid transaction, and this process is very secure, and so far, unhackable.
4). Cryptocurrency Transactions Have Very Low Fees:
Transactions that are done through the bank can carry anywhere from 0.2% to sometimes up to 5% transactions fees. But if the transactions are done via the blockchain network, it could cost as low as $0.5 to transfer over $1 billion worth of bitcoins which would have cost over $1m to $60m to execute with a bank or financial institution.
A classic example was a $2 billion US dollars worth of bitcoins transfer that was done via the blockchain network in September 2018 for a cost of just $0.78 instead of between $2 million to $100 million in charges using a 0.2% to 5% transaction rate.
7). Cryptocurrencies Have Global Access:
No matter where you’re from in the world, you can own and trade cryptocurrencies. The global accessibility of cryptocurrencies does not limit its ownership, and as such, no party can truly fully prevent anyone around the world from owning and trading cryptocurrencies no matter how much they tried.
2). Cryptocurrency Transactions Are Mostly Anonymous:
Unlike other transactions online or in the bank that requires documentation and KYC from the client, cryptocurrency transactions are mostly anonymous, as the only trace is either through the wallet address or if the person did the transaction through a centralised exchange.
5). Cryptocurrency Payments Are Location Independent:
Without having to go to a bank or stay at a particular location to make a transfer, cryptocurrency transfers are mobile. This means that the cryptocurrency owner can transfer funds to any part of the world within a few seconds or minutes without having to worry about being at a particular place or at a particular time.
3). Cryptocurrency Transactions Are Executed Via A Peer-To-Peer Model:
Unlike banks and other financial institutions, cryptocurrency transactions are done on a peer to peer basis. this means that a cryptocurrency owner can transfer a cryptocurrency to another wallet address owned by another person without the need for any financial intermediary to control the transaction.
So unless you’re transferring cryptocurrencies via a centralised exchange or a financial institution, cryptocurrency transactions are 100% peer-to-peer.
8). Cryptocurrency Transactions Cannot Be Changed:
Transactions that happen on the cryptocurrency network are mostly always permanent. So it’s usually difficult for any government or private organisation to reverse them. If the transaction happens on some other blockchain network owned by a private company, it could be reversed, but not on the blockchain network.
Some other benefits of cryptocurrencies are:
- Cryptocurrencies are open source
- Cryptocurrencies cannot be seized on a decentralised network
- Cryptocurrencies require no permissions
- Cryptocurrency transactions are transparent for everyone to see
- Cryptocurrencies represent freedom
Challenges of Cryptocurrencies
Some of the challenges of cryptocurrencies are:
1). Cryptocurrency Transactions Are Mostly Irreversible:
Depending on what network the cryptocurrency was sent through, the transactions are mostly irreversible and if you send your cryptocurrencies to the wrong wallet address they are largely lost forever.
2). Cryptocurrencies Are Volatile:
The price of cryptocurrencies can potentially rise by more than 100% in a day and crash by 99.99% the same day.
3). Cryptocurrencies Have Limited Use For Now:
Unlike fiat money that can be used to pay for goods and services almost anywhere, cryptocurrencies cannot currently be used everywhere to pay for goods and services, but rather in some places. As such, cryptocurrencies have limited use only for now.
4). Cryptocurrencies Have Little to No Government Regulations:
Lack of proper government regulations makes the use of cryptocurrencies susceptible to criminal activities. With proper regulation, it would be easier to track and keep people in check.
How To Buy Cryptocurrencies
There are several ways to buy cryptocurrencies. Some of them are:
- Buy from a decentralised exchange like Pancakeswap, Uniswap, and much more and store it in a crypto wallet like Trust Wallet, Metamask, or a hardware wallet like Trevor.
- Buy from a centralised exchange like Binance, Kucoin, Gate.io and the likes and store in your wallet account on the exchange
- Buy from an individual or company and have it transferred to your online or offline wallet
To Sum it Up
Cryptocurrencies are the future of money. While they’re still in their infant stage in the global economy, their influence is slowly picking up and in a decade, they’d not just solidify themselves as a great tool for almost all payments but will be a great asset class that will define the wealth of the people and institutions who hold them.