Cryptocurrency is a hot topic generating media coverage, intrigue, investments and even controversy. If you're new to the world of crypto, you may not know what it is, how it works or how to start investing in it. This extensive guide covers the emerging and complex world of crypto. You'll learn the basics plus the technology and the types of cryptocurrency currently being traded.
The Basics of Cryptocurrency
What Is Cryptocurrency?
Before exploring the various digital currencies, you may wonder: What are cryptocurrencies? Well, they're digital assets that are bought, sold and traded solely online. Cryptography technologies make these digital currencies possible. Cryptocurrencies are usually issued in units called coins or tokens.
Who Controls Cryptocurrencies?
In the traditional currency model, centralized authorities such as national governments issue their own money. Whether you use physical cash, a bank card or digital payment platforms like CashApp or Venmo, you spend or receive this traditional currency. In contrast, cryptocurrencies are not created or issued by central authorities. They typically come from crypto networks or platforms such as Bitcoin and Ethereum.
How Do People Trade Virtual Currencies?
Cryptocurrencies are traded on virtual networks called exchanges. To buy and sell on a cryptocurrency exchange, you need to have a digital wallet, a crypto wallet or an investment account.
Some digital wallet apps such as PayPal, CashApp or Venmo allow you to buy, sell and hold crypto. However, you can't directly use the currency itself to pay for products or services. You can only do that with a crypto wallet service like Coinbase or Trust Wallet.Investment platforms offer a couple of options for investing in cryptocurrencies. Some, like Robinhood, let you buy and sell crypto directly. Others, like Ally Invest, offer access to related stocks, trusts or exchange-traded funds. These financial instruments come from companies involved in tracking, trading or speculating on future prices of crypto.
Are There Risks with Investing in Crypto?
Cryptocurrency can be considered volatile, with prices wildly fluctuating at times due to supply and demand, investor behavior, and even media coverage. While traditional investments can also fluctuate for similar reasons, crypto is considered riskier overall. This is believed in part because of the newness of this type of investment and its historical data to base decisions on.
The Technology Behind Cryptocurrency
What Is Blockchain Technology?
To understand how blockchain works, let's start by looking at the word itself. A single "block" is a data structure — a digital record of transactions involving certain types of data. A single block can contain any type of encrypted information such as medical records or financial transactions.
Each block of data must be validated by the network that contains it. Once validation is complete, the network closes that block and moves on to the next. Closed data blocks cannot be changed. These blocks are structured in long chains, hence the term "blockchain."
Where Are Blockchains Created and Stored?
Blockchains live on decentralized peer-to-peer networks. Every blockchain network consists of several devices called "nodes." Each node is a self-contained unit capable of sending and receiving data: Thus, it can act as both a client and a server machine.
Are Blockchains Used Only for Cryptocurrencies?
ith the wide range of cryptography technologies, blockchain can be used in many applications besides generating crypto. Voting systems could allow people to securely cast ballots with blockchain code from their mobile devices. With voter fraud a current relevant issue, some propose blockchain voting as a possible solution. Blockchain code could also hold confidential medical records, shared securely without the risk of data breaches.
How Is Cryptocurrency Created from These Technologies?
The most common method of issuing crypto is mining. Computers on decentralized networks must solve complex mathematical problems to add blocks to a blockchain. The first one to reach the correct solution receives a specific amount of coins or tokens in return. These computers are called "miners." Bitcoin mining is the most well-known of these processes.
How Much Computing Power Is Needed To Mine Cryptocurrency?
With the complex problem-solving involved to generate crypto coins, the mining process calls for a lot of computing power. Crypto mining rigs are equipped with several powerful graphics cards to help make these calculations. Each card requires significant amounts of power, so crypto mining rigs must be outfitted with high-wattage power supplies.
Keep in mind that the average crypto mining rig operates around the clock. Also, most mining centers use hundreds or thousands of rigs in a single location. With the sheer amount of heat generated during mining, powerful cooling equipment is needed to prevent hardware failure. So, how much power does the mining process use? The Digiconomist's Bitcoin Energy Consumption Index estimates that one bitcoin transaction consumes 1,449 kilowatt-hours of electricity. That's enough power to fuel an entire household for just over seven weeks. Globally, bitcoin mining consumes around as much power as Argentina uses in one year.
Types of Cryptocurrency
How Many Kinds of Cryptocurrency Exist?
There are literally thousands of different cryptocurrencies in use all over the globe. While that number sounds staggering, there are around 20 that are the major players in the crypto game. Currently, the five most popular cryptocurrencies include Bitcoin, Ethereum, Tether, USD Coin and Binance Coin.
1. Bitcoin
Right now, Bitcoin is the largest cryptocurrency in use. To this day, no one knows who created it. Using the pseudonym Satoshi Nakamoto, Bitcoin's inventor first rolled it out in 2009. As the first known cryptocurrency, Bitcoin is supported by a decentralized blockchain acting as a public ledger containing every transaction in its history.
Bitcoin's blockchain is key in preventing fraud. Those in possession of bitcoins can use its ledger to prove they're the owners before using it. It's also popular in peer-to-peer money transfers, with cheaper rates and faster transfer times than traditional money transfer methods.
2. Ethereum
Launched in 2015, Ethereum is a popular cryptocurrency alternative to Bitcoin. It runs on Ethereum, a blockchain network and software platform that lets developers construct smart contracts and decentralized applications known as dApps. Users can download both and use them directly without needing third-party app exchanges like Google Play or Apple's App Store. Ethereum's currency is distributed in units called ether — the word is both singular and plural.
3. Tether
Tether is currently the third most popular cryptocurrency in the world. Like Bitcoin and Ethereum, it is also based on a blockchain network. Debuting in 2014, Tether is classified as a stablecoin — its value is tied to an existing currency. Tether is based on the US dollar, giving it better stability to help avoid the extreme price fluctuations experienced with other types of crypto. It also makes exchanging to other cryptocurrencies easier. One Tether is equal to $1 USD.
4. USD Coin
Debuting in 2018, USD Coin is another stablecoin cryptocurrency. Created by the Centre Consortium, USD Coin also links its value to the US dollar. It runs on the Ethereum blockchain network plus a few others. Like Tether, one USD Coin is equal to $1 USD.
Binance Coin
Binance Coin was launched in 2017. It's currently issued by the Binance Exchange, which was created by business executive Changpeng Zhao. While it first existed as utility tokens and ran on Ethereum's blockchain, Binance Coin now operates on its own blockchain network. Its usage has become more widespread, as it's now accepted by several vendors for purchasing travel, entertainment and online services. Binance issues two types of crypto. There's BNB along with Binance USD, a stablecoin backed by the US dollar.
What Other Types of Crypto Exist Besides the Big Five?
Around a dozen other kinds of crypto make up the top digital currencies in the world. These include stablecoin along with other currencies that fluctuate more widely in value. Some examples include Polkadot, DAI, TRON and Avalanche. Several of these also rank high in popularity.
XRP
XRP originated from Ripple Labs in 2012. As the official coin of the Ripple Ledger Network, XRP is a popular investment cryptocurrency. It's also used in exchange for other types of crypto and to finance transactions on the Ripple Network. XRP is different from other digital currencies because it isn't mined. Only 100 billion XRP have been issued, and there are currently no plans to produce more.
Cardano's ADA
Cardano is a blockchain platform offering smart contract functionality like Ethereum. Its cryptocurrency is called ADA, named for the 19th-century mathematician Ada Lovelace. While its next steps involve supporting dApp development and distribution, Cardano has built a reputation for its focus on academic research as well as its energy-efficient transaction verification.
Solana
Solana debuted in 2017 as a blockchain platform supporting dApp development. Its notable selling points include faster transactions-per-second rates and cheaper transaction fees compared to Ethereum.
Instead of the proof-of-work method that requires coin miners to validate through complex mathematical calculations, Solana uses the proof-of-stake system. PoS uses random validation to confirm and close blocks before new ones are created. Proof-of-stake is much less energy-intensive than proof-of-work.
Dogecoin
Dogecoin has the distinction of being the first cryptocurrency created as a joke. Nicknamed "memecoin," this currency was invented in 2013 by software engineers Jackson Palmer and Bill Markus. While they intended it to poke fun at crypto's extreme volatility, Dogecoin eventually caught on and enjoyed a major price jump in 2021. It even inspired a spinoff, Shiba Inu, that same year.