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  • Writer's pictureClaudia Campisano

What is cryptocurrency?

Updated: Apr 14, 2023


"What is cryptocurrency" article's cover

In 2014 the Oxford Digital Dictionary (ODO) officially added the word cryptocurrency to its database:



This event was significant as it represents the achievement of mass education, emphasizing the real revolution that cryptocurrencies -and even more decentralized finance- are bringing to our society.


 

How do cryptocurrencies work?


Cryptocurrencies are digital or virtual assets secured by cryptography -the science of using mathematical computation to encrypt and decrypt information- making double spending impossible. They are often used as an alternative form of payment, more precisely as are medium of exchange within a peer-to-peer (P2P) digital economic system making payments cheaper and faster worldwide.


Moreover, they are not issued or controlled by governments and are defined as typically decentralized based on open-source software. All the made transactions are secure thanks to blockchain technology.


 

What is cryptocurrency in simple words?


a graphic of cryptocurrency tokens

Cryptocurrencies are based on public-private key pairs cryptography to transfer coins. A private key is an ultra-secure password -that never should be shared with others- that allows you to send coins on the network. From this, it’s extracted a public key that you can share with anyone, enabling you to receive coins.


A common way to create a cryptocurrency is mining, which entails employing computer processing power to solve complex mathematical problems to earn coins. This is usually used to generate bitcoin; other cryptocurrencies use different methods to create and distribute coins with less environmental impact.


Before adding every transaction on the blockchain is needed to verify it. The most widespread consensus mechanism to approve and verify transactions are Proof-of-Work (PoW) and Proof-of-Stake (PoS). To explore this concept, read our previous article on the differences between PoW and PoS.


The most important features of cryptocurrencies can be summarized as follows

  • Decentralization

  • Irreversibility and immutability

  • Anonymity (more precisely, transactions are made through pseudonyms, known by the name of address)

  • Limited supply and scarcity

  • Transparency

  • Speed


Bitcoin: the first relevant crypto

Bitcoin is the most popular cryptocurrency created by an unknown person or group of people under the pseudonym of Satoshi Nakamoto” in 2008. It became available to the public as open-source software in 2009.


Here, you can find a brilliant article about the complete Bitcoin history.


Ether: a new era of decentralization

This coin -second for market cap- was created by Vitalik Buterin, who was inspired by the most relevant crypto, bitcoin, aiming to solve its critical issues. With the passing of time, Ether has acquired more value, and its blockchain, Ethereum, has become the milestone of decentralized finance (DeFi), without which many dApps would not exist today.


Altcoin, Stablecoin, Memecoin and Shitcoin

Altcoin is composed of two words: alt stands for alternative and coin. This umbrella term collects all digital assets/currencies except bitcoin, with different purposes and use cases.



Memecoin is a cryptocurrency inspired by memes on the Internet and social media. The first memecoin is Dogecoin (DOGE), followed by Shiba Inu (SHIB).

a graphic of meme coins, shibainu, dogecoin.

They are community-driven and gain popularity overnight, thanks to the Fear of Missing Out (FOMO). Their price could drop unexpectedly and often have a huge or unlimited supply.


Shitcoin is one of the most controversial terms in the crypto industry. It disparagingly describes certain investment cryptocurrencies and projects. The term refers to all those useless cryptocurrencies that exist in the market and has been created without a defined purpose with speculative prices.


 

How to buy and store cryptocurrencies?


The easiest way to purchase cryptocurrencies is to buy them on exchanges. There are two main types of exchanges: centralized exchanges (CEXs) and decentralized exchanges (DEXs).


Currently (16th November 2022), cryptocurrencies in the marketplace are 21.767, according to CoinmarketCap, a useful tool where you can find charts, spotlight, and trends of cryptos but also relevant information such as their market capitalization.


 

Pros and Cons of cryptos


Opinions about cryptos are different from one investor to another. Here are a few reasons that some people believe it is leading-edge technology, while others think it is only a fad.


Supporters of cryptocurrency love cryptos because they remove centralized intermediaries (such as central banks and trusted third parties), changing the way we trust and eliminating the single point of failure, and trying to guarantee the concept of decentralization.


Despite most public opinion, cryptocurrencies do not guarantee anonymity. Indeed, they leave a digital trail that agencies like the Federal Bureau of Investigation (FBI) can decipher. This is an advantage for mass adoption to fight illicit action.

This feature is a double-edged sword because it opens up possibilities for governments to track the financial transactions of ordinary citizens.


Another relevant aspect that needs to be considered is the vulnerability to cyber-attacks. Cryptos are digital assets used on the web; make any operations and transactions with this in mind.


 

Are cryptocurrencies the future of finance?


Cryptocurrency is a new paradigm for money. They have brought people to understand finance in an easier and more decentralized way.


Cryptos are a real revolution!


They have turned over the fintech industry, allowing every user to be the custodian of his/her funds. They are a highly innovative and fairly recent financial product. The oldest, bitcoin, was born 14 years ago, and the promising others were born from much less.


For this reason, it’s certainly essential that the sector grows and, with it, also the regulation and protection for anyone who works with this new asset.


However, cryptocurrencies are not all reliable assets. As explained above, there are bogus projects and shitcoins to steer clear of.


To operate consciously in this area, it is necessary to learn every project considered interesting, study the tokenomics, and check the people who created and supported the project. Only then you can think of investing responsibly.


Have you already invested in any projects and already own cryptocurrencies?


You can store your cryptocurrency, as usual, you store your cash, in a wallet.


Improperly in the crypto industry, we define a wallet as holding our digital coins. But to be more precise digital coins are digital and belong to the online world; the wallet is definable more as a signing device, a software that stores and manages our private keys allowing us to firm messages and transactions.


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