From Bitcoin to Ethereum, cryptocurrencies represent a new era in finance and technology. According to CoinMarketCap, there are approximately 22,932 cryptocurrencies, with a total market capitalization of $1.1 trillion. They have become mainstream investments popular amongst investors all over the world but still remain a buzzword to many. For an asset worth this much, it is important to truly understand the concept behind cryptocurrencies and how blockchain technology works. 

Whether you are a new investor thinking of buying BTC or an experienced trader looking to gain more insight into the phenomenon called cryptocurrency, this blog is for you. In this piece, we demystify the concept of cryptocurrency and blockchain technology to help you make more informed investment decisions. 

Let’s delve in! 

What Are Cryptocurrencies?

At the most basic level, cryptocurrency means digital money. It is a form of currency that cannot be circulated physically yet remains a powerful digital asset that can be invested just like fiat currencies like the US Dollar or Pounds. 

The driving force behind cryptocurrency lies in decentralization, which means operating without a central authority like a government or financial institution. This decentralized structure enhances security, reduces the risk of fraud, and empowers users by granting them greater control over their financial assets.

Cryptocurrency also operates on the foundation of cryptographic technology, which uses advanced mathematical principles to secure transactions and control the creation of new units. At its core is blockchain technology, a decentralized and distributed ledger that records all transactions across a network of computers. We’ll look at how the blockchain works further in this article and how this technology has been applied in recent times.  

What are the Types of Cryptocurrencies? 

Beyond Bitcoin, it is important to know that there are diverse kinds of cryptocurrencies like Litecoin, Ripple, Ethereum, and many more. These cryptocurrencies are categorized based on functionalities, use cases, and underlying technologies, but together, they form a thriving network of digital asset ecosystems. 

Let’s look at some of the popular categories of cryptocurrencies. They are: 

Payment Cryptocurrency

Payment cryptocurrencies are designed primarily for facilitating transactions, and they also act as a medium of exchange. These cryptos allow you to make peer-to-peer transactions (send or receive from fellow traders) or purchase goods and services. The aim of payment cryptocurrencies is to promote decentralization, security, and transparency in financial transactions. Some of the popular types of payment cryptos include Bitcoin (BTC), Bitcoin Cash (BCH), and Litecoin (LTC).    

Utility Tokens

Utility tokens provide access to a specific product or service within a blockchain ecosystem. You use these kinds of cryptos to access premium features on a blockchain-powered site, pay for services, or participate in a decentralized application (DApp). 

Binance Coin (BNB) is a type of utility token used for transaction fee payments on the Binance exchange. Another example is Chainlink (LINK), which is used for decentralized Oracle services.    

Stablecoins

Stablecoins are cryptocurrencies pegged to stable assets like fiat currencies such as USD, EUR, or commodities to control price volatility. This kind of crypto provides people access to the crypto investment benefits without fearing the notorious crypto market fluctuations. 

Because of their stable nature, they can also be used as payment cryptocurrencies and for other day-to-day transactions. Some examples of stablecoins are Tether (USDT), USD Coin (USDC), and DAI. 

Central Bank Digital Currencies (CBDC)

CBDCs are the digital forms of a country’s national currency issued by its central bank. They represent a government-backed digital version of physical currency, which allows digital transactions and financial inclusion. CBDCs aim to combine the benefits of digital currencies with the stability and backing of a national government. While many central banks are exploring CBDCs, no widespread implementation has occurred yet. However, there are some CBDCs in existence, like Jamaica’s JAM-DEX currency, launched in July 2022, Nigeria’s e-Naira currency, launched in October 2021, China’s e-CNY currency, launched for the pilot phase in April 2021, amongst a few others. 

How Does Blockchain Work?

Blockchain is the technology at the heart of many cryptocurrencies today. It operates as a decentralized and distributed ledger. Instead of relying on a central authority, blockchain relies on a network of computers or nodes, with each maintaining a copy of the entire ledger. 

Every crypto transaction ever made is grouped into blocks, which end up forming a continuous chain through cryptographic hashes and timestamps— complex mathematical codes that make each transaction immutable or unchangeable. 

Now, when someone wants to add a new transaction to the ledger, the majority of computers in the network must agree that it’s valid. It is usually done using consensus mechanisms like proof of work or proof of stake. Proof of work requires the participation of cryptocurrency miners to solve complex puzzles to validate the transaction. Proof of stake, on the other hand, requires chosen participants to create new blocks based on the amount of cryptocurrency that they hold. 

Once a block is added, it’s practically impossible to alter previous transactions because it would require changing all subsequent blocks—  an incredibly challenging task. 

While blockchain is mostly used in the cryptocurrency industry, its application goes beyond that. This technology can be used in any industry for data protection. 

How Do You Get Started In Crypto? 

Now that you know how cryptos and the blockchain work, how do you begin your journey? 

Here’s a step-by-step guide to get started: 

• Choose a wallet: Start by selecting a cryptocurrency wallet to store your digital assets. Wallets can be hardware, software, or online platforms, each with its own security features.
• Explore cryptocurrency exchanges: You’ll need an exchange platform to be able to buy and trade cryptocurrencies. Some popular exchanges include Binance, Coinbase, and Independent Reserve. 
• Understand keys: Cryptocurrencies use public and private keys for secure transactions. The public key is your wallet address, while the private key grants access to your funds. Ensure that you understand how these keys work, but ultimately, always safeguard your private key!

Your Crypto Adventure Begins

Once you have your wallet and have access to an exchange platform, it’s time to start investing. You can start by exchanging your fiat currency for a fraction of a popular cryptocurrency. Ensure that you conduct extensive research before hopping into any sort of investment. In essence, DYOR!