What are cryptocurrencies? In short, cryptocurrencies are one of the most widely misunderstood asset classes. Since Bitcoin’s launch in 2009, some have labeled crypto a scam, dead, or a tool for carrying out illicit activity. However, the value and utility of cryptocurrencies are becoming difficult to ignore. As major institutions, banks, payments providers, and enterprises show increasing interest in cryptocurrencies and the underlying blockchain technology that powers them, many people are asking, “what is crypto?” and, “what is cryptocurrency doing that is so revolutionary?”.
In this article focused on what crypto is, we explore the world of cryptocurrency. We’ll discuss how blockchains and cryptocurrency mining work. Plus, we’ll dive deep into some of the fundamental concepts of crypto and the many different types of crypto assets available. In addition, we’ll be answering some common questions, including “what is cryptocurrency?” and “what is cryptocurrency mining?”.
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What is Crypto?
The mainstream adoption of cryptocurrency is becoming difficult to ignore. From PayPal offering crypto services to “central bank digital currencies” (CBDCs), institutional investment, non-fungible tokens (NFTs), and crypto gaming, cryptocurrency provides a unique value proposition that is unparalleled.
So, what is crypto? Crypto comes in many forms and can serve many purposes. Bitcoin (BTC), the original cryptocurrency, is widely considered to be “digital gold” due to the scarcity of the asset and its use as a hedge against inflation. Furthermore, Ethereum (ETH) is a type of programmable money and is a platform for creating other cryptocurrencies known as tokens.
Cryptocurrency investing is inherently risky. Compared to the stock market, the crypto market is highly volatile. Many people have lost everything; however, many have made life-changing gains by implementing an effective trading or investment strategy.
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Cryptocurrency is a type of digital currency secured by cryptography and digital signatures. Thanks to the use of blockchain technology, a type of distributed ledger technology (DLT), counterfeiting and double-spending are almost impossible. Various cryptocurrency transactions use a network of computers or “nodes” that each holds a copy of the same ledger. Plus, unlike fiat currencies that are under the control of a central authority or a single point of failure, such as a bank or government, cryptocurrencies are extremely difficult to manipulate and interfere with.
Cryptocurrencies come in many forms. This includes coins, tokens, non-fungible tokens (NFTs), and synthetic assets such as real estate or stocks. One of the many benefits of cryptocurrencies is that they can exist outside of the traditional financial system. Accordingly, the entry barrier for participation is much lower than that of financial legacy instruments. This means that cryptocurrency has the potential to end world poverty and provide access to financial instruments that are censorship-resistant.
Moreover, cryptocurrencies are borderless and are open to anyone with an internet connection. They can be an effective way to preserve purchasing power in countries with struggling economies or where inflation of local fiat currencies is high. Plus, crypto can help alleviate issues around capital control.
How Does Cryptocurrency Work?
Since the introduction of Bitcoin in 2009, the cryptocurrency landscape has evolved dramatically. However, to truly understand how revolutionary cryptocurrency is, we need to take a closer look at how Bitcoin works. If you want even more backstory, be sure to read our full “What is Bitcoin?” article.
On a fundamental level, Bitcoin is a peer-to-peer electronic cash system that uses blockchain technology to facilitate payments and transactions without intermediaries. Also, the Bitcoin network consists of thousands of nodes all running the same software in sync with one another. Each node in the network holds a copy of the same ledger or book of accounts. This ledger holds a record of every transaction to ever exist on the Bitcoin blockchain. However, rather than being under the control of a bank or a government, the ledger is decentralized.
Each node in the network must reach the same consensus about the validity of each transaction. A transaction can only be processed when these nodes reach the exact consensus about the sender, receiver, and sent amount. The purpose of this is to avoid double-spending, as Bitcoin is not a physical asset. Double-spending enables malicious actors to create illegitimate transactions that trick the network into thinking that somebody owns assets that are not theirs. For example, if Bob has one BTC and tries to send two BTC to Alice, Bob could be attempting a double-spend. Nodes have a financial incentive to act honestly and only process legitimate transactions to ensure that bad actors cannot cheat the system. Proposing an illegitimate transaction to the network could result in a rogue node losing block rewards.
How Does Blockchain Work?
A blockchain is a type of distributed ledger technology (DLT). Further, there are many variations of the blockchain. However, the most prominent type is the “public” blockchain. It serves as a decentralized database that nobody can alter. Also, public blockchains such as Bitcoin and Ethereum are fully transparent. This means that every transaction is publicly viewable.
Blockchains store “blocks” of transactions digitally. Nodes in the network that hold a copy of this distributed ledger must agree about the fidelity of each transaction. Moreover, to do this, blockchains use a “consensus mechanism”. Bitcoin uses a consensus mechanism called “proof-of-work” (PoW). In PoW, nodes, or “miners,” must compete to solve complex mathematical equations for the right to validate a transaction. They achieve this using cryptography to prove the legitimacy of a transaction and the “work” that went into validating it.
Further, when a miner appends a block of transactions to the blockchain, the block-producing party receives block rewards or “mining rewards”. Each block of transactions is linked to the previous block in a way that makes the blockchain more secure as it grows. This is because any potential attacker would require exponentially more computing power to manipulate the network. As such, the larger the chain of transactions, the more interlinked each transaction is.
Moreover, the financial cost of attacking the network grows when new blocks are added to the chain. Plus, every new block receives a timestamp so that the entire network can see precisely when it occurs. Want to learn more about blockchain? Check out the Blockchain & Bitcoin 101 course at Moralis Academy to gain a firm understanding!
What is Cryptocurrency Mining?
So, what is cryptocurrency mining? Mining is the process by which new cryptocurrencies enter into circulation. Also, mining is the process that confirms cryptocurrency transactions. Since the introduction of Bitcoin, many novel cryptocurrency mining concepts have risen to prominence. However, to understand the basic concepts of cryptocurrency mining, it’s helpful to take a look at Bitcoin mining.
The process of mining Bitcoin uses sophisticated computers and hardware to solve complex mathematical equations. Each miner in the network competes to solve this mathematical problem as quickly as possible. The first miner to solve the equation is awarded the opportunity to append the proceeding block of Bitcoin transactions to the blockchain before the competition starts for the next block. This is the “work” that miners must prove they have carried out before the network can reach a consensus.
Furthermore, Bitcoin mining is expensive. Not only does this process require substantial amounts of electricity, but mining hardware itself can cost hundreds of thousands of dollars. Also, profitability varies depending on the number of active miners in the network and the price of Bitcoin. However, Bitcoin mining has proven to be an effective way to earn a passive income with crypto for many people. Plus, there are many types of cryptocurrency mining that do not require expensive hardware or substantial upfront costs. Take a look at this new article by Forbes to learn more about the different types of crypto mining.
How Many Cryptocurrencies are There?
The number of cryptocurrencies is growing every day. At the time of writing, there are 15,895 cryptocurrencies, according to CoinMarketCap. There are several different types of cryptocurrencies. For example, native coins such as Bitcoin, Ethereum, Solana, and Cardano enter circulation during the genesis blocks of their respective blockchains. However, there are also several tokens created on top of these blockchains. An example of this would be the Chainlink token (LINK) on Ethereum or the PancakeSwap token (CAKE) on Binance Smart Chain (BSC).
Although the terms are thrown around loosely, tokens and coins are quite different. Whereas coins such as Bitcoin (BTC) and Ethereum (ETH) are native to their respective blockchain and come in the form of rewards for block production, tokens do not have their own proprietary blockchain. Despite this, many people still refer to tokens as coins and vice versa.
Furthermore, tokens and coins can serve various functions. Some of the most prominent types of cryptocurrency include utility tokens, governance tokens, exchange tokens, and non-fungible tokens (NFTs). NFTs are tokenized representations of digital ownership on the blockchain, and just about any asset can be an NFT. This includes land ownership, in-game items, art, and music.
Moreover, as the crypto realm expands, an increasing number of innovative crypto assets are emerging. From security tokens to carbon credits and social tokens, the mainstream adoption of cryptocurrency is evident in the growing number of exciting cryptocurrencies available.
Additionally, projects are making it easier than ever to create tokens with just a few lines of code. At Moralis, we provide tools, templates, and building blocks to create tokens and decentralized applications (dApps) fast. This takes the leg work out of the development process so that projects can get their products and crypto assets to market quickly.
Is Cryptocurrency Safe?
Investing in any asset is inherently risky. At Moralis Academy, we never provide financial advice. However, we encourage you to only invest what you can afford to lose. Cryptocurrencies can be incredibly volatile, especially if you come from a traditional background with stocks. Many people end up losing substantial sums of money by not conducting their own research or failing to have an effective investment strategy.
Many of the stories published in mainstream media are intentionally sensationalized. For example, when Bitcoin drops in price by 10%, many would see this as a small correction and perhaps consider “buying the dip”. However, it is not uncommon for such an event to trigger headlines such as “Bitcoin loses billions in value in a day”, or “Bitcoin is dead”.
Cryptocurrency trading and investing can be risky. There are so many scams out there that it can be challenging to know what is trustworthy and what isn’t. Accordingly, it’s essential to always do your own research and only invest what you can afford to lose. Moreover, crypto is as risky as you make it. Investing in the latest meme coin or dog token could return substantial gains. However, if a project has no fundamental value, it may be worth considering the long-term implications of your investment and taking profits along the way.
What is Cryptocurrency? – Summary
So, what is cryptocurrency going to look like in the coming years? Cryptocurrency is set to disrupt many industries. In particular, crypto has cast a shadow on the traditional financial sector by offering an inclusive, accessible means to wealth preservation and creation. Furthermore, the adoption of crypto by payments providers such as PayPal and Block (formerly Square) is paving the way for widespread blockchain adoption in various industries, including art, music, real estate, energy, insurance, and gaming.
Fundamentally, cryptocurrencies have the potential to revolutionize the world of finance by providing flexible, fast, low-cost, cross-border transactions. With crypto, you can be your own bank and operate outside of the traditional system. Further, crypto provides a farmer in Venezuela access to the same financial instruments as a Wall Street investor. In turn, this lays the foundations for universal financial freedom.
To truly understand what the future of money and currency looks like, it’s important to first understand the history of money. To learn how this shifting paradigm has evolved over centuries and where we’re heading, check out the Bitcoin Monetary Revolution course at Moralis Academy.
There has never been a better time to level up or learn a new skill in an emerging field. Blockchain and cryptocurrency are creating a wealth of opportunities globally. Start your crypto journey the right way with Moralis Academy! Also, don’t forget to follow us on Twitter @MoralisAcademy! We’d love to hear which cryptocurrencies you’re following and your thoughts on the market! Additionally, make sure to check out the many crypto projects we cover in this blog to keep up to date with the latest trends and narratives!