If you’ve been following cryptocurrencies and blockchain, you’ve heard about distributed ledger technology (DLT). Although the idea of distributed computing isn’t entirely new, the execution of distributed ledgers is one of the most ingenious inventions of our time.

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Even though new coins continue to emerge and existing ones get rebranded, modified, or even replaced, the market is growing exponentially.

Cryptocurrencies are either public like Bitcoin or private like Ethereum; there are several others in between. There are different types of cryptocurrencies —all with varying features and uses, making them harder to understand for first-time investors. Read on to learn more about Cryptocurrency, Cryptocurrency types, and mining.

What is Cryptocurrency?

Cryptocurrency is a digital asset that can be used as a medium of exchange and store of value. Cryptocurrency is decentralized. This means it is not issued or controlled by any single entity, government, or bank. It is issued and controlled by all cryptocurrency users.

Cryptocurrency is also known as virtual currency: a type of digital asset designed to work as a medium of exchange using encryption techniques to secure its transactions, much like how email or banking works today.

Cryptocurrency comes in handy when you want to buy goods and services anywhere there’s a fair online marketplace—without relying on a central authority like banks or governments. Instead, Cryptocurrencies use blockchain technology as their trusted transaction ledger, much like how financial institutions use checkbooks today.

How does Cryptocurrency work?

To use Cryptocurrency, you must first create a virtual wallet similar to a bank account. You then use a cryptocurrency exchanger to exchange cash for the virtual currency. When you go to a retailer or service provider that accepts Cryptocurrency, you pay them in their virtual currency. You can then either keep the Cryptocurrency in your virtual wallet or transfer it to another person.

Cryptocurrency works through the use of distributed ledgers. This means that all the transactions in a specific virtual currency are recorded on a decentralized network. All transactions are verified and confirmed through a consensus-building process among network users.

This consensus process secures the integrity of the blockchain network and prevents illegal activities like counterfeiting by ensuring that every transaction is genuine and authentic.

Types of Cryptocurrency

Proof of Work (PoW)

The concept of proof of work is a core feature that all cryptocurrencies must use to be secure. PoW is a consensus mechanism based on the assumption that it is nearly impossible to create a computer program that can find a solution to a particular mathematical problem. A mining process is needed to create new units of a cryptocurrency. For Bitcoin, this means solving complex mathematical puzzles that verify and record transactions into a public ledger known as the blockchain.

However, unlike credit cards and PayPal, mining for Cryptocurrency does not have any inherent worth. The only reason to mine for Cryptocurrency is to get rewarded for verifying and recording transactions into the blockchain.

Mining for Cryptocurrency is only profitable when there are many people mining. And for it to be profitable, miners need more hardware power to solve more complex puzzles and verify more transactions.

Bitcoin, Ethereum, Dogecoin, Bitcoin Cash, Litecoin, and Monero, are some popular PoW coins.

Proof of Stake (PoS)

Like PoW, PoS is a consensus mechanism that is based on the assumption that it is nearly impossible to create a computer program that can find a solution to a particular mathematical problem. However, this time, the basis of the consensus is someone’s own reputation and not the amount of computational power used. This means that PoS relies on the honesty of other cryptocurrency owners, rather than the computational power of the owners.

PoS aims to solve the problem of centralization in Cryptocurrency. The problem is that cryptocurrencies can be extremely expensive to run, which is a huge problem in terms of sustainability and scalability. Mining for Cryptocurrency, for example, requires huge amounts of energy and equipment. PoS, however, does not require the same heavy-duty costs, which makes it ideal for smaller and decentralized cryptocurrencies.

Popular PoS coins include BNB, Cardano, Solana, Polkadot, Avalance, NEAR Protocol, among others.

Tokens

Tokens are digital assets representing a value on a blockchain. Usually, tokens are built on top of another cryptocurrency, such as Ethereum’s ERC-20 tokens, which are built on top of Ethereum’s ETH cryptocurrency.

Tokens are mainly used in blockchain-based platforms, but they can also be used in other ways. For example, tokens can be used to gain access to certain systems (such as decentralized applications) or they can be used as instruments for the exchange of goods and services. For instance, Ethereum produces ERC20 tokens that can be used to pay for services and products that run on the Ethereum blockchain.

In addition, there’s a growing trend toward decentralized organizations (or DTOs) issuing tokens as a way of promoting community and funding projects. In this way, tokens are similar to equity-based crowdfunding, but without the regulatory and financial implications of equity-based investment.

Converting assets into a digital token on the blockchain is known as tokenization. Once tokenized, the asset can then be traded and exchanged just like any other cryptocurrency.

Tokenization is often used in relation to real-world assets, such as gold, diamonds, or real estate, making it possible for these assets to be traded freely across borders without having to go through a third party such as a bank or broker. In addition, tokenization allows everyday people to own these types of assets without actually having them physically present in their possession. As such, people in countries with unstable economies or currencies can own valuable assets outside their country’s borders without having them confiscated by their government or other forces that may try and take control of their wealth.

When you invest in a token, you invest in its potential to increase in value over time, which means that the value of the token is directly proportional to the popularity of the platform it is used with. For example, if a platform becomes very popular and widely accepted by users, then it could lead to increased demand for its tokens. With increased demand comes a price increase per token.

Tether USD (USDT), USD Coin (USDC), Binance Coin (BNB), and Binance USD (BUSD) are some of the most popular tokens.

Stablecoins

While traditional fiat-based currencies are usually backed by gold, government-issued coins are backed by nothing. As such, they lose value over time due to inflation and are typically only used in countries where the government’s currency is unstable.

Cryptocurrencies offer a solution to this problem, as they are decentralized and designed to be inflationary by design. However, inflationary cryptocurrencies lose value over time due to market volatility. Stablecoins are central banks for crypto, creating digital currencies that are pegged to the US dollar or some other reference asset. The goal of Stablecoins is to create a digital currency that is as stable as fiat money.

Some common examples of Stablecoins include TerraUSD (USDT), Dai (DAI), Binance USD (BUSD), and USD Coin (USDC).

Mining Cryptocurrency

The collection of cryptocurrencies is also referred to as mining. Mining involves verifying transactions on the blockchain and trying to solve complex mathematical problems in order to earn new currency. The process can take time and can be difficult, but it is possible to make money even if you don’t have access to large amounts of capital or specialized hardware.

Cryptocurrency can be mined in the following ways:

Hardware: This involves purchasing specialized hardware such as ASICs (application-specific integrated circuits). This can be relatively expensive, but it’s also the most effective way to mine Cryptocurrency.

Software: Mining software runs on your computer and verifies transactions. This is usually free, but it may require some technical knowledge. It’s also easy to get started if you already have a computer.

Mining pools: These are groups of miners who combine their computing power. The reward is shared among all members of the pool, so you don’t need to purchase special equipment or software.

Once the mining device solves these problems, it can then validate the transaction on the blockchain and receive Cryptocurrency as a reward.

Final words

Cryptocurrency is a digital asset that uses blockchain technology to facilitate secure online transactions. It is decentralized, not controlled by any single entity or government, and is created and managed through the use of advanced cryptography.

The cryptocurrency was originally designed to be a means of exchange but has grown to play a pivotal role in financing various activities, including trade and investment, as well as paying for goods and services.

The rapid growth and popularity of Cryptocurrency show no sign of slowing down and it is expected to continue to grow in popularity and importance, both as a method of exchange and investment. Building your investment portfolio with cryptocurrencies is one of the best ways to diversify your wealth and grow your assets over time.

However, there are some cryptocurrencies that are already mature, meaning the price growth is expected to be rapid. Therefore, you can consider buying now. As a general rule of thumb, if the price of a cryptocurrency falls, it is a good sign. This is because it means more people are dumping the coin. You should buy bitcoin when the price is low and sell it when it is high.

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Cryptocurrency.   

The word itself, now, has the potential to grab all our attention.   

And, why not?   

Well, 2021 has given a new direction to the unknown fate of cryptocurrency. For instance, look at some of these stats:  

• Bitcoin market capitalization grew to $1072.21 billion as of February 21st, 2021.  
• The global blockchain market is now expected to go reach more than $23.3 billion by 2023.  
• In Q1 of 2021, the highest number of global daily bitcoin transactions is 367,536.  
• Bitcoin has gained 193,639.36% between 2012 and 2020.   

So on and so forth….  

When we talk about cryptocurrency there is one name that stands out and that is “Bitcoin.” While most people associate the terms cryptocurrency and Bitcoin as one, it’s really not! In fact, the concept of cryptocurrency started way before Bitcoin was introduced.  

Hope I have your attention by now because from here things are going to get very interesting.  

How and when did crypto (Cryptocurrency) originate?  

The revolutionary idea of a digital currency was discussed in early as 1980-90 by a group named ‘cypherpunks’. The group would meet every month to discuss new ideas and developments.   

Around the same time, David Chaum, an American cryptographer, invented DigiCash, the first internet currency, in the Netherlands. It eventually garnered the attention of Microsoft, who wanted to buy the currency but the deal never materialized.  

In 1998, Wei Dai used a cryptographic system in hope of developing a new payment method. He even published a proposal for B-Money. Despite his efficient and practical methods, the currency never developed fully.  

So, what suddenly triggered the popularity of cryptocurrency?   

To understand that let’s take a hypothetical situation:   

Suppose, I give you a million dollars in cash, what would you do with it?  

The two most reasonable answer is that you’ll either store it or spend it.  Either way, you wouldn’t want to have so much cash on you.   

So, what do you do?   

You’ll simply keep it in your bank account for storing or spending it later.   

But, the point to note here is what banks do with your money once it’s deposited?   

Well, banks usually invest all your money by offering loans to people in need.   

Now there is always a chance that these loans into a bad investment. What happens then?  

If the banks lose your money, you’ll start losing your trust in the bank and so does other people like you. And if the story sounds familiar, well that’s what happened in “The Financial Crisis of 2008.”  

Now, you might be wondering why are we reading about the Financial Crisis instead of the origin of Cryptocurrency.   

The answer is simple, the Crisis brought forwards the shortcomings of the banking ecosystem and other similar institutions.   

Similarly, when the government spends money earned in taxes for development. Now, what if their expenditure exceeds their income?  

Most of the Governments deal with it by asking the central banks to print more money. This makes more money available to the public.   

While this solved a problem for the Government, it reduces the value of money already in circulation.   

But, how does it affect you?  

Let take an example, consider that you have $1 out of $100 in circulation in the market which means that you own 1% of the total money in the country.  

Now, if Government suddenly decides to print more money and add another $100. Now the total money in circulation goes up to $200, meaning that you now own only 0.5% of the entire market. That’s a fifty percent depreciation in the value of the money you saved.  

These two reasons were enough for common people to start looking for a new system without the shortcomings of regular currencies.   

Humble Beginning of Bitcoin  

After the Financial Crisis, in 2009, Satoshi Nakamoto, a mysterious entity with a pseudo name, published the Bitcoin (BTC) whitepaper.  

The document proposed a “peer-to-peer version of electronic cash” to “allow online payments to be sent directly from one party to another without going through a financial institution.”  

The identity of Satoshi is unknown to this day. Satoshi could be a person or a group of developers. Satoshi not only published the Bitcoin whitepaper but also created the software around its blockchain before disappearing in 2010.  

How does Bitcoin solve this problem?   

We all know that the governments control the currencies in all the countries. Bitcoin takes that power and gives it back to the public.   

It does this by fixing the number of coins that could ever be in circulation and its rate of production. Bitcoin’s code used in its design ensures that the maximum number and production rate cannot go beyond the set limit. Also, this code is transparent for everyone for easy verification.  

This way, the value of Bitcoin will depend only on the market and will remain free from all Government interventions.  

Now, we are dependent on a third-party vendor to validate a transaction whenever we make a transaction from our stored money. However, after the Financial Crisis of 2008, there is no guarantee that the vendor won’t make a risky investment with our money.   

To solve this problem, Bitcoin allows users to directly transact with one another by eliminating any intermediaries.  

How?  

Well, you can simply need to create a Bitcoin Wallet for yourself to store your Bitcoins. This wallet will act less like a bank and more like your physical wallet.   

Although maintained by various companies, unlike traditional banks, the wallet cannot take its own decisions. This is because the codes in their design are transparent and accessible to everyone to assure people that their deposits are safe.  

Now that you know, how cryptocurrency originated and why Bitcoin came into existence. Let’s understand more about its value proposition and how it works in real life.   

Why does Bitcoin have value and what are its uses?   

Bitcoin is a chain of blocks built on top of a blockchain. Data is added in these blocks and over time new blocks are built atop of previous ones.  

Transactions records are stored on nodes that are essentially multiple powerful devices across the world. The way a block cannot be altered without altering all the subsequent blocks.  

Bitcoin boasts itself as having a decentralized ledger, meaning that there is no one person or organization looking after the network.    

In the whitepaper, Satoshi Nakamoto wrote, “The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed but proof that it came from the largest pool of CPU power.”  

This is what makes Bitcoin almost attack-proof. In Bitcoin blockchain, if the majority of computational power, which is about 51 percent or more, is controlled by nodes that do not intent to corrupt the network. The chain grows and outpaces attackers. This makes Bitcoin a secure platform for the transaction.   

Furthermore, the Bitcoin network’s code has a predictable upper limit and issuance rate. This means that the total number of coins can never exceed 21 million.   

Its limited supply is seen to create a store of value against inflation, which is quite similar to gold.   

How does the Bitcoin network work?  

To understand that, let’s take a look at this example to compare regular and Bitcoin transactions.  

Now, consider a person, John who wants to spend $1,000 on his friend Emma. John initiated the transaction by notifying his bank.   

What happens next?  

Bank, now, verifies if John, who wants to initiate a transaction, has the necessary funds.   

Once done, the bank balance of John is reduced by $1,000, and Emma’s balance is increased by the same amount.   

Note that, in this example, we have assumed that both of them have accounts in the same bank.  

Unlike the conventional method, the transfer of Bitcoin follows a different path. Let’s see how:  

Here, a bank is replaced by nodes of a particular blockchain that is involved in the transaction due to its decentralized design.  

Now, in this case, if John wants to send one Bitcoin to Emma, they must notify the network so that all the nodes can know.  

To hash transactions and other information in the block, the nodes solve a puzzle given by the protocol referred to as mining.  

Mining is a task performed by miners who must keep hashing slightly modified data each time until a solution is found. Once found, a Bitcoin token can be sent to Emma.  

A new block is created once a solution for the successful transfer of Bitcoin is found. In return, the miner receives a block reward (in Bitcoin).  

Once the transaction is added, all nodes in the Bitcoin blockchain can see and validate it, and update it in the ledger to reflect it.  

Once the transaction is completed, John’s crypto wallet is updated which will show one Bitcoin sent, while Emma’s wallet will show one Bitcoin received. 

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