The world of cryptocurrency is vast and exciting, but it can be a bit confusing or overwhelming when you are first getting started. This piece will explain what cryptocurrency is, how it works, why it’s so popular, and whether it is a good investment.
What is crypto?
A cryptocurrency is a digital asset or currency that is secured by cryptography, which makes it very difficult to counterfeit or double-spend. Bitcoin is the most well-known cryptocurrency, but there are over 10,000 on the market!
Many cryptocurrency assets are built on decentralized networks based on blockchain technology, which is a distributed ledger that is maintained by a network of computers around the world. A defining characteristic of a decentralized cryptocurrency is that it is usually not issued by a central authority, such as banks or governments, meaning that they are resistant, but not immune, to government manipulation and interference.
The term currency is somewhat misleading. Technically, all cryptocurrencies can be bought and sold, just like regular forms of currency, however, only a handful of coins, generally payment coins, can be used like fiat currencies to buy and sell goods and services. Therefore, outside of payment coins, generally, cryptocurrencies represent digital products, services and assets. For instance, Ethereum is a decentralized smart contract platform that can also be used to securely host decentralized applications (dApps).
How did cryptocurrency start?
In 2009, in the aftermath of the global financial crisis, an anonymous developer, or group of developers, known as Satoshi Nakamoto, created the first cryptocurrency, Bitcoin. Nakamoto’s intention was to create a global, decentralized digital currency that was separate from the traditional banking system, which was largely responsible for the worldwide economic recession in 2008.
In the following years, people took notice of the blockchain technology that Bitcoin was built on and could see the exciting potential in the technology in a range of different areas. In 2011, the first cryptocurrencies besides Bitcoin (also known as altcoins) emerged – Litecoin and Namecoin. Litecoin was very similar to Bitcoin but it could process transactions much faster and at a fraction of the cost of the Bitcoin network. Namecoin was developed to increase the privacy and security of the internet and to try to decentralize its infrastructure.
After these cryptocurrency projects took off, many other developers and investors began to enter the market and the cryptocurrency community began. People saw that cryptocurrency and blockchain technology were the next big thing. They also understood that there was a huge amount of money to be made from investing in and/or trading crypto. And that’s how the cryptocurrency market of over 10,000 coins that we have today was born!
Bitcoin was the first cryptocurrency. Along with the innovative blockchain technology, Bitcoin paved the way for other cryptocurrencies, which aimed to provide services or solve specific problems.
How does crypto work?
Cryptocurrency transactions are generally sent between peers using cryptocurrency wallets. In a peer-to-peer network like Bitcoin, computers (or peers) are able to share information without the need for a third computer acting as a server. The user initiating the transaction uses the digital wallet software to transfer crypto to another wallet (essentially, a public cryptocurrency address). The cryptocurrency transaction is then encrypted and broadcast to the network to be recorded on the blockchain. They are recorded on the blockchain ledger through a process called “mining”.
What is mining?
Cryptocurrency mining is a process that uses computers from around the world to solve complex mathematical problems in order to verify transactions. The miner who solves the problem is compensated with a certain amount of the coin they are mining. This is known as the block reward.
What is blockchain technology?
A block is a collection of transactions that is recorded in a distributed ledger. After the successful miner solves the problem, a new block is added to the ledger. When the next problem is solved, another block will be chained to the end of the previous one. And thus a “chain of blocks” or a “blockchain” is born.
Blockchain is a powerful technology because each block is duplicated and distributed to every node on the decentralized network for verification, which removes the need for a trusted third party, such as a central bank. It also makes it virtually impossible to create false or counterfeit transactions.
Important to remember
This is a description of how Bitcoin and many other popular cryptocurrencies work, however, this does not apply to every crypto. Some coins use Proof of Stake (PoS) rather than Proof of Work (mining); several privacy coins don’t use a public ledger; and a few cryptocurrencies, such as IOTA, do not even use a blockchain, although this is rare.
Why are cryptocurrencies so popular?
Crypto is popular for a number of reasons, including the potential for huge returns on investment, low transaction fees, and being part of the future of technology.
Crypto is seen as the future
A lot of people are excited about crypto because they see it as the future. Cryptocurrency and blockchain have had a huge impact already and will continue to innovate in areas such as finance, cloud storage, gaming, trading, art collecting, contracts and documentation, and even voting. Many people in the crypto market want to be early investors in an innovative and revolutionary technology and reap the rewards from this as time goes on.
Potential for huge returns on investment
Another reason that crypto is so popular is the potential for huge profits. It is also far more accessible than the stock market, which many believe is elitist in nature and geared towards those with large initial investments. Crypto has opened the door for millions of everyday people to trade and invest whatever they can afford.
Cryptocurrency transactions can be cheap
Crypto is gaining popularity all around the world because it is often cheap to use. Other forms of online payments, particularly sending money internationally, can be expensive as there are often large fees attached to these transactions. But with cryptocurrency, you can make everyday transactions or send large sums of money worldwide on the cheap, regardless of the total value.
Some examples of popular digital currencies
The cryptocurrency market is full of exciting projects! There are a lot of different cryptocurrency use cases. Many of them have a specific utility and others aim to solve a particular problem.
Bitcoin is a popular payment coin that can be used to pay for goods and services, as well as to transfer value from one party to another. There are several other payment coins (or digital currencies), such as Litecoin and Bitcoin Cash, that have quicker transactions and smaller fees, but Bitcoin remains the most well-known.
Coins like USDT, known as stablecoins, are frequently used because they are pegged to real-world assets and traditional currencies, such as the US dollar, which doesn’t change much in value, and as such can provide a safe place to keep money without being subjected to Bitcoin volatility. Ethereum is a hugely popular smart contract platform that is used for building decentralized apps (dApps) and also executing smart contracts.
Decentralized finance (DeFi) projects, like Uniswap, are popular with users who want access to financial services without having to trust a third party. People who are primarily concerned with privacy and anonymity flock towards privacy coins, such as Monero. Recently there has been a huge surge in the interest and adoption of Non-Fungible Tokens (NFT), which are unique digital collectibles. This is partly because people see huge potential profits from trading NFTs, but also because it provides a way to prove ownership of unique digital assets, such as original pieces of art, books, and games.
Is cryptocurrency a good investment?
Since its inception, cryptocurrency has been steadily increasing in adoption worldwide. This generally translates to increased value in the market. That said, there have been several large crashes as well, most notably in 2014/15 and 2018. The market has always bounced back stronger than ever, but it’s important to remember that no matter how promising the projects you are investing in are, there is no such thing as a sure thing in crypto. Be careful who you take investment advice from and always do your own research.
Did you know?
In 2014/15, the entire cryptocurrency market cap plummeted by 80%. It then entered the stratosphere with a 27,000% recovery by the start of 2018. At the end of 2018, the market crashed back down 88%. But it recovered again in 2021, surging upwards by over 2,500%. This is why crypto is seen as an exciting, but volatile market as cryptocurrency prices can fluctuate wildly.
How can cryptocurrency make you money?
The crypto market has a lot of inherent value, but it is also largely based on speculation, similar in some ways to the stock market and real estate.
Real estate speculation involves buying property with the hopes of reselling it at a higher price in the future. This is based on a number of factors, such as the quality and location of the house and property, access to parks, schools, and shopping centres, crime rates etc. In the stock market, investors and traders speculate on the future valuation of publicly listed companies, such as Apple and Tesla. This is based on an extensive range of factors, such as the revenue and profit the company generates, competitors, quarterly reports, government regulations etc.
Crypto is quite similar. Traders and investors use a variety of different information and tools in order to speculate on the future valuation of crypto assets. There can be a high level of risk involved, which is why it is very important to be educated before diving in the deep end. But on the flip side, it can be very exciting, and there is potential for huge profits as well!
How do I buy cryptocurrency?
The easiest way to buy and sell crypto is to use a cryptocurrency exchange, such as Swyftx. There you will be able to deposit your fiat currency and buy cryptocurrencies of your choice, quickly and affordably. You can then store your cryptocurrency on the exchange to sell at a later point, or you can transfer it to a software or hardware wallet if you plan to hold it long term.
All of the large cryptocurrencies, such as Bitcoin and Ethereum, are available on all the major cryptocurrency exchanges, but small market cap cryptocurrencies may only be available on one or two crypto exchanges. If you are looking to invest in small cap coins, you must ensure that the exchange is reputable and secure and then identify the easiest way to deposit your funds onto that exchange, as they may not natively support your local currency.
This article was written to give you a brief introduction into cryptocurrency. It has highlighted what crypto is and how it works, as well as discussing why crypto is popular and whether it is a good investment. If you would like to learn more about any of the terms or concepts mentioned in this article, there are plenty of resources on each topic located on the Swyftx Learn platform.