What Are Cryptocurrencies?
Okay, so let’s start off with a beginner’s guide to crypto. It’s not as complicated as you might assume, we promise – so, grab a coffee and read on.
Cryptocurrencies, usually referred to as ‘cryptos’, are digital assets that are fungible – meaning they can be divided into smaller parts, like traditional fiat money. However, they are based on blockchain technology, so all transactions are permanently recorded in an immutable distributed ledger.
The original and most popular cryptocurrency is Bitcoin (BTC). All other cryptos can be referred to as ‘altcoins’, with the biggest being Ethereum (ETH). Although there are literally thousands of different cryptos, in this guide, we’ll focus on those cryptos that have gained enough traction to make them potentially viable in the digital economy.
Differences Between Cryptocurrencies
Although all cryptocurrencies share some basic characteristics, they can also vary significantly. Crypto coins are cryptos that run on their own dedicated blockchain. On the other hand, crypto tokens are cryptos that rely on another third-party blockchain.
Some cryptos, like Bitcoin (BTC), utilise proof-of-work (PoW) blockchains, while others, like Ethereum (ETH) use proof-of-stake (PoS) blockchains. PoW and PoS are different approaches to verifying the integrity of the individual blocks in the blockchain. Both have advantages and disadvantages – PoW is widely regarded as more decentralised and secure, but PoS as being much more energy efficient and scalable.
Wait… What’s the Difference Between PoW & PoS?
The proof-of-work protocol has all nodes (users) on the blockchain solve a cryptographic puzzle to validate a new block. The first to solve it gets a reward. There’d be no alternative to this protocol if it weren’t for the formation of giant server farms, built by anyone with the means, sucking up enormous amounts of energy to solve these cryptographic puzzles. The incentive has also led to the pooling of server power, which can, in fact, lead to centralisation – contrary to the popular belief that PoW keeps cryptocurrencies more decentralised.
Proof–of-stake utilises an election process. One node is chosen to solve a cryptographic puzzle, based on the size of their stake. This process is made fairer by a Slashing Penalty put in place for validating fraudulent transactions. You see the elected node – the validator – must have their tokens ‘staked’, rendering them collateral. The collateral is frozen for the validation period and can be charged (either a fixed amount or percentage) in the event of fraudulent validation.
PoS and PoW protocols aside, Individual cryptos still vary in terms of how decentralised they really are. Some, like Bitcoin, are highly decentralised, while others, like XRP, are at least partially centralised.
Want to find out more about a specific cryptocurrency? We’ve provided a dedicated page, or cheat sheet, for each individual crypto.
One of the most commonly used types of cryptocurrency is the stablecoin. At the time of writing, the most popular was Tether (USDT), the third biggest crypto by market capitalization, coming in just behind Ethereum (ETH).
Stablecoins use the same underlying blockchain technology as other cryptocurrencies but are pegged to a fiat currency, usually the US dollar, on a 1-to-1 basis. This means they can be used to transfer wealth internationally, at a fraction of the cost, and much more quickly than traditional payment systems like SWIFT. The sender simply converts a fiat amount to the stablecoin, sends it, then the recipient, wherever they are, converts it back into the fiat currency of their choice.
Stablecoins are also used to facilitate trading between different assets and can be a good way of preserving wealth in crypto wallets while avoiding market volatility. You can find out more about the most popular stablecoins on their own dedicated pages; Tether (USDT) and USD Coin (USDC).
Central Bank Digital Currencies (CBDCs)
Over the last few years, you’ve probably heard Central Bank Digital Currencies (CBDCs) being talked about in the news. These often also get referred to as ‘cryptos’, but this is not accurate. CBDCs are entirely centralised, and merely a digital form of fiat currencies. In fact, they are in many ways the complete antithesis of cryptocurrencies – because they give even more control to governments and central banks.
What Are Cryptos Used For?
Although cryptocurrencies like Bitcoin were initially just a digital payment method, today they have a multitude of use cases.
Virtually all cryptos can be used for payments, although their practicality in this regard varies greatly. Some cryptos, like Bitcoin, Ether, Litecoin, XRP, and Dogecoin, are widely accepted by online retailers, service providers, casinos, and even tax authorities. On the other hand, some, like Chiliz (CHZ), are only useful for payments in very specific ecosystems.
Cryptos that use proof-of-stake blockchains, like Ethereum (ETH) and Solana (SOL) can be staked to help secure their networks. Stakers will earn rewards for doing so, which makes this popular with DeFi investors.
Some cryptos are technically utility tokens. You can think of them as virtual coupons that give access to specific services. Examples of these include Basic Attention Token (BAT) and Golem (GNT).
Cryptos like SAND or UPX are used for in-game purchases in specific metaverses – in this case The Sandbox and Upland respectively.
- Wealth Protection
Bitcoin is often referred to as ‘digital gold’ and is seen as a potential way to store and protect wealth over the long term.
How to Buy And Use Cryptos
The most popular way of acquiring cryptocurrencies is via large centralised crypto exchanges like Binance, Coinbase, and Kraken. These are easy to use and offer robust security, but you will have to comply with stringent KYC and AML measures.
There are also several other ways to acquire crypto, including:
- Decentralised Exchanges
There are many different decentralised crypto exchanges available. These offer direct peer-to-peer transactions and rely on smart contracts rather than a centralised intermediary. While they can save on fees and offer greater privacy, they are far less user-friendly than centralised exchanges.
- Staking Rewards
You can earn crypto rewards when you stake crypto to help secure a PoS network like Ethereum or Solana. Various staking programs exist, including pools. The rewards paid out will depend on the amount you stake and for how long you are willing to stake it.
- Mining – Although profitably mining Bitcoin is now out of the question unless you invest thousands in high-end Application Specific Integrated Circuit (ASIC) hardware, there are still some cryptos that can be mined on consumer-grade hardware. These included Dogecoin (DOGE), Ethereum Classic (ETC), Monero (XMR), ZCash (ZEC), and Ravencoin (RVN).
- Forks – When a blockchain forks, those holding the original coin or token, usually get given an equal amount of the new token too. For example, when Bitcoin Cash forked from the Bitcoin network, Bitcoin (BTC) holders were given Bitcoin Cash (BCH). However, the market value of the new tokens is usually very significantly lower than the original.
- Airdrops – Many networks will distribute currency from time to time, especially when trying to establish themselves and build awareness of a new coin or token. Sometimes crypto is airdropped to winners of competitions too. However, you should always be careful, because many scams use airdrops as cover.
- Crypto ATMs – In some countries, you can find physical cryptocurrency ATMs at places like supermarkets and airports. These allow users to buy major cryptos, like Bitcoin, using cash and cards.
Crypto Laws And Regulations
Because cryptocurrencies, and blockchain in general, are still emerging technologies, it is important to be aware of the latest laws and regulations wherever you are living.
For example, at the time of writing in 2022, Portugal did not tax crypto earnings at all, whereas the United States’ Internal Revenue Service was embarking on a strict crackdown on crypto income. And, while China had banned cryptos, Paraguay, El Salvador, and the Central African Republic had actually made Bitcoin legal tender.
Furthermore, in the United States, the Securities and Exchanges Commission (SEC) is currently involved in major legal battles with companies like Ripple, and has threatened it may classify most cryptos as securities – this would have major tax implications for US crypto users, and could change the international crypto landscape. Stay up to date with all the latest crypto legal developments by checking our news section daily.
Crypto Markets And New Projects
Finally, it’s important to remember that crypto markets have proven to be highly volatile. This is especially true of smaller altcoin projects. While some gain traction and can prove to be excellent investments, many quickly fade into obscurity and become worthless. Always conduct your own research and due diligence before investing in any crypto project.