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Crypto Explained: What is Cryptocurrency? How does it work? (2022)

15/10/21
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What is cryptocurrency? What’s all this hype about? Coin98 will provide you with everything you need to know about cryptocurrency investment.

In 2021, multiple mainstream media were constantly broadcasting about Bitcoin, cryptocurrency, the crypto bubble, the digital gold rush, etc. Many wonder what crypto is. What is cryptocurrency? What’s all this hype about?

In this article, we will introduce cryptocurrency and everything around it.

  • What are cryptocurrency, digital money, and virtual currency?
  • Coin, token, bitcoin, and altcoin.
  • How to get/buy/store cryptocurrency?
  • Cryptocurrency investment.
  • Information sources.

What is Cryptocurrency?

Cryptocurrency, or Crypto, in short, is a series of binary data issued by the blockchain, working as a medium of exchange and rewards for miners, blockchain validators, investors, etc.  Cryptocurrency means cryptography and currency.

  • Cryptography: The blockchain uses sophisticated cryptography to verify, control and secure every crypto transaction.
  • Currency: In simple terms, it is a medium of exchange for goods and services.

Crypto uses blockchain technology that consists of multiple computers around the globe, creating a decentralized and high-security network among computers. The computer network stores all blockchain information and ensures nobody can interfere with changing the data.

Who invented Cryptocurrency? What was the first cryptocurrency?

Bitcoin was the first cryptocurrency to ever exist. Bitcoin was first introduced on 31 October 2008 by Satoshi Nakamoto - a pseudonym representing a person or persons. Up to this moment, the identity of Satoshi Nakamoto has never been disclosed.

Understanding Cryptocurrency

What is the difference between Cryptocurrency, Digital currency vs Fiat?

Cryptocurrency is a medium of exchange issued by the blockchain system. It uses cryptographic techniques to prevent the system from fraud, attacks, and counterfeiting. Bitcoin was the first cryptocurrency invented by Satoshi Nakamoto in 2009.

The value of cryptocurrency is determined by the community using it.

Digital currency is a digital form of fiat money issued by a government. The number you have in your bank account is considered a digital currency. Users can transfer money, withdraw from ATMs and pay for services.

Fiat money, so-called money, is considered a medium of exchange often established by a centralized entity such as the government. It has a long history since it replaced commodity-based currencies. 

What is Cryptocurrency used for?

There have been numerous use cases for crypto. Some of the few are:

  • DeFi (Decentralized Finance): Yield Farming, Lending & Borrowing.
  • Medium of exchange.
  • Store-of-value asset.
  • Payment.

How does Cryptocurrency work?

Cryptocurrencies run on blockchains, with the majority also involved with smart contracts. In deeper detail, cryptocurrency works in a process called cryptography. Cryptography keeps the data on blockchain secure, hence making cryptocurrencies discreet and safe to use.

cryptography

How does Cryptocurrency gain value?

Each cryptocurrency is attached to a specific project or product that makes it valuable. Cryptocurrency gains value in a variety of ways, mainly from its tokenomics design and product model. For example:

  • BTC is a deflationary token (tokenomics design), which makes it scarcer and more worthy over time. At the same time, BTC gains value as a store-of-value asset (product model).
  • ETH is not only deflationary and available for most DeFi interactions like Farming and Staking (tokenomics design), but it also gains value as the leading DeFi blockchain as well as the indicator of DeFi (product model).

Key features: Pros and Cons of Cryptocurrency

Cryptocurrency has been here for a while. Even though cryptocurrency is beneficial for various purposes and has improved numerous points to the current monetary system, it is still flawed and possesses negative sides.

Pros

  • Accessible.
  • Flexible.
  • Transparent.
  • Massive potential upside.
  • Decentralized.

Cons

  • Volatile.
  • Risky/Vulnerable.
  • Unregulated.
  • Irreversible.
  • Low liquidity.
pros cons cryptocurrency

Different types of Cryptocurrency

In the crypto-verse, you might be familiar with the terms coin and token. Below, we will introduce the basic concept and differences between coins and tokens.

Coin & Token

A coin represents an independent blockchain and functions like a native currency of the blockchain. Every blockchain has only one unique coin. It is used for transaction fees, financial services, security, and Dapp development inside the blockchain.

For example:

  • The Bitcoin network has BTC.
  • The Ethereum blockchain has the ETH coin
  • The Cardano blockchain has the ADA coin.
  • Binance Smart Chain has the BNB coin.

Unlike coins, cryptocurrency tokens are invented to serve utility functions. Tokens don’t have any separate blockchain, they are issued inside the blockchain.

For examples:

  • KONO (Konomi) is a utility token since it can be stored and transferred inside the Ethereum blockchain.
  • PORT (Port Finance) is a utility token since it can be stored and transferred inside the Solana blockchain.
  • They both don’t have any separate blockchains, such as the Konomi blockchain or the Port Finance blockchain.

Whenever some projects want to expand beyond the blockchain, they can develop their own blockchains to migrate their tokens. This means the tokens will be regarded as coins.

For example: Before the mainnet, SOL (Solana) was the utility token on the Ethereum blockchain. After the mainnet, Solana had an independent blockchain, therefore, SOL became the coin representing the Solana blockchain. This means other tokens can be issued on Solana.

cryptocurrency coin token
Coins and Tokens

Bitcoin & Altcoin

Bitcoin is the first cryptocurrency, leading the crypto market. Therefore, the Bitcoin price has a huge impact on other token prices.

Altcoins (Alternative-coin) refer to all coins/tokens, except for Bitcoin. 

Bitcoin Dominance is a metric measuring the Bitcoin market cap relative to the market cap of other existing coins/tokens. It indicates the cash flow is going to Bitcoin or other altcoins.

Investors often use this metric to anticipate the altcoin season to gain the most optimized profits.

bitcoin dominance
Bitcoin Dominance

How to buy Cryptocurrencies on Crypto Exchange

Investors can buy and sell cryptocurrencies on various exchanges. With advanced blockchain technologies, there are two types of exchanges.

Centralized Exchange (CEX) is governed by a third-party organization. Investors don’t own the private key of their crypto assets, the exchange owners manage those assets. Users have IDs and passwords to log in to your exchange account, and they are required to complete the KYC (know your customer) process given by governments. For example: Binance, Huobi, Gate.io, etc.

Decentralized Exchange (DEX) is a platform allowing users to trade cryptocurrencies without any intermediary or centralized entity. Users have their private keys that prove the ownership of the crypto wallets. For example: Uniswap, SushiSwap, Saber, SpiritSwap, etc.

How to store Cryptocurrencies with Crypto Wallet

Hot wallets or Non-custodial wallets are places to store coins/tokens online, where users have to keep the private keys to protect their own crypto assets. There are some popular wallets for storing crypto assets, namely: Coin98 Wallet, Trust Wallet, Metamask, etc.

Cold wallets exist in the physical shape (usually as a USB) that require multiple security steps. Investors often use cold wallets for long-term coins/tokens storage. This complexity enhances the security of the wallet in return. Some popular cold wallets are Ledger, Trezos, etc.

cryptocurrency wallet 1
Hot Wallet vs Cold Wallet

Wallets on exchanges or Custodial wallets, basically, users don’t own any private key. They access their funds by password kept by the exchange. Since investors store their crypto assets on exchanges, there are potential risks of scams and shutdowns. Binance, Okex, and Coinbase are the most popular centralized exchanges.

Therefore, investors use various types of exchange according to their usage. 

How to get and earn Cryptocurrency

Crypto Mining

You can mine cryptocurrency, or in other words, earn it from mining. Blockchains that use the proof-of-work consensus to work (like Bitcoin) need nodes to keep the network operating securely. By being a node, you will earn rewards as you are directly involved in the process of running the blockchain.

Learn more: What is Crypto Mining? How does Crypto Mining work?

Skin in the game

Skin in the game means participating directly in DeFi to earn rewards. This can be done by Providing Liquidity, Yield Farming, Staking, and other kinds. Be aware that DeFi is still highly risky, so you should be responsible for your own funds and DYOR before investing in any form.

Others

Cryptocurrency is constantly evolving. More and more ways to earn with cryptocurrency are showing up. Some of which, for example, are Play to Earn or Move to Earn. In these kinds of methods, you can simply play games or work out to receive rewards. These revolutionary ideas are the reasons why the crypto market rose so dramatically in the previous few months.

How to invest in Cryptocurrency

Holding

Holding is the most popular investment method. Investment decisions depend on fundamental analysis, judgments, anticipations, and future potentials about the invested projects.

  • The investment can last for months, years, sometimes even decades. The crypto market is relatively small in comparison to other traditional financial markets. Therefore, the potential profit can be up to 10x, 100x, or xxx of your investment.
  • Compare other similar projects in terms of technologies, tokenomics, roadmap, team, etc.
cryptocurrency coins 2

Trading

In simple terms, you’re trading when you constantly hop in and out of an investment for a quick profit.

  • The trading time frame can range from seconds, minutes to hours, days, or months.
  • Traders use technical analysis to break down the chart, find the buy and sell positions and take profits or cut losses. However, liquidation can occur due to the high-volatility market.

Tips to invest in cryptocurrency safely

Investing in cryptocurrency bears high risks if you are unaware. Here are some tips to help you on your way to investing in cryptocurrency:

  • DYOR before putting your money into any project/cryptocurrency.
  • Manage your portfolio and diversify it based on your level of conviction.
  • Most of the time, cryptocurrencies can be used to stake or provide liquidity to earn even more rewards. If you understand these mechanisms deeply, you can utilize this and maximize your profits instead of leaving your tokens idle in your wallet.
  • Learn about tokenomics designs and product models to understand how your cryptocurrency accrues value. Some tokens have little to no use cases and value, making them only go down in price.

Cryptocurrency information sources

The crypto world is evolving at a fast pace, and news is published daily, so it’s not easy to catch up with. It’s easy for any website to copy and publish the same news with little editing. To serve the community, Coin98 Insights recommend some sources that we use to get updated daily.

  • News: Telegram, Twitter, Facebook.
  • Market news: Coindesk, Coingecko, Coinmarketcap.
  • Insight information: Coin98 Insights, Messari, The Block Crypto, Delphi Digital, Medium, Binance Research.

Cryptocurrency environmental impact

As mentioned above, some blockchains use the proof-of-work consensus to keep the network secure. However, running a node requires a large amount of electricity usage. At the same time, a large of heat will be radiated by the computers running nodes, which imposes a bad effect on the environment.

Nevertheless, most blockchains now move to the proof-of-stake consensus, making them more environmentally friendly. 

The future of Cryptocurrency

Cryptocurrency is still evolving at a rapid pace, and no one can predict what it will look like, even within the smallest time frames. 

With that being said, we can deny how quickly and constantly cryptocurrency is growing. So, the future of cryptocurrency may not be obvious in terms of the specific result, but it may be clear that it will be bright with lots of innovations and growths kicking in.

top 10 cryptocurrencies
Top 10 cryptocurrencies over the past 5 years.

Crypto Adoption

In 2017 - 2018, the crypto market was a busted bubble, resulting in a bearish trend that lasted for 3 years later. Numerous investors lost their funds at that time. Therefore, crypto had a bad reputation since it was related to illegal activities, scams, and fraud.

Many said Bitcoin has no value and will soon be “dead”. In fact, the Bitcoin network is still alive and at the writing time, the Bitcoin price reached $60,000.

Investing in crypto is risky since it has high volatility, meaning that it can increase multiple times in a short time and then inclines forever. Therefore, you should do some research on what you’re going to invest in and be responsible for your investments.

Moreover, in 2021, multiple large Venture Capital companies and investment companies have “skinned in the crypto game” such as Grayscale, Square, Microstrategy, etc. They invested in Bitcoin and other altcoins. Especially, numerous new crypto startups are being funded.

Large banks JP Morgan, Morgan Stanley, and other tech companies Tesla, Paypal, Apple Pay support cryptocurrency payment directly on their platforms.

El Salvador and Ukraine have legalized Bitcoin as a payment in their countries. The president of El Salvador signed a bill to airdrop Bitcoin for citizens to incentivize the usage. This means cryptocurrency is being adopted by society.

What is required to invest in cryptocurrency?

Knowledge

Without knowledge, you can throw your money into anything, but the outcome is sometimes is bad. Therefore, you should acquire sufficient knowledge about the crypto space.

New technologies and news are constantly released every day. It’s hard for investors to keep up with that amount of information. News is released today, but it can be out of date a few days later.

DeFi is now the most promising application of blockchain technology. Every blockchain has its own DeFi ecosystem, namely, Ethereum, Solana, Binance Smart Chain, Near, Cardano, etc.

Knowledge is the invisible power and the key to success in this crypto world.

Security and Safety

Every investor should put security and safety above everything else. It’s painful since you lose all your funds for non-sense reasons. In many countries, crypto investors are not protected by the government since it’s not legalized and sometimes illegal.

The crypto space has a bad reputation since numerous scams have happened. Some scams can be easy to spot, but some are organized by professional fraudsters. They create very promising and illusory scenarios to scam the money from investors.

Therefore, you should be careful and responsible for your investment decision.

  • Check the validity, credit, and authenticity of the crypto platforms.
  • Keep your passphrase via multiple methods, and don’t share it with anyone.
  • Do research on projects that you invest in.

How much money to invest in Cryptocurrency?

In the crypto world, how much money do you invest?

There is no specific answer to this question, it depends on knowledge, investment appetites, ages, experiences, leverages, etc. As a result, it’s common in the crypto world when there are differences among the community.

Be responsible for your money. There are countless investors who risk their own lives. “High risk, high reward” is the phrase you usually hear. However, nobody knows which direction the market will go. For instance, you have the right investment in a project, but you lose patience and hop out of the investment. 

Those risky investments affect your personal life and the people around you, which drains your mental health. The advice here is to manage your funds and gradually increase them as you level up your knowledge and investment skills.

FAQs: What people ask about Cryptocurrency

Is Cryptocurrency safe and legal?

The majority of cryptocurrencies in the market are safe. However, most of them are still unregulated, up to this moment.

Is Cryptocurrency a good investment?

Cryptocurrencies are extremely volatile compared to other assets. As a result, they often return high profits if you select the right moment and the right token.

On the opposite, they can also cause you massive losses. Be aware of such risks before investing in them. 

Is Crypto the future?

To say whether Crypto is the future is a difficult task. One thing that I can assure, is Crypto will constantly be growing, and in the long term, every market will go up in value.

Is Crypto taxable?

Crypto is taxable in a few countries, like the U.S.

Is Cryptocurrency real money?

The liquidity of the Cryptocurrency market is growing in size day by day. Cryptocurrencies can now be easily converted to Fiat, and can even be used to pay for real-life assets. So it is not wrong to call Cryptocurrency real money.

How many Cryptocurrencies are there?

According to Coingecko, there are currently about 13,424 Cryptocurrencies.

What is the point of Cryptocurrency?

Cryptocurrency is used for a variety of purposes, like as a medium of exchange or a store-of-value asset.

Can I create a Cryptocurrency?

Yes, you can. In fact, creating a Cryptocurrency can be done easily through Coin98 Token Issuer. Feel free to check out our product!

Conclusion

To conclude, cryptocurrency is changing the way the traditional financial system works with DeFi. This article has pointed out the most important information about cryptocurrency. I hope you’ve gained helpful insights to understand the potential behind cryptocurrency.

If you want to know further about cryptocurrency, please leave a comment below and join Coin98 Community for further discussions about Crypto.

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