What is cryptocurrency? Everything you need to know about blockchain, coins and more

Someone in your life is talking about cryptocurrency – maybe your partner or your best friend. Or maybe you’ve seen it in the news or on social media. Either way, you want to understand this new technology that people are telling you to invest in.

Below, Select delves into what constitutes a cryptocurrency and what to look for before investing.

Basically, a cryptocurrency is a digital asset that uses computer code and blockchain technology to work a bit on its own, without the need for a central part – whether it’s a central part. person, company, central bank or government – to manage the system.

A blockchain is a ledger that keeps track of cryptocurrency transactions. This transaction register is kept on computers linked through a distributed network. Transactions in cryptocurrency protocols are combined into blocks, and those blocks are then tied together in a historical record of everything that happened on that blockchain.

Bitcoin, the first cryptocurrency created, was originally developed to serve as the native payment mechanism of the online world. Faster, cheaper, resistant to censorship, and not subject to the whims of a government or central bank.

Today there are thousands of cryptocurrencies. These still act as payment mechanisms but have also been developed for other use cases, such as lending and borrowing or digital storage. And one of the broadest use cases for this technology is speculation, buying in the hope that the price will rise and the holders can make a profit.

The vision behind cryptocurrency is that of a peer-to-peer electronic money system that is not controlled by a central authority and therefore is fast, cheap and immune to censorship (e.g. PayPal blocking sales of firearms) and other forms of corruption or control.

Although the definition is fluid, there are several features that typically make up a crypto asset:

• Cryptography: This is where the term “crypto” comes from. Cryptocurrency (or crypto for short) uses cryptography, which are techniques for securing information or communications. Cryptocurrencies use something called public key cryptography. In systems using public key cryptography, there is a public key, which can be shared with others; in cryptocurrency, this is the key that you share with people so that they can send you crypto. There is also a private key, which you do not share with others. Think of the private key as a password. It secures your crypto holdings and is used to sign transactions that you initiate with others.

• Transparency: The ethics of crypto is one of transparency. Much of the code on which these protocols are built is open source, freely available for redistribution and modification. Additionally, each crypto transaction is time stamped in the blockchain, creating a public provenance or timeline of ownership or custody of assets.

• Incentives: Cryptocurrency protocols are designed with game theory components in an effort to ensure that all users of the system act in a way that keeps the system running. For example, Bitcoin miners have to use computing power to verify transaction blocks. To compensate for the work done by miners, newly minted coins are automatically distributed to miners when they verify a block of transactions. In this way, miners are encouraged to continue to put the power on the verification of transactions.

In the crypto space, many terms are used interchangeably which, of course, makes the conversation confusing for newcomers. But overall, there are three categories of crypto:

• Crypto assets / digital assets: It is the catch-all term for all the unique assets that were born out of the blockchain revolution and use crypto. Cryptocurrencies and crypto tokens fall into this category.

• Cryptocurrency: These crypto assets are also called crypto coins and are the native ones of blockchains. So, for example, bitcoin (BTC) is the native cryptocurrency of the Bitcoin blockchain and the ether (ETH) is the native cryptocurrency of the Ethereum blockchain. These coins are used to pay transaction fees and also compensate minors or users who verify transactions.

• Cryptographic tokens: These are crypto assets that do not have their own blockchain. Crypto tokens run on top of an existing blockchain. Ethereum is the most popular blockchain to build tokens on, but there are other blockchains that can support it. For example, Beeple’s NFT art, which sold for $ 69 million, was built on top of the Ethereum blockchain. Decentralized Finance (DeFi) tokens also fall into this category.

Since its inception in 2009, the ecosystem surrounding cryptocurrency and blockchain technology has grown into a billion dollar industry, while cryptocurrencies have a total market capitalization of over $ 1,000 billion. dollars.

Technology has led to serious innovations, both internal and external, prompting financial service providers and other industries to update their processes to better reflect people’s expectations for online transactions and communication. For example, the speed and low cost of cross-border crypto transactions has led many people to start re-evaluating the remittance industry and other payment networks, namely Western Union.

Being an open system, one of the objectives of Cryptocurrency aims to expand access to financial service tools to many people who are not allowed to enter the traditional banking system. And the industry encourages self-sovereignty, the ability of individuals to maintain control over their data, whether it’s identity information or their money.

Still, there are risks in getting involved in cryptocurrency and financial systems that are not regulated by the government, including hacks and lost wallet passwords, where people are completely stranded on their phones. accounts and / or lose their money. Remember: these accounts are not FDIC insured.

Because cryptocurrency is beyond government control, it allows individuals and organizations to circumvent laws, restrictions, and regulatory oversight. Early in Bitcoin’s history, it was used to send donations to WikiLeaks, after the U.S. government pressured the card networks, Visa and Mastercard, to halt transactions with the organization. More recently, some Venezuelans have turned bolivars into bitcoins as a way to store value, as bolivars have been inflated to nearly worthless by the Venezuelan government. However, cryptocurrencies have also facilitated illicit activities like money laundering.

There are many ways to analyze crypto assets and projects, although there is no quick fix to finding the next big thing. Here are some things to consider when researching cryptocurrencies:

• Data: Because it is based on transparency, the industry generates a huge amount of data. Market cap, or the total value of all coins or tokens that have been minted, is a serious indicator in space. You can compare cryptocurrency data on sites like CoinGecko and CoinMarketCap.

• Use case : It is helpful to understand the number of active users on a network and what those users are doing on the network. Is the project addressing a real problem? How widely can a protocol be adopted, both by individual users and businesses?

• Developer activity: Separately, protocols with a large ecosystem of developers are generally considered to be better projects because it means that many people maintain the codebase and work on improving it.

• The team: Investigating the team behind a cryptocurrency project can be helpful, but it’s also a challenge. Since there is an ethic of privacy in the crypto ecosystem, many users, developers, and even the C suite like to remain anonymous, using only a pseudonym. And that doesn’t always mean projects aren’t trustworthy.

Keep in mind that cryptocurrencies and crypto tokens are a new category of investment, only a little over a decade old. These digital assets are built with new, experimental technology, and there is thin and ever-changing regulatory oversight over the industry. As such, crypto assets are considered a riskier bet than more traditional assets, like stocks and bonds.