Cryptocurrencies; Bitcoin, Ethereum, Cardano, or be it Elon’s former favorite, Dogecoin, what exactly are they? What’s so much hype around this term? And why is it important to learn about them, their functionality, and their use cases? Let’s start from the basics while covering this new paradigm in global capital markets.
Suppose we try to understand cryptocurrency by diving deep into technicality. In that case, we’ll end up equipping ourselves with cryptocurrency as a virtual or digital currency or asset class that is secured by cryptography. Furthermore, this digital currency is based on a network distributed across a number of computers around the world. What sets them apart from traditional currencies is the fact that they are not issued or governed by any government or central authority.
Let’s have a look at some of the key points that will help you understand cryptocurrencies better.
- Cryptocurrencies such as Bitcoin and Ethereum are forms of digital assets that are based on a decentralized network distributed across a large number of computers.
- These digital assets are not backed by any underlying asset value like the fiat currencies we have today.
- These assets exist uncontrolled and undisturbed by the control of governments and central authorities.
- Cryptocurrencies allow cheaper and faster money transfers in comparison to traditional money transfer concepts.
- Cryptocurrencies’ prices are highly volatile and considered fairly risky assets to invest in or trade in.
Let’s start with understanding the word ‘crypto.’ Well, it basically refers to the variety of cryptographic techniques and encryption algorithms safeguarding these entries. Their major achievement and aim is to enable secure online payments by eliminating the use of third-party intermediaries.
The underlying technology powering cryptocurrencies is blockchain technology, a set of linked blocks containing information on an online ledger. Each block in a blockchain is equipped with a set of transactions, and these are not just random transactions, as they have been independently verified by each validator present on the network.
Understanding Crypto Classifications
There are basically five categories into which cryptocurrencies are divided. Let’s have a glance at them!
Thousands of cryptocurrencies are tradeable these days. But let’s talk about the one with some real relevance that carries the potential to serve as a store of value. Well, you might have guessed it already; we are talking about Bitcoin. There are a lot of financial experts who suggest that Bitcoin might be a central cryptocurrency for the digital world.
When we talk about the physical world, we include metals, oil, and other things in the commodities segment. However, in the digital world, commodities are something that corresponds to storage, computing, network, protocols, and platforms. You can understand it better by looking at Ethereum, Cardano, Solana, and Polkadot, among many others. The major takeaway here is the fact that each of them is aimed at building their own digital ecosystems.
Tokens are something that can be considered similar to the finished digital products achieved through crypto commodities, but they are tangible. They allow modulation similar to debt or equity instruments, making them stand apart from cryptocurrencies and commodities as a separate asset class.
Of course, not every coin, token, or project you come across in the crypto world makes sense and holds any true value to ponder upon. Shit coins are those that are not aimed at solving any problem., have little to no use cases, and are just hyped by social media influencers or celebrities like Elon Musk. They don’t come with a great lifespan, making them a poor choice as investments.
They are a completely different breed, as the name suggests, they are part equity, part loyalty, and part utility tokens backed by pass-through value. A classic example of this is the BNB coin, the native token of Binance Exchange. The model of these tokens is designed in such a way that they are the heart of DeFi.
Advantages Brought By Cryptocurrency
- As cryptocurrencies work on the principles of blockchain technology, there is no single point of failure in transactions.
- Cryptocurrencies make fund transfers easy between parties, irrespective of geographical restrictions.
- Eliminates the need for third parties, banks, or intermediaries to carry out transactions.
- Cryptocurrencies have shown tremendous potential and have allowed investors to make huge returns on their capital.
- Fees and charges are streamlined.
Disadvantages of Crypto
- The transactions carried out on blockchain in terms of cryptocurrencies are pseudonymous.
- Due to the fact that the transactions are pseudonymous, there is a risk of them being used for criminal and illegal activities.
- Cryptocurrencies are more inclined towards centralization these days, bypassing their major separating factor.
- It’s getting more and more expensive to participate in a network and earn.
- Prices of cryptocurrencies are highly volatile in nature, paving chances for investors to lose money more often and making them a risky investment.
- They come with off-chain security issues.
Cryptocurrencies are relatively new to the market, specifically if we compare them to traditional commodities, currencies, and investment options. Considering the history of cryptocurrencies, there can be a debate over whether you should invest in them or not. These new paradigms for money are based on the aim of streamlining the existing financial architecture in order to make it faster and cheaper while countering the infrastructure costs involved.
With constant and consistent advancements being witnessed in the field of cryptocurrencies, we’ll have modified and elevated scenarios in terms of transactions, safety, and independence. There is a possibility in the future that, with the proper governing and safety factors in place, cryptocurrencies can make transactions seamless, fast, and cheaper without the involvement of third parties in terms of value and money.