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    What Is Crypto? Explained For Beginners

    Updated: Jul 29th, 2022
    Kevin Groves
    Kevin Groves
    What Is Crypto? Explained For Beginners

    Cryptocurrency has become a booming trend and popular investment choice for multiple generations from millennials, baby boomers to Gen Z. This article dissects the topic of what is crypto, why you should pay attention, which are the most popular and the risks involved.

    What Is Cryptocurrency?

    A cryptocurrency is an electronic form of currency that uses cryptographic proof to validate transactions instead of using trust between two or more parties. The digital signatures that are created prove the validity of each transaction which is highly secure and made public for anyone to verify. Cryptocurrencies were initially developed with the creation of Bitcoin by the founder Satoshi Nakamoto. This was the first cryptocurrency that successfully used blockchain technology at scale.

    What Is The Point of Crypto?

    Cryptocurrencies have become a preferred online digital currency because it does not require a third party such as a bank to mediate and verify transactions. Instead, cryptocurrencies are based on blockchain technology which ensures all transactions are occurring in a decentralized environment. Cryptocurrencies provide an alternate payment method to traditional financial institutions.

    In short, crypto offers greater control over an individual's finances, easier to transfer money around and involves fewer costs. Unlike cash, bank cheques and credit cards which are vulnerable to fraudulent activity, cryptocurrencies are extremely difficult to counterfeit or hack. The advantages of crypto compared to traditional banking can include:

    • Ease of use to perform transactions
    • Fast transaction speeds at any time and place
    • Transactions can be 100% verified on a public ledger
    • Lower costs to send money around the world
    • Improved security and technology

    As an example, sending money using a bank transfer or SWIFT international transfer to a bank account in another country will take up to 1 week for the funds to clear. In comparison, using a cryptocurrency such as Bitcoin to transfer any amount can take between 11 minutes and 1 hour, with an average transfer time of 11 minutes.

    crypto transaction speedscrypto transaction speedsSource: Coin98 Analytics.

    What Is Crypto Used For?

    Cryptocurrency was primarily seen as a speculative asset and investment vehicle to increase wealth. The crypto performance can be measured against traditional fiat currency. For enthusiasts and advocates of the underlining blockchain technology, the volatility in price is less meaningful as an investment and their objective is to buy and hold for the long term.

    However, in recent years the cryptocurrency market has matured and its application has grown beyond a speculative asset. The emergency of smart contracts and utility tokens has given rise to an entire market of real-world use cases. These include decentralized finance, lending and borrowing, non-fungible tokens, peer-to-peer exchanges, and paying for goods and services. According to reports, these examples equate to more than 50% of the transaction volume of cryptocurrencies.

    Why Is Crypto So Popular?

    Cryptocurrencies are popular because they present a new façade to the current outdated financial system with a reported 220 million users worldwide. They have also become popular as an investment vehicle as it offers higher returns than any other stock or commodity. The blockchain industry's state is now compared to the dot com bubble, which ultimately reshaped how society interacts and behaves.

    Global cryptocurrency usersGlobal cryptocurrency usersSource: Crypto.com

    The growing network effect of the asset class has led to eye-watering financial returns for early adopters and investors. Upcoming generations will embrace cryptocurrencies even further, with data suggesting over 94% of crypto investors are millennials and Gen Z.

    In particular, cryptocurrencies with a vibrant ecosystem and utility tokens have greater value for real-world adoption. For example, these projects have led to the development of innovative technologies such as Decentralised Finances (DeFi) and Non-Fungible Tokens (NFT's). There are real-world benefits such as earning higher interest on their savings associated with these cryptocurrencies that increase the value of the ecosystem and investment.

    Why Should You Care About Crypto?

    Cryptocurrencies have entered mainstream attention as more companies and investors have sought to get exposure to cryptocurrencies, either by investing or accepting them as payment. For example, Tesla was one of the major companies that allowed people to purchase a car using cryptocurrencies like Bitcoin. Additionally, PayPal offers users exposure to cryptocurrencies in the sense that they can buy crypto on their platform or send crypto through the application.

    As we become more interconnected with the internet, cryptocurrencies will be integrated with emerging apps to transfer money quickly and conveniently. Furthermore, they offer a safeguard not entirely guaranteed by financial institutions or other corporate entities. Instead, cryptocurrencies and any transaction are secured by blockchain technology to the extent that they become error-free without excessive bank charges. Additionally, cryptocurrencies resolve the outdated financial model and are often considered "the future of money" because They add a new trust dynamic to the way we conduct financial transactions.

    What Types of Cryptos Are There?

    To help understand the purpose of each cryptocurrency it can be useful to broadly define cryptos within one of two categories: (1) coins and (2) tokens.

    • Coins. Cryptocurrency coins are digital assets that are linked with an accompanying blockchain. Bitcoin (BTC) and Ether (ETH) are two examples of coins that are necessary to secure the operations of the associated blockchain.
    • Tokens. Meanwhile, cryptocurrency tokens are digital assets that have been created by applications developed on top of blockchains. Although the Ethereum blockchain is secured by ETH, the blockchain hosts a range of applications that have created additional cryptocurrency tokens.

    The intrinsic value of each cryptocurrency is determined by a range of economic factors including its use case, the supply flow into the market, and the popularity of the associated project (aka demand).

    How Many Cryptocurrencies Are There?

    The number of cryptocurrencies on the market is unknown without a definitive answer. According to reputable sources such as Coinmarketcap and CoinGecko, the number of cryptocurrencies varies between 10,139 and 13,322 with the top 10 projects contributing to around 80% of the total market cap. These figures include coins that have been submitted to the respective websites and approved for public listing. In contrast, Statista data shows there are only 6,826 cryptocurrencies on the market with hundreds in the process of being developed.

    In a Vice article, a developer highlights that creating a new blockchain project and coin involves "pressing a few buttons," which indicates there are new cryptocurrencies created every day and "no definite answer exists" on the exact number of coins.

    What Are The Top Cryptocurrencies By Market Cap?

    Bitcoin is the biggest cryptocurrency in terms of its popularity, market capitalization and user adoption compared to other coins. With a market cap of USD 1.16 Trillion, Bitcoin is the dominant cryptocurrency within the overall asset class. The next largest cryptos are Ethereum, Binance Coin, Tether, Cardano, Solana, XRP, Polkadot, Shiba Inu and Dogecoin.

    RankCryptocurrencyPrice (USD)Market Cap (USD)
    1Bitcoin$61,921.03$1,168,480,194,452
    2Ethereum$4,357.38$516,659,276,769
    3Binance Coin$531.89$89,055,475,088
    4Tether$1$70,314,864,180
    5Cardano$2.00$66,650,825,582
    6Solana$197.45$59,539,127,085
    7XRP$1.07$50,544,953,970
    8Polkadot$43.69$43,236,919,934
    9Shiba Inu$0.00007406$40,505,239,439
    10Dogecoin$0.2841$37,661,385,479

    How Do You Get Cryptocurrency?

    There are several ways for investors to buy crypto with US Dollars, Euros or Pounds. The major exchanges such as Binance, Coinbase, Kraken and FTX have secure wallets to safely store the coins on the buyer's behalf. For more information on where to purchase cryptocurrency, read the list of the best exchanges for crypto that are based on HedgewithCrypto's reviews.

    Alternatively, the biggest cryptocurrencies like Bitcoin and Ethereum have become 'blue-chip' and can also be purchased from crypto ATM's, especially in countries such as the USA and Australia. While cryptocurrencies can be kept in exchange wallets, users need to provide a wallet address when purchasing crypto from an ATM. Cryptocurrencies are not yet interoperable, meaning that sending an Ethereum, an ERC-20 standard token, to a Binance wallet, a BEP-2 token, will lead to a loss of funds.

    Why Should I Buy Crypto?

    Cryptocurrencies are revolutionary financial instruments and are typically purchased for one of two reasons: (1) as an investment or (2) to complete currency-like transactions. With those two key reasons in mind, it is useful to ask yourself the question; what am I aiming to achieve with this purchase?

    Cryptocurrencies are more commonly purchased for the long-term investment potential that they hold. While this isn’t guaranteed, many younger and high-risk investors can afford to allocate a small percentage of funds to this new asset class. In doing so, investors can gain exposure if the crypto market gains a long-term footing within the financial sector.

    Alternatively, due to the cheapness of crypto-to-crypto transactions and the privacy some blockchains offer, cryptos can also be purchased for the purpose of transferring wealth. The first cryptocurrency, Bitcoin, was initially developed to exist as a peer-to-peer payment system. It is only after a decade that the coin has become a potential store of value. However, like Bitcoin, there are now tens of cryptocurrencies that could help a user transfer wealth globally.

    Is Cryptocurrency A Good Investment?

    Cryptocurrencies are a good investment for long-term investors and adopters but come with a level of risk. The SEC argued that Bitcoin and other digital currencies could be "high-risk investment opportunities," especially given that they operated in an unregulated market. The SEC highlighted that crypto is the "wild west" given the number of scams and crypto exchange hacks that have occurred in the past.

    The established coins such as Bitcoin or Ethereum have a very low risk of failure given the size of the market cap and proven real-world use cases and successful applications. Research indicates that social factors rather than economic reasons influence the price of Bitcoin, Ethereum and other coins. For example, a Tweet from an influential person can affect the price of a cryptocurrency.

    Volatility is one of the main hallmarks of cryptocurrencies. People will invest in cryptocurrencies because they can rapidly go up in price. Equally, the price can reverse rapidly and result in losses. Contrary to norms, the high volatility attracts more investors to participate in the new asset class. In contrast, a decreased level of volatility is beneficial for traditional investments such as retirement funds.

    Are Cryptocurrencies Regulated?

    Cryptocurrency is legal to purchase, store and sell in many countries in the world such as the United States, Canada, United Kingdom and Australia. The laws of each country stipulate the legality of Bitcoin and other cryptocurrencies with a handful of countries banning cryptos such as China, Egypt, Bolivia, Vietnam, Indonesia and Morocco.

    Cryptocurrency is an unregulated asset class in most countries due to minimal laws to provide consumer protection for investors. Although, the majority of countries have taken a lenient view of cryptocurrencies but will enforce strict anti-money laundering policies and taxation requirements.

    For example, crypto is a taxable commodity in the United States, and any financial gains need to be reported to the IRS. Thus, while cryptocurrencies are operating in a grey area, each country or union selects the extent to which cryptocurrencies are regulated. However, the more regulated cryptocurrencies are, the closer they come to the desired mass adoption.

    For example, countries like El Salvador have made cryptocurrencies, specifically Bitcoin legal tender in the country. Argentina and Ukraine are also dabbling with the idea of legalizing Bitcoin.

    Frequently Asked Questions

    In simple terms, a cryptocurrency is a form of virtual money that was designed to promote a peer-to-peer electronic cash system and does not rely on a centralized entity for approval. Crypto are created or issued by any central government and belong to a decentralized network.

    Cryptocurrencies are created through a process of mining or staking which depends on whether the coin uses a Proof-of-Work (PoW) or Proof-of-Stake model. Both models involves solving complex computation equations and validating transactions.

    The former requires mining hardware to validate transaction which reward the miners with newly created coins. An example is Bitcoin, which grants miners a "block reward" every 10 minutes with network transactions to be validated. The miners are rewarded with new Bitcoins for their services to process transactions on the blockchain.

    On the other hand, a Proof-of-Stake system does not require mining equipment. Individuals can pool resources and participate in a process called cryptocurrency staking to validate transaction and secure the network. The participants are rewarded with staking rewards in the same currency as the network.

    The decision to trade or invest in cryptocurrency coins such as Bitcoin, Ethereum, Litecoin, XRP and Bitcoin Cash depends on how much involvement the person wants to have after purchase. An investor will buy when the asset is low in price with the goal to generate income or appreciation over time and sell Bitcoin or altcoins for a profit.

    In comparison, a trader is more involved to manage a position over a shorter during such as hours, days or even weeks. The trader may use leverage to take advantage of volatility by trading the swings with a smaller capital amount. If the price or direction exceeds a risk tolerance, the trader will exit the position and wait for the next opportunity to make a profit in the market.

    Cryptocurrencies are stored in digital wallets with a unique electronic address to receive or send crypto. There are two categories of wallets commonly referred to 'hot wallets' and 'cold wallets'.

    Hot wallets are connected to the internet which makes them ideal for making quick transactions. For example, crypto exchanges use hot wallet to allow its users to withdraw crypto from the exchange quickly. Hot wallets can also be owned by investors and kept on a computer or a smartphone. However, hot wallets are more vulnerable to hackers.

    Cold wallets on the other hand are more secure. The assets held on the wallet are not connected to the Internet. As a result, funds are more secure because the wallet does not facilitate unauthorized access to the user's funds. For more information, read our guide on the best hardware wallets.

    Conclusion

    Cryptocurrency is a modern version of digital money that was originally developed to exist outside the remit of Governments and financial institutions. As human culture synergizes with digitization, cryptocurrencies will become even more important in accessing digital gateways whilst offering protection from illicit actors.

    Kevin GrovesKevin GrovesKevin Groves

    Kevin started in the cryptocurrency space in 2016 and began investing in Bitcoin before exclusively trading digital currencies on various brokers, exchanges and trading platforms. In 2019, he started HedgewithCrypto to publish informative guides about Bitcoin and share his experiences with using a variety of crypto exchanges around the world.

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