What Is Cryptocurrency?

Cryptocurrency is a class of digital currencies, most of which are secured via decentralized computer networks.

Cryptocurrencies are different from fiat currencies such as the U.S. dollar, which are backed by federal governments and central banks.

Cryptocurrencies are essentially private, digital currencies. Cryptocurrency investors see it as a store of value and a means of payment or exchange, like other forms of currency, but without relying on the policies of a central government. Bitcoin (BTC) and other cryptocurrencies allow entities anywhere in the world that are connected to the internet to transfer value within minutes without the need for a bank or other intermediary.

Transactions in Bitcoin, Ether (ETC) and other leading cryptocurrencies are verified and secured via a blockchain framework that uses a network of nodes that independently records each transaction and updates a public ledger. This ledger system creates many different copies of the same transaction record, which provides a deep level of security. The blockchain software is “open source,” meaning anyone can download the software and contribute to the public ledger. Once all the computers in the network agree on a transaction, it is permanently recorded in the blockchain.

Cryptocurrency investors access their currency via a special password called a private key. Investors must enter their private key to send or receive cryptocurrency. Crypto investors store these keys in cryptocurrency wallets. Wallets can be either hardware devices similar to USB sticks or mobile app software that users can access on their phones. Wallets connected to the internet are known as “hot” wallets, while wallets not connected to the internet are “cold.”

Most cryptocurrencies use one of two methods to verify and record transactions on their blockchains: proof of work and proof of stake.

Proof-of-work verification requires computers to solve complex cryptographic puzzles known as hashes. This competitive process is called cryptocurrency mining, and it’s the way cryptocurrency miners can win the right to validate transactions and earn rewards for their efforts.

Proof-of-stake verification selects transaction validators from a chosen pool of investors or groups than own coins associated with a particular blockchain. Validators are chosen randomly, but their chances of being selected correlate positively with the number of coins they have locked up, or staked, in the network. Proof-of-stake validators also receive rewards in the form of crypto payments for validating transactions.

Bitcoin, the original cryptocurrency, uses proof-of-work verification, and it’s one of the most commonly criticized elements of the Bitcoin network. Because cryptocurrency mining requires a tremendous amount of electricity, proof-of-work verification has a massive carbon footprint. Bitcoin mining alone consumes nearly 139 terawatt-hours of electricity per year annually, more energy consumption than the entire country of Norway.

That energy consumption is one of the main reasons Ethereum transitioned from proof-of-work to proof-of-stake validation via an upgrade known as “The Merge,” which happened on Sept. 15, 2022.

In theory, anyone with a computer can attempt to complete the hashes required to mine cryptocurrency. In reality, cryptocurrency mining is not as simple as it may seem.

Solo crypto miners can mine using a computer’s central processing unit, or CPU; advanced graphics processing units, or GPUs; or specialized crypto mining application-specific integrated circuits, or ASICs. ASICs vary widely in price, but some of the top crypto mining ASICs cost in the $3,000 to $4,000 range.

Mining using CPUs or GPUs can be much more affordable, but neither option has as much processing power as a crypto mining ASIC. The processing power of an ASIC is called its hash rate, and devices with higher hash rates generate larger mining profits.

Because of the costs and competition in crypto mining, many miners join mining pools, which are groups of miners who work together to mine crypto and share their collective rewards.

Once a person has determined which proof-of-work cryptocurrency to mine and purchased mining equipment, the miner must configure the mining device and set up a cryptocurrency wallet to collect the mining rewards.

As the name suggests, cryptocurrency is commonly used as a digital currency to buy goods and services. More than 15,000 global businesses accept Bitcoin payments, according to Zippia. Microsoft Inc. (ticker: MSFT), PayPal Holdings Inc. (PYPL), Overstock.com Inc. (OSTK) and Home Depot Inc. (HD) are just a few examples of major companies that accept Bitcoin.

Cryptocurrency is especially useful for digital transactions in which the two parties wish to remain pseudo-anonymous. Bitcoin and other crypto users use pseudonyms or addresses to hide their true identities when they complete transactions. This anonymity has made cryptocurrency very appealing to criminals, particularly money launderers. Fortunately, because the Bitcoin network is only pseudo-anonymous, authorities have figured out ways to successfully identify and track down crypto criminals.

Some investors believe cryptocurrency is a better long-term store of value than traditional fiat currencies. Because many cryptos have a set total number of coins, they are not subject to central banks printing more currency. Some Bitcoin enthusiasts see it as a form of digital gold that investors can use as a hedge against inflation.

Finally, leading cryptocurrencies have been incredibly successful long-term investments, outperforming virtually every other asset class. In the past five years up to August 2022, the price of Bitcoin is up more than 450%, while the price of Ethereum is up more than 530%. Popular altcoins Dogecoin (DOGE) and Cardano (ADA) are up more than 3,000% and 400%, respectively, in that time.

Cryptocurrency

Bitcoin was the first cryptocurrency ever created, back in 2009, and it remains the most popular crypto in the world based on virtually every possible metric. Bitcoin has the largest market capitalization of any cryptocurrency at about $440 billion in mid-August 2022, making it more than twice as valuable as any other digital currency. More than 15,000 global businesses accept Bitcoin as payment, there are more than 36,000 Bitcoin ATMs in the U.S. and there are more than 260,000 U.S Bitcoin transactions per day.

Bitcoin has a tremendous first-mover advantage over other popular cryptos, but some investors argue that Ethereum’s transition to a more energy-friendly proof-of-stake transaction verification model will open the door for Ethereum’s Ether coin to overtake Bitcoin as top crypto in the future. Ethereum’s programmable blockchain gives it more functionality than Bitcoin, allowing developers to build decentralized applications, or dApps, on its network. The more dApps are added to the Ethereum blockchain, the more utility and popularity the cryptocurrency gains.

Much like Bitcoin dominates the world of cryptos, Binance is by far the largest global cryptocurrency exchange. Binance’s 24-hour trading volume was recently around $13.1 billion. In addition, Binance has a 9.9 CoinMarketCap exchange score, higher than any other crypto exchange. CoinMarketCap calculates its exchange score based on several factors, including web traffic, average liquidity, volume and confidence that reported volume is legitimate.

 

Binance’s 0.1% trading fees are relatively low compared to other leading U.S. crypto exchanges. The company also has a reputation for high-speed trade execution.

Binance is a Chinese company, and it stopped accepting U.S. users in 2019. Instead, Binance announced a partnership with a U.S.-based version of its platform, Binance.US. Binance.US was formed via a partnership with the Financial Crimes Enforcement Network, or FinCEN. Binance.US doesn’t offer as many cryptocurrencies and crypto trading pairs as its parent company, but it still has a large selection of more than 60 cryptocurrencies for its users to trade.

There’s no question most top cryptocurrencies have been spectacular investments over the past several years. Bitcoin, Ethereum and other leading cryptocurrencies have been tremendous success stories up to this point, and there’s a good chance that success will continue in the long term. However, there are also plenty of risks crypto investors should consider before going all in.

First, Bitcoin is only about 13 years old, giving it a limited long-term track record compared to other assets, such as stocks and bonds. It is also prone to extreme volatility. In fact, Bitcoin hasn’t finished a full calendar year without an annual gain or loss of at least 60% since 2015.

It’s also extremely difficult to appropriately value cryptocurrencies based on investing fundamentals. Cryptos don’t represent ownership of a physical asset, and they don’t generate cash flow or pay interest or dividends.

Crypto prices are tied directly to supply-and-demand dynamics. If their utility and acceptance continue to rise in the decades to come, limited supply will ensure that crypto prices rise as well. However, at this point, cryptocurrencies remain high-risk speculative investments and may not be appropriate for investors unwilling to tolerate extreme volatility.

Cryptocurrency

Bitcoin is by far the most popular cryptocurrency in the world, with a market capitalization that at times has reached $1 trillion. Bitcoin was the first cryptocurrency, having started trading in 2009. Since its launch, Bitcoin’s price has skyrocketed, but it has experienced several periods of busts along the way. In addition to being the most popular cryptocurrency, Bitcoin is also the most useful. Bitcoin is accepted as payment at more than 15,000 global merchants. Bitcoin also made history in June 2021 when El Salvador became the first country in the world to make Bitcoin legal tender.

Bitcoin was the first cryptocurrency, but thousands of other cryptos have sprung up since Bitcoin was launched. These other cryptocurrencies are collectively known as altcoins. Ether is by far the most popular altcoin and is second in value to Bitcoin. The Ethereum blockchain was the first to introduce smart contracts, code that allows it to run decentralized applications, or dApps. Litecoin (LTC) was created in 2011 with a focus on faster transaction confirmation times than Bitcoin. Solana (SOL) is a relatively new cryptocurrency that features a unique system of proof-of-history, or PoH, and PoS transaction verification that consumes far less energy than Bitcoin, making it a potentially greener alternative. While Bitcoin is currently the cryptocurrency market leader by a wide margin, altcoins account for most of the global cryptocurrency market cap.

Stablecoins are a subset of cryptocurrencies that attempt to peg their value to an external reference, such as the U.S. dollar or the price of gold. Stablecoins are backed by a reserve asset, making their price movements far less volatile than other cryptos. Cryptocurrency traders often rely on the stability of stablecoins to move in and out of other cryptocurrencies quickly without paying large fees. Popular stablecoins include Tether (USDT) and USD Coin (USDC), both of which are pegged to the price of the U.S. dollar.

Digital tokens are assets that are similar to cryptocurrencies but are issued by a specific project to serve a purpose within that project. A token may represent an ownership stake in the project, a method of payment within the project’s ecosystem or a right to participate in the project’s network. Like coin tokens at an arcade, digital tokens have little value or utility outside of the specific project for which they are created. A nonfungible token, or NFT, is a type of token that represents ownership of a unique item, such as a digital collectible or piece of art.

Some cryptocurrency investors see crypto as the future universal mode of global commerce. Others see cryptocurrency as the standard currency of the internet. Still others see cryptocurrency as an investable asset class and an alternative to gold as a store of value and a hedge against inflation. Cryptocurrency also could grant financial freedom to people living in parts of the world with limited or no access to banks.

Up to this point, cryptocurrency hasn’t come close to replacing fiat currencies as the world’s preferred way to make financial transactions. However, cryptocurrency has become extremely popular as a speculative investment. In the five years ending in August 2022, the price of Bitcoin increased by more than 450%, while the price of Ether ballooned by more than 530% in that time.

 

  • Portability. Cryptocurrency is useful in making cross-border financial transactions, which can otherwise be difficult and costly.
  • Anonymity. It is difficult to trace specific transactions back to individual users.
  • Security. Blockchain technology provides both security and transparency, given that all transactions are publicly recorded in the ledger.
  • Universality. Cryptocurrency also allows users to complete transactions free from the interference of governments, banks or other central authorities.
  • Returns. Up to this point, cryptocurrency as an asset class has also been an extremely good long-term investment.

 

  • Volatility. Most top cryptocurrencies are extremely volatile, making them unreliable stores of value in the short term. Decentralization may protect against government interference, but it also means there is no central cryptocurrency bank or Federal Deposit Insurance Corporation to prop up the value of a cryptocurrency if it is falling or reimburse investors if cryptocurrency is lost or stolen.
  • Regulation. While global governments can’t prevent users from making cryptocurrency transactions, they can potentially restrict or tax cryptocurrency transactions and even make them illegal entirely.
  • Utility. Although the list of global merchants that accept cryptocurrencies as payment is growing rapidly, most stores and financial institutions still don’t accept cryptocurrencies, limiting their usefulness as an alternative to fiat currencies.

Bitcoin was created by a person or group of people named Satoshi Nakamoto, the pseudonym listed on the 2008 white paper that described how Bitcoin would work. Over the years, several people have publicly stepped forward claiming to be the real Satoshi, but none have provided sufficient evidence to prove their identities. In the first seven months after Bitcoin’s creation, Satoshi reportedly mined as much as 1.1 million Bitcoins. Those Bitcoins would be worth more than $25 billion as of August 2022.

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