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What Is Cryptocurrency?

The topic of digital assets is increasingly heard about in the mainstream media. Nevertheless, for many people this issue is still shrouded in mystery. Often, even people who have some…

Date: 2024-03-29 Author: Łukasz Michałek
What Is Cryptocurrency?

The topic of digital assets is increasingly heard about in the mainstream media. Nevertheless, for many people this issue is still shrouded in mystery. Often, even people who have some experience with the investment market and are somewhat interested in new technologies do not know much about cryptocurrencies and blockchain technology. Meanwhile, investing in digital assets is so popular nowadays that it is definitely worth supplementing knowledge in this area. To meet this, in this article we answer the question that often appears on the Internet “cryptocurrencies what is it?”

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What are cryptocurrencies by definition?

Admittedly, there is no single generally accepted definition. Nevertheless, there are many different descriptions available on the Internet, which quite unambiguously describe the phenomenon that is cryptocurrencies. Cryptocurrencies are a kind of digital currency. They operate on the basis of cryptography and blockchain technology. They store possession information in contractual units.

What are cryptocurrencies? By definition, a cryptocurrency is a distributed ledger system that is based on cryptography.

Cryptocurrency a special case of virtual currency. However, the fact that it is colloquially called a currency does not mean that it can be treated in the same way as the zloty or the dollar, as it differs significantly from fiat currencies in certain respects. It should be noted that most countries do not recognize cryptocurrencies as units of currency or as means of payment. In colloquial speech, you can also encounter such names as virtual currencies. It should be added that this is one of the variants of digital money but are not digital currencies. The issuance of digital currencies is currently being considered by some central banks.

Cryptocurrencies are sometimes compared to gold (they are sometimes called digital gold). Such comparisons are due to the fact that their supply is usually limited. As a result, they are considered assets with the potential to increase in value therefore they are treated as investment assets.

Nevertheless, obviously unlike gold, cryptocurrencies are not physical in nature. Interestingly, some people compare cryptocurrencies to gold, as in the case of cryptocurrencies there is a process of “cryptocurrency digging.” This is a kind of verbal analogy to gold mining. Moreover, in some materials, you can read that the economics of some cryptocurrencies were inspired by the economics characteristic of precious metals.

What are cryptocurrencies used for?

At the time of their creation, cryptocurrencies were intended by design to be digital currencies that enable transactions relatively apart from the involvement of a central intermediary. The goal was independence and separateness from any financial institutions. It was assumed that digital currencies would act as a means of payment.

As for the question “what cryptocurrencies are used for in practice,” the answer must be that, without a doubt, primarily for investment. This is due, among other things, to the fact that at this point cryptocurrency is only recognized as a means of payment in a few countries (including El Salvador) . Of course, even in Poland it is possible to pay with Bitcoin in some places, but it is undoubtedly a rarity and will probably remain so for a long time to come, despite the rapidly advancing adoption of cryptocurrencies.

Meanwhile, Bitcoin (and many other cryptocurrencies) are digital assets with strong deflationary pressures (which makes many people see them as assets that can retain value in the long term). Besides, historical data shows that the history of Bitcoin’s (and other top cryptocurrencies’) price is an example of an asset that has scored rare increases. As a result, people who decided to make such an investment a few or, even more so, a dozen years ago earned a lot from it. This made more and more people around the world interested in digital assets.

What’s more, cryptocurrency investments often attract the attention of very novice investors who don’t have much experience with navigating the investment market. However, this does not mean that investment in digital assets is a niche phenomenon that only novice investors or people fascinated by blockchain technology are interested in. On the contrary, current trends indicate that large investment funds and corporations are looking more and more boldly at investing in Bitcoin and other digital assets.

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What are the charkateristics of cryptocurrencies?

Cryptocurrencies are distinguished by a number of interesting characteristics that have earned them many supporters. These include the use of cryptography and blockchain technology, as well as the lack of a central intermediary (independence from governments) . Besides, there is no denying that a very characteristic feature of the entire cryptocurrency market is large price fluctuations.

  • Lack of a central intermediary – Traditional currencies rely on trust in the entities that issue money. As a rule, these are central banks or institutions like the Monetary Policy Council. In the case of most cryptocurrencies, the entire mechanism is based on blockchain technology. Exchanges in this market occur on a peer-to-peer basis.
  • Supply – Many cryptocurrencies have a predetermined maximum supply. The best-known example is Bitcoin, which has a fixed maximum supply of 21 million units. It is estimated that the last Bitcoin will be mined around 2140. In contrast, about 90% of the total supply of Bitcoin has already been mined today. At the same time, it should be noted that there are also cryptocurrencies on the market that do not have a fixed maximum supply. An example here are the so-called memecoins (such as Dogecoin or Monero).
  • Blockchain Cryptocurrencies how does it work? In a nutshell, blockchain (blockchain in English) is a method of organizing and storing data in consecutive blocks. The said blocks together form a chain. The operation of cryptocurrencies is based on this method and advanced cryptographic solutions. As a result, it is a technology that allows reliable and secure registration of all transactions performed on the network. As a result, it allows transactions to be carried out between network participants (on a peer-to-peer basis) with minimal risk of fraud.
  • Cryptocurrency digging, transaction validation and consensus algorithm – Cryptocurrency digging is a process that uses complex mathematical algorithms to validate transactions occurring on the network. Individuals who lend the computing power of their equipment to dig cryptocurrencies are rewarded with a certain portion of a given cryptocurrency. This type of process takes place in the case of cryptocurrencies based on the Proof-of-Work consensus algorithm.

A common alternative to Proof-of-Work is Proof-of-Stake. Proof of Stake (PoS) is a consensus algorithm that is designed to reduce the power consumption that Proof-of-Work consumes, as in this case no computing power is needed to validate transactions. The issue of the consensus algorithm is the basis for understanding how cryptocurrencies work.

  • Price flu ctuations – The cryptocurrency market is notorious for large price fluctuations. This is a characteristic phenomenon of assets that arouse extreme emotions and that have to face dynamically changing demand.

A number of different factors influence the valuation of cryptocurrencies – starting with the general liquidity of the market at any given time. Through various external factors such as the introduction of new regulations, political events or current media reports. Ending with purely technical aspects such as the specifics of the digital asset market.

When investing in cryptocurrencies, one should definitely keep in mind that this is an asset that can record several dozen percent increases and equally spectacular decreases. With this in mind, when investing funds in this type of asset, you need to take into account extremely high investment risk.

Types of cryptocurrencies and the most popular cryptocurrencies

Bitcoin

The first cryptocurrencies appeared on the market only in 2010, so it is not a long story. The most popular cryptocurrency and at the same time the symbol of the entire market for digital assets is, of course, Bitcoin. Altcoins for a long time could not penetrate the consciousness of those interested in cryptocurrencies. A more pronounced increase in interest in altcoins began to be noted only around 2015.

Altcoins

A number of cryptocurrency projects have been developed based on Bitcoin. A particularly popular one is Litecoin, which was created based on and source code of Bitcoin. Litecoin was intended to be a faster and more scalable version of Bitcoin. Litecoin’s supply is limited (84 million units).

Speaking of altcoins, one can’t help but mention ETH, which is the native token of the Ethereum network. this is a cryptocurrency that was created in 2015 and has long ranked second in terms of market capitalization. Ethereum stands out because it allows the use of so-called smart contracts to create custom tokens and decentralized applications. Admittedly, there are at least a few projects on the market today that allow the use of smart contracts. Nevertheless, it is Ethereum that has by far the most supporters.

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The most popular cryptocurrencies (in terms of market capitalization as of early 2023) are Bitcoin, Ethereum, Tether, BNB, USD Coin, XRP, Cardano, Polygon, USD Binance, OKB, Dogecoin, Polkadot, Solana, respectively.

It is noteworthy that among the most popular cryptocurrencies, stable coins (e.g. Tether, USD Coin, Binance USD) occupy the leading places. Such cryptocurrencies have a fixed price based on the rate of a specific underlying asset. This can be, for example, a selected fiat currency (e.g. USD in the case of Tether), a selected cryptocurrency (e.g. WBTC based on Bitcoin’s valuation) or bullion (e.g. PAX Gold based on gold’s valuation).

A particularly interesting type of cryptocurrencies are memcoins, or meme-inspired cryptocurrencies, which are often created purely for a joke. The first cryptocurrency of this type was DOGE (or Dogecoin), which entered the market in 2013. Its history is linked to the Doge meme, which depicted a Japanese dog of the Shiba Inu breed.

It is a cryptocurrency that has no limited supply. Another example of a very popular cryptocurrency of this type is Shiba Inu. Interestingly, despite the fact that we are talking about cryptocurrencies created for a joke, these are projects with a market capitalization of billions of dollars. From a purely pragmatic point of view, an investment in this type of asset should not make sense. Nevertheless, many investors around the world choose to invest funds in cryptocurrencies signed with a friendly doge or other mimic cryptocurrencies.

By the way, it is worth mentioning the term “shitcoins”. This is a cryptocurrency that has a reputation as a poor investment. These are usually coins without a specific use, with low market capitalization. “Pump&Dump” tactics are often used here, by which the price of the cryptocurrency is raised on the basis of recommendations that are false.

Summary

In conclusion, cryptocurrencies or otherwise cryptocurrencies are the realization of a very interesting vision of money that can function in a secure way without the need for a central intermediary/issuer.

By design, cryptocurrencies were intended to be an asset for exchanging value between market participants. However, due to their characteristics, Bitcoin and other cryptocurrencies quickly became seen as an investment asset.

Currently, the adoption of cryptocurrencies is not yet at such a level to say that the use of cryptocurrencies is something common. Nevertheless, the interest in cryptocurrencies on the part of investors (both small investors taking their first steps in the investment market and institutional investors) is so high that there is no doubt that cryptocurrencies have become a serious investment asset, which without complexes is placed alongside stocks, real estate, bonds, bullion and many other opportunities that are associated with classic investment assets.

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Łukasz Michałek
Łukasz Michałek
Founder of the rapidly developing cryptocurrency channel "Biblia Kryptowalut" on YouTube. He also co-creates the Arena Trading group with Marek. Łukasz is fascinated and passionate about blockchain technology and cryptocurrencies, which constitute the central element of his activity in the cryptocurrency industry.
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