What is Cryptocurrency?

You have definitely heard about cryptocurrency, but are you sure you understand it? What exactly is cryptocurrency?

Financial instruments like stocks, bonds, futures etc. are complex topics for most people. Cryptocurrencies might be even more MORE!

Why are cryptocurrency so complicated?

A large part of the reason comes down to psychology and our human nature.  The cryptocurrency world is ONLY digital.  Unlike physical objects, we can't associate our lives or experiences with cryptocurrencies as these are only terminologies and  can't visualise them before we start using them or force ourselves to understand.

Humans value things that they own, or anticipate owning, in large part because they see them as an extension of their lives. Stated simply, it’s easier to develop meaningful feelings of ownership over a physical entity than a digital one.

A paper in the Journal of Consumer Research presents a series of studies that demonstrate this difference. “Our findings illustrate how psychological ownership engenders a difference in the perceived value of physical and digital goods, yielding new insights into the relationship between consumers and their possessions,” the researchers said.

In an initial study at a tourist destination, Ozgun Atasoy and Carey Morewedge arranged for 86 visitors to have their photograph taken with an actor dressed as a historical character. Half the visitors were given a digital photo (emailed to them straight away), the others were handed a physical copy. Then they were asked how much they were willing to pay, if anything, for their photo, with the proceeds going to charity. The recipients of a physical photo were willing to pay more, on average, and not because they thought the production costs were higher.

In this article we want to ensure that you get the basic of cryptocurrency. This will equip you with a solid background and we assure you that by understanding this article (maybe not 100%) you are more knowledgeable than 60% of the people around you on cryptocurrencies.

So, let's cut the chase and explain what is cryptocurrency?

A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers. This structure allows them to exist outside the control of governments and central authorities - HENCE the word DECENTRALIZED.

Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency. To us this is a NO BRAINER, although we are aware that cryptocurrency can be used for illicit activities, this is just a fraction of whole crypto space and the BENEFIT that can be OBTAINED outweighs this by FAR.

Where did all of this start?

The MOST renowned cryptocurrency is BITCOIN- it was the first crypto introduced back in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.

Their main idea was to eliminate the use of banks or a third party to do a transaction, they created DIGITAL CASH with the purpose of peer to peer payments. So if an individual in the United Kingdom wants to send some money to his friends in Nigeria, he can just do a transfer in Bitcoin to the other party, eliminating the use of banks, their fees and the slow process.

Apart from peer to peer transactions Bitcoin is now accepted as a way of payment in physical shops around the world and as an online payment. The whole concept has created a lot of enthusiasm for Bitcoin - in fact at the time of writing the prices of Bitcoin is the highest it has ever been (approx. $23,000). Bitcoin's massive success attracted investors around the world to buy and keep it for the long term. It is considered as DIGITAL GOLD as the gains made by those holding onto it BY FAR exceed any other investment (excluding other cryptocurrencies).

Bitcoin operates on network called blockchain. Transactions executed during a given period of time are recorded into a file called a block, which is the basis of the blockchain network. A block represents the 'present' and contains information about its past and future. You can IMAGINE a blockchain as simply a big excel file containing all the transactional data. Blockchains are an essential component to cryptocurrencies as they ensure the INTEGRITY of the whole system.

Although Bitcoin is the largest coin by market capitalization, there are MANY other cryptocurrencies on the market. Cryptocurrencies are split into three different types:

1.) Bitcoin

2.) Altcoins

3.) Tokens.


Introduction to cryptocurrency


So, what is the difference between Bitcoin and Altcoins?

Altcoins which is the abbreviation of 'Alternative Coins' are coins that have been created to compete with Bitcoin and provide a better functionality/solution than Bitcoin. However, don't take this a rule of thumb, there are a number of altcoins which are COMPLETELY different from Bitcoin.

Ethereum and Chainlink are examples of Altcoins which are completely different from Bitcoin.

Whilst Bitcoin is a digital currency, these two Altcoins were designed as huge platforms for building decentralized applications on a blockchain.

Ethereum and Chainlink can be used by anyone to build their own applications called dapps. This is the most common way that new cryptocurrencies are created; they are made on blockchains that allow application building.

This is all possible because Ethereum introduced new technology to the crypto world when it launched in 2015. This technology is called a smart contract. A smart contract can automatically execute transactions when certain things happen.

And Tokens?

Tokens are completely unique in the fact that they do not have their own blockchain.

They are used on dApps (decentralized applications); these are the apps that we have spoke about earlier and are built on blockchains like Ethereum and Chainlink. The dApps are built to use smart contracts, which were tokens come into play. These tokens reside on their own blockchains and represent an asset or utility of it's own. Of course each token will have it's own unique utility.  But a good example would be Binance coin.

When users trade with BNB (Binance token) on Binance exchange, their fees are 50% less.

How are Altcoins are Tokens issued?

Altcoins/Tokens are made available to anyone to purchase through an Initial coin offering (ICO). In a stock market when a company goes public it is called initial public offering (IPO), investors will buy the stock if they believe in the potential of the company. Similarly when there is an ICO, the developers behind the coin publishes a WHITEPAPER which is a document explaining the coins and it's utility. Once the coins is launched, investors will buy the coin according to it's attractiveness and potential.

At the moment due to the size of the Bitcoin market, the price of both altcoins and tokens follow that of Bitcoin. However, it is expected that this will change soon and cryptocurrencies will follow their own trajectory.

Easy isn't it? So how can you get your hands on Bitcoin, Altcoins or Tokens?

Bitcoin can be either mined or bought through an exchange. Mining is a complex process which requires time and skills. The easiest way to get hold of your digital asset is by using a crypto exchange whereby users can create an account, deposit money and exchange it in any cryptocurrency they want instantaneously.

It is important that the crypto exchange is chosen wisely as a wrong decision might lead to the loss of all the hard work.

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