What is Cryptocurrency?

A cryptocurrency is a type of digitized or virtual currency that can be used to exchange goods and services without the need for a central authority such as a government or bank. It has no physical form, is stored in a public ledger system, is cryptographically protected from alteration, and uses blockchain technology to prevent fraud.

Cryptocurrency enables unrestricted financial transactions, expands banking services to the underprivileged, and introduces an innovative method for value preservation and transition.

The defining attribute of a cryptocurrency is that it is completely decentralized because it is based on Blockchain technology. No government or body is able to manipulate the value of such a digital asset.

Table of Contents

• Key Features of Cryptocurrency
• Understanding cryptocurrency
• Types of Cryptocurrencies
• Bitcoin vs. Ethereum
• Cryptocurrency mining
• Advantages of Cryptocurrency
• Can Cryptocurrency Be Hacked? Debunking the Myths
• Which Type of Cryptocurrency Should You Invest In?
• Conclusion

“Cryptocurrency currencies take the concept of money, and they take it native into computers, where everything is settled with computers and doesn’t require external institutions or trusted third parties to validate things.”– Naval Ravikant, CEO of AngelList

Key Features of Cryptocurrency

Understanding cryptocurrency

Cryptocurrency refers to digital or virtual money that is secured through cryptographic techniques and uses decentralized technology known as blockchain. Unlike traditional currencies, cryptocurrencies are not issued by banks or governments, removing them from reliance on centralized financial institutions.

Essentially, cryptocurrency marks the beginning of a new financial ecosystem in which individuals do not rely on a third party for control over their money. Cryptocurrency facilitates borderless transactions, increases security, and provides financial access to millions of people around the world.

The first known cryptocurrency, Bitcoin (BTC), was introduced in 2009 by the enigmatic figure Satoshi Nakamoto. Nakamoto published a whitepaper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System‘, which explains how Bitcoin can function as a cash system without the use of a financial third party.

Bitcoin is recognized as the first successful digital currency; however, the concept of cryptocurrency has existed since the 1990s. Cryptocurrencies such as DigiCash and HashCash failed because they were built on decentralized systems.

In cryptocurrency systems, no single entity is responsible for creating new denominations of any particular cryptocurrency. Everyone knows the current supply and how much will be available in the future. In fact, the last Bitcoin will be mined by 2140, and after that, no new Bitcoins can be produced.

How Does Cryptocurrency Work?

Bitcoins can be transferred from one person to another using a peer-to-peer network without the intervention of third-party institutions such as banks. Essentially, people can send and receive cryptocurrencies without using intermediaries.

This is what a common cryptocurrency transaction looks like:

1. User initiates a transaction: Alice transfers one Bitcoin (BTC) to Bob via her vault wallet.

2. The network verifies transactions: Miners or validators ensure Alice has enough money and confirm the transaction.

3. Transaction moves to blockchain: The public ledger records the new transaction and saves it in such a way that no one can change it.

4. The transaction proceeds to the final stage: 1 BTC is transferred to Bob, and Alice’s wallet is modified for the transaction.

• Transactions can be completed in seconds to minutes when the network is less congested.
• Aside from being significantly lower than standard bank fees, the cost of transactions is low.
• Because the transaction is irreversible, the likelihood of fraud is significantly reduced.

What Makes Cryptocurrency Valuable

In contrast to traditional currencies such as dollars or rupees, the value of cryptocurrencies comes from:

• Scarcity: A lot of cryptocurrencies, for instance, Bitcoin, have a capped value to ensure that there is no inflation.

• Utility: Other cryptocurrencies, such as Ethereum, support smart contracts and decentralized applications (DApps).

• Adoption: The value of cryptocurrency increases as more people and businesses use it.

• Mining and Validation: The amount of effort required to mine new coins has an impact on supply and demand.

Consider the year 2021, when Bitcoin’s price skyrocketed to more than $60,000 USD from $0.08 in 2010, owing to its high adoption rate and limited supply.

Types of Cryptocurrencies

Since the creation of Bitcoin in 2009, the cryptocurrency market has grown significantly. Today, there are over 20,000 different cryptocurrencies, each with a specific purpose. All of them can be classified into three major categories based on their technology and function:

• Bitcoin: The Pioneer and Digital Gold

• Altcoins: Alternative Cryptocurrencies to Bitcoin

• Stablecoins: Price-Stable Digital Assets

Each of the three categories has unique strengths and use cases in migration. With that being said, let’s analyze them in further detail.

1. Bitcoin (BTC): The First and Most Valuable Cryptocurrency

Bitcoin remains the most well-known and widely accepted cryptocurrency to this day. It was invented in 2009 by Satoshi Nakamoto and is described as a virtual currency for peer-to-peer transactions that can be sent and received without the involvement of centralized banks and other third-party mediation.

Key Features of Bitcoin:

• Fixed Supply: The total amount of Bitcoins that will ever exist stands at 21 million, similar to gold.

• Decentralized: No single authoritative body governs Bitcoin.

• Security & Immutability: The blockchain public ledger on which transactions are recorded is permanently immutable.

• Strong Market Influence: Almost 50 percent of the entire cryptocurrency market capital goes to Bitcoin.

How is Bitcoin Used?

• Store of value: Because of its ability to maintain value over time, Bitcoin is often referred to as “Digital Gold.”
• Payments and Transactions: Used by prominent businesses such as Tesla, Microsoft, and PayPal.

Example: An investment of $1,000 in Bitcoin in 2011 could be converted into over $50 million today.

2. Altcoins – Alternative Cryptocurrencies to Bitcoin

Anything aside from Bitcoin is known as an altcoin. They were created in order to offer additional features, faster transaction speeds, and lower fees than Bitcoin.

The following categories mark the further division of altcoins:

1. Smart Contract Platforms (Ethereum, Solana, Cardano, and others)

These coins allow the creation of DApps, smart contracts, and other blockchain applications, making Ethereum and Solana-based decentralized currencies.

Popular Smart Contract Cryptos:

• Ethereum (ETH): The most popular and widely used smart contract platform. Supports NFTs, De-Fi, and Web3 applications. Ethereum serves as the foundation for 80% of De-Fi projects and NFT marketplaces, making it critical for Web3 infrastructure.

Key Facts About Ethereum:

• Launched: In 2015 by Vitalik Buterin.
• Purpose: Allows smart contracts and decentralized applications (DApps) to function.
• Consensus Mechanism: Transitioned from Proof of Work to Proof of Stake in 2022 (Ethereum 2.0).
• Market Cap: As of 2024, Ethereum is valued at over $500 billion.
• Fun Fact: Surprisingly, Ethereum is more widely used in the real world than Bitcoin, owing to the former’s higher transaction fees.

• Solana (SOL): This cryptocurrency is known for fast transactions and low costs, making it a strong competitor to Ethereum.

Key Facts About Solana:

• Launched In 2020 by Anatoly Yakovenko.
• Purpose: Increase transaction rate while increasing speed.
• Consensus Mechanism: Implemented Proof of History alongside Proof of Stake.
• Market Cap: Currently, Solana has a market cap of 50 billion dollars.
• Fun Fact: Despite suffering network outages in 2022 and 2023, Solana has significantly increased its reliability.

• Cardano (ADA): A scientifically supported blockchain that aims to be secure and sustainable.

Key Facts About Cardano:

• Launched In 2017 by Charles Hoskinson (co-founder of Ethereum).
• Purpose: Focused blockchain for smart contracts and DeFi with an emphasis on research.
• Consensus Mechanism: Ouroboros Proof of Stake (PoS), which is less energy-consuming than Bitcoin and Ethereum.
• Market Cap: Above 20 billion dollars.
• Fun Fact: The Government of Ethiopia is utilizing Cardano for its blockchain-based education records for 5 million students.

2. Privacy Coins (Monero, Zcash, Dash, etc.)

These types of cryptocurrencies enable users to conduct transactions anonymously. For example, all Bitcoin transactions are visible and documented in a public ledger.

Popular Privacy Coins:

• Monero (XMR): Hides transaction details using Ring Signatures.

Key Facts About Monero:

• Launched: In 2014.
• Purpose: 100% personal & anonymous transactions.
• Privacy Feature: Utilizes Ring Signatures & Stealth Addresses to conceal transaction information
• Market Cap: Approximately $3 billion.
• Fun Fact: Monero is frequently delisted from centralized exchanges because of government pressure.

• Zcash (ZEC): Users have the option to conduct private transactions or transparent ones.

Key Facts About Zcash:

• Launched: In 2016.
• Purpose: Enables users to select privacy or transparency.
• Privacy Feature: Utilizes Zero-Knowledge Proofs (zk-SNARKs).
• Market Cap: Approximately $2 billion.
• Fun Fact: Edward Snowden assisted in the launch of Zcash pseudonymously.

• Dash (DASH): Monitors and enhances privacy levels when utilizing InstantSend for swift transactions.

Key Facts About Dash:

• Launched: In 2014.
• Purpose: Instant, cheap payments.
• Feature: InstantSend & PrivateSend transactions
• Market Cap: Approximately $1.5 billion.
• Fun Fact: Dash is widely used in Venezuela as a substitute for hyperinflated fiat currency.

Use Case: Privacy coins are often used by people whose main concern is anonymity, security, or both.

3. Meme Coins (Dogecoin, Shiba Inu, etc.)

Meme coins began as a joke cryptocurrency, although some gained popularity and serious market value, making them highly speculative. The market value for these coins is still mostly driven by community hype and celebrity endorsements.

Popular Meme Coins:

• Dogecoin (DOGE): Launched as a joke in 2013, but gained fame after gaining support from Elon Musk.

Key Facts About Dogecoin:

• Launched: In 2013.
• Purpose: Initially began as a meme, today applied for tipping and payments.
• Unlimited Supply: Dogecoin does not have a supply cap, unlike Bitcoin.
• Market Cap: Approximately $20 billion.
• Fun Fact: Elon Musk referred to Dogecoin as “the people’s crypto,” triggering a huge price spike in 2021.

Dogecoin’s value increased by 12000% in 2021, causing early investors to become millionaires overnight.

• Shiba Inu (SHIB): Built on Ethereum, marketing itself as the “Doge killer”.

Key Facts About Shiba Inu:

• Launched In 2020.
• Purpose: Started as a meme but turned into a serious project.
• Ecosystem: ShibaSwap (DEX), Shibarium (Layer-2 blockchain), and NFTs.
• Market Cap: More than $20 billion.
• Fun Fact: In 2021, an investment of $8,000 in SHIB became $5.7 billion, the biggest crypto transaction ever.

4. Utility Tokens (BNB, Chainlink, Uniswap, etc.)

Utility tokens are cryptocurrencies that allow users to access certain services on a blockchain network. They are not necessary for payment, but rather for facilitating interactions with blockchain infrastructures.

Popular Utility Tokens 

• Binance Coin (BNB): Serves as a trading fee discount on Binance and fuels the Binance Smart Chain.

• Chainlink (LINK): Serves as a bridge between smart contracts and real-world information.

• Uniswap (UNI): A token for Uniswap, the first DeFi (DEX) exchange.

Example: Binance Torch (BNB) is one of the most important utility tokens, as it is used for active trading, payment, and DeFi services.

3. Stablecoins – Price-Stable Cryptocurrencies

Stablecoins are cryptocurrencies linked to real-world commodities like the US dollar, gold, or other stable assets. Stablecoins have a fixed value that does not vary the same way Bitcoin or Ethereum does, and are mostly preferred for trading, saving, or paying. 

Types of Stablecoins

Why Use Stablecoins?  

• Hedge Against Volatility: Using stablecoins enables traders to cash in profits during an unfavorable market.  

• Cross-Border Transactions: Transfer funds globally in real-time with no additional banking costs.  

• Earning Passive Income: Numerous DeFi ecosystems pay high interest for deposit accounts secured by stablecoins.

Example: In 2022, stablecoins accounted for over $7 trillion in transactions, a figure exceeding Visa’s annual payment volume.

“Well, I think it is working. There may be other currencies like it that may be even better. But in the meantime, there’s a big industry around Bitcoin. — People have made fortunes off Bitcoin, and some have lost money. It is volatile, but people make money off of volatility too.” – Richard Branson, Founder of Virgin Galactic

Bitcoin vs. Ethereum

Cryptocurrency mining

Cryptocurrency mining is the process of adding new blocks to the cryptocurrency Blockchain network through intensive mathematical computing. It is to be noted that the reward for Bitcoin mining halves every 4 years. The reward for mining one block of Bitcoin as of now is 12.5 Bitcoins (approximately $200,000 or Rs 1,28,00,000). Mining other cryptocurrencies won’t yield as much reward as Bitcoin mining, but any kind of mining is a difficult process.

“When bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the bitcoin universe, an algorithm replaces the function of the government …[that] is actually pretty cool.” -Albert Arnold Gore, Former Vice President of the United States

What can one do with cryptocurrency?

The prices of these cryptocurrencies are highly volatile and therefore keep fluctuating now and then. If one has the knack and expertise in trading, then one can well engage in buying and selling these currencies. If such short selling does turn favorable to you, then you can make a killing. You just need to have patience.

On the other hand, several businesses accept Bitcoin as payment. Other cryptocurrencies are still picking up as a payment medium. You can get premium access to Usenet and Mega, which are among the biggest names in online file sharing, through Bitcoins. You can get premium offerings from Reddit through Bitcoin.

Buying new and used computers, tablets, phones, etc., through Bitcoin is possible through Bitcoin Store and Betemit. The prices in Bitcoin Store are cheaper than on Amazon for certain products. You can use Amagi Metals and Coinabul to buy and sell metals like silver, gold, etc., in exchange for Bitcoin. FatProperty allows house renting through Bitcoins.

Ethereum is used in smart contracts. It is a well-known fact that Google makes billions every year selling our private search data to large multinationals. The Ethereum blockchain is helpful in this regard as it logs when the search engine uses our data and makes it publicly available. Large firms would think twice about using our data, fearing privacy concerns from the public.

The gambling industry is worth around $240 billion in the USA. Players are often highly skeptical of casinos, and they may lead them into fraud. Ethereum or even Bitcoin, for that matter, can be used, which will completely disrupt the casino industry because all transactions are secure here.

Advantages of Cryptocurrency

• Immutable: No entity can change a transaction after it’s completed. Your transactions can’t be undone by any regulatory body as this is beyond all that. Once a transaction is done it is done for good.

• Pseudonymous: No transaction or account can be traced to its real-world identity. You send and receive cryptocurrencies on some character addresses. For Bitcoin, it is about 30 characters. In fact, the group that started this cryptocurrency by inventing Bitcoin is under the pseudonym Satoshi Nakamoto. 
  
• Low transaction fee: Miners are rewarded in cryptocurrencies only, and hence there is no fee, or even if there is, it is very little. Cryptocurrency and blockchain may well be the alternative for corresponding banking transactions.

• Identity protection: Payment through a credit or debit card requires that you provide your identity at the POS or where you use the card. But if you use cryptocurrency, you can transfer your funds directly to your intended individual without anyone anywhere knowing your real identity.

• Better ownership: You are the sole owner of the currency assets, which is also the same in the BFSI sector. The difference and advantage of having currency assets here are that, unlike banks, these assets can’t be frozen.
• Fast: Transactions happen instantly and are confirmed within minutes.

It doesn’t matter what your physical location is. If you have a reliable internet connection, you can send cryptocurrencies to a friend in the city or a relative across the continent.

“As a portfolio manager, when do you start advising your clients that they have some cryptocurrency exposure? When will there be an index fund, a mutual fund of cryptocurrencies? It will happen.” – Melanie Swan, Technology Theorist in the Philosophy Department at Purdue University

• Security: All those keen on security know that the public key cryptography system is the best among cryptographic systems. Cryptocurrencies use this public-key cryptographic system, and that is why the security is robust.

• Accessible: 40% of the global adult population doesn’t have a bank account. But the majority of the world and these adults have some access to the internet. They can leverage this opportunity to use cryptocurrencies, where, without any intermediary, they can send money across the world.