‘Cryptocurrency’ defined
/ˈkrɪptəʊˌkʌr(ə)nsi/
A cryptocurrency is a coded data string that represents a unit of currency.
Disclaimer: What follows below is not financial advice. The contents of this website do not constitute any recommendation or offer. It is meant solely for educational purposes, and readers are requested to do their own research before engaging with cryptocurrencies.
Cryptocurrency vs. Traditional Currency
Let’s start with the basics.
Cryptocurrency is a digital currency independent of a central authority like banks and government, and acts as a medium of exchange.
Your traditional currency, on the other hand, is the one that you’re already familiar with: the physical currency issued by the government, for instance, your $100 note.
In what ways does cryptocurrency differ from your traditional currency?
Digital vs. Physical
A cryptocurrency is a digital currency. It does not exist physically, and is therefore, intangible. Famous examples of cryptocurrencies include Solana, Bitcoin, Ethereum, and Litecoin.
Traditional currency is obviously tangible, and assumes a physical form. The conventional forms of traditional currency include banknotes and coins. Examples of these include your traditional Rs. 500 note or a Rs. 2 coin.
Decentralized vs. Centralized
We have already learned that transactions of cryptocurrencies are made possible by way of blockchain technology. One of the critical principles of blockchain is that it is decentralized, which implies that transactions are not controlled by a central authority.
Let’s give you context.
For instance, let’s say Hannah wants to transfer 4 SOL to Emma. Now the transaction between them is NOT governed by a central authority. No third party can interfere with this process.
However, unlike cryptocurrencies, transactions of traditional currencies are centralized, which means they are overlooked by a central authority.
Let’s take an example of Google Pay itself. Hannah sends Rs. 400 to Emma via Google Pay using UPI. Hannah’s bank deducts Rs. 400 from her account to transfer it to Emma’s bank account, which gets credited. Thus, in the above transaction, banks act as a central authority and govern the transaction between Hannah and Emma.
Generated by Computers vs. Issued by Governments
Cryptocurrency is a digital currency. Units of cryptocurrency are generated by a process called mining, which involves using computer power to solve complicated mathematical problems that issue coins.
But in the case of traditional currency, we know that it is issued by the governments of respective countries, in the form of banknotes and cash.
How else does cryptocurrency compare to traditional currency? (yes, there's more!)
One crucial point to be noted is that while the supply of your traditional currency is unlimited in nature because the government can technically issue as much money as they wish to, the supply of cryptocurrency can be either limited or unlimited.
What do we mean by this?
Essentially, a limited supply of cryptocurrency refers to an upper limit on the maximum number of currency issued or circulated in the market. Bitcoin, Binance Coin, and Ripple are famous examples of limited cryptocurrencies.
Unlike the above- mentioned examples, some cryptocurrencies are unlimited in their supply. There is absolutely no upper limit on the amount of crypto that can be generated or circulated in the market. Dogecoin is the most widely known example of a cryptocurrency that has an unlimited supply.
How can financial value be linked to digital currency?
In traditional currency, you know that a dollar note represents $1, and hence you can exchange it to buy a commodity that is of the same value. The government issues the dollar notes, and has the sole authority to do it. No other individual or organization is entitled to issue currency on behalf of the government.
However, in cryptocurrencies, there is no central authority overlooking your transactions. How, then, will the value of cryptocurrency be determined?
The value of cryptocurrency is driven by the market, just like any other goods/ services people demand. Naturally, if demand increases faster than supply, the price increases. And cryptocurrencies gain more value when they are of a higher price.
The value of cryptocurrency also depends on many other factors. These are mentioned below:
- By the process of mining: Miners contend for the encrypted number when attempting to generate a viable block, and the very first miner wins the newly created cryptocurrency.
- By increasing utility: Utility increases when the apparent value or potential of a cryptocurrency increases.
- Availability: The value of a cryptocurrency may increase if it is more easily accessible on multiple exchanges.
Now that we’ve given you a brief, let’s take a real- life example to show how financial value is linked to digital currency.
1 SOL is equal to $33.22 at the rate, as of 1st October, 2022, 2:24am. But the same cryptocurrency, as of 2nd October, 2022, 5:19am, was 1 SOL= $32.5.
(Check the source, here!)
Notice how the demand and supply for Solana (SOL) changes the price of it accordingly, and that too within a mere 27 hours!
Now, this value is further susceptible to changes- it may rise or depreciate based on various factors.
But the bottom line is that cryptocurrencies function as digital currencies with a store of value, and function as a medium of exchange between parties.
Types of Cryptocurrencies
Let’s take up each of the different types of cryptocurrencies, one by one!
Payment Currencies
These assets are mainly used for payments. You could use payment currencies to pay for your bills, goods, and services.
Examples include Bitcoin (BTC) and Litecoin (LTC), among many others.
Blockchain economies
Along with letting you pay for transactions, blockchain economies enable users to create their own digital assets, applications, etc.
Famous examples include Ethereum (ETH) and NEO (NEO).
Privacy coins
In a privacy coin transaction, only the sender and receiver are notified of the precise number of cash involved in the transaction. Only the owner of the privacy coin wallet is aware of the total amount of balance of the wallet.
Examples of Privacy Coins include ZCash (ZEC) and Monero (XMR), among many others.
Utility tokens
Utility tokens are digital tokens that enable users to carry out actions on a specific network. These functions can include ownership of products, and voting on a particular pitch or topic.
Examples include Basic Attention Tokens Civic, etc.
Stablecoins
Cryptocurrencies in which the value of the cryptocurrency is pegged, or tied to that of another currency or financial meter.
As recently as September 2022, TrueUSD (TUSD) became the first regulated stable coin, fully backed by the US dollar!
Cryptocurrency Myths - Busted!
#1 Cryptocurrency is a scam
This is far from true! Cryptocurrencies are gradually being widely accepted as a medium of exchange. As recently as September of 2021, El Salvador accepted Bitcoin as a legal tender, revolutionizing the future of digital payments for the citizens of its country. Finland has also legalized the buying and selling of cryptocurrencies! Although trading in cryptocurrencies is legal in Finland, it can still not be used as a legal tender, i.e., the government and businesses are not legally required to accept cryptocurrency as a method of payment for goods and services.
Governments of various other countries are looking for methods to regulate the supply of cryptocurrencies.
Necessary PSA: Financial scams are not limited to the digital world. They can very well (god forbid) take place in the physical world. However, requisite knowledge about the system is extremely crucial to safeguard your assets. Make sure you’re well aware of the possible threats and solutions, before carrying out any transaction.
(self- promo: stick with us long enough, and we’ll equip you with as much knowledge as we can! 🚀)
#2 Cryptocurrencies are used only for illegal activities
No, guys, they just make it sound problematic! There have indeed been cases of infamous frauds and illicit crimes associated with cryptocurrencies. But this is simply because individuals with nefarious minds were one of the first ones to embrace cryptocurrencies and take advantage of them.
However, governments of various countries are actively on the hunt to track down criminals and they are working toward anti-money laundering solutions, to ensure a safer crypto future for all of us!
#3 Cryptocurrencies aren't safe
Cryptocurrencies exist because of blockchain technology, a distributed database protected by incredibly challenging encryption algorithms, that are pretty hard to break into!
Obviously, like any digital platform or website, the blockchain can also be hacked into or tampered with. But don't worry; there are a few smart ways to guarantee that your cryptocurrency remains safe. We’ll be talking about these later in the course; stay tuned!
Use Cases of Cryptocurrency
Storage
Cryptocurrencies are not only a very effective method of payment, but they are also a safer way to store money. The traditional currencies we use are inflammatory, i.e., they lose value with time. On the other hand, superior supply mechanisms used by cryptocurrencies limit inflation and may see a gain in value as demand increases. This means that if you save your money in cryptocurrencies, it may actually rise in value over time as opposed to falling.
Asset Tokenization
The introduction of cryptocurrencies has enabled people to tokenize real-world assets. Copyrights to real estate and artworks to products- everything can be tokenized and represented as a cryptocurrency token.
Gaming
Non-fungible tokens (NFTs), a type of cryptocurrency, are already overturning the gaming sector. These are being used in the gaming industry to represent specific in-game digital assets. Each NFT has a different value which is not interchangeable because each one stands for something distinct. This provides every user a completely authentic in-game object, the likes of which is possessed by no one but them!
Payments
Cryptocurrencies have revolutionized the payment sector by enabling instantaneous transactions between users, without the need for a centralized authority to overlook them.
Almost there!
At the end of the day, cryptocurrency is still a relatively nascent development. Users who engage with web3 at different levels participate in transactions– from users who are still trying to take that leap of faith and transition from web2 to web3, to users who have been the OGs ever since blockchain was launched!
Do not get intimidated- You’ll make it to the other side, slowly but surely. And while you’re at it, make sure you make the most out of your learning of web3 and its various components, because trust me, it’ll be of immense use in the coming days!
If you have understood the basics of cryptocurrencies and how they work, let’s go ahead and explore another member of the web3 family- the token!