Cryptocurrency is a type of digital currency that uses cryptography to provide a secure payment system. These encryption techniques serve to regulate the generation of monetary units and verify the transfer of funds. They do not need a central bank or other institution to control them.
Cryptocurrencies are a type of digital currency, which are those that do not exist physically, but serve as a medium of exchange, allowing instantaneous transactions through the Internet regardless of borders. Other types of digital currency include virtual currencies (normally controlled by developers), electronic money, and internet coupons.
In 2009, the first completely decentralized cryptocurrency appeared: Bitcoin, which was created by Satoshi Nakamoto along with the software that supports it (blockchain). To this day, it is unknown who is behind the creator’s name. The emergence of bitcoin was so innovative that the terms cryptocurrency and Bitcoin merge into one, and it is indistinct to speak of one or the other.
In our time, more cryptocurrencies have appeared based on the pioneering Bitcoin, which are known as altcoins.
Origin of cryptocurrencies
Throughout history, there have been multiple means of exchanging goods and services. All of them have undergone evolutions and changes or, directly, have disappeared. This is the case with bartering or the use of precious materials, which gave way to the system that has functioned until today: bills and coins.
However, in an era where technology gains more and more ground every day, a medium of exchange more adjusted to the times becomes necessary: cryptocurrency.
As a result of the cypherpunk movement in the 80s, cryptocurrency emerged. This art defended the widespread use of writing with secret keys that only those who knew how to decipher them could understand.
A decade later, David Chaum creates Digicash to provide a centralized electronic money system that allowed more secure and anonymous transactions. In the same period, Adam Back proposes Hashcash, a system to control spam and denial-of-service attacks.
Although it wouldn’t be until 2009 when Bitcoin emerged, the first completely decentralized cryptocurrency.
Characteristics of a cryptocurrency
The main characteristics of cryptocurrencies are:
- Cryptography: They use encryption techniques to make secure collections and payments.
- Decentralization: They do not need to be controlled by any institution.
- No possibility of counterfeiting or duplication: A cryptographic system protects users.
- No intermediaries: Direct person-to-person contact.
- Transactions are irreversible: Once payment is made, there is no possibility of cancellation.
- They can be exchanged for other currencies.
- Privacy of use: It is not necessary to reveal your identity when doing business.
Cryptocurrencies are part of many investment portfolios, since their great capacity for appreciation makes them very interesting for investors. Setting up a well-structured portfolio that reduces the risk of losing money is totally recommended before starting to invest.
How do cryptocurrencies work?
Cryptocurrencies use cryptography to secure transactions that are executed within a blockchain. That is, through complex mathematical algorithms, user data is privatized and transactions are authenticated.
A blockchain is a chain of interconnected blocks, where each block contains a record of transactions. This technology is based on decentralization, which means that information is stored and verified in multiple nodes of the network, instead of depending on a central authority.
When a transaction is made with a cryptocurrency, a record is created on the blockchain. This record includes the sender’s address, the recipient’s address, and the amount transferred. Transactions are grouped into blocks and added to the blockchain through a process called mining.
Mining consists of adding new blocks to the blockchain. To do this, large computers are used that solve mathematical problems to validate and verify transactions that are carried out within a network.
There are thousands of companies and individuals, known as miners, around the world with devices dedicated to mining cryptocurrencies. Miners receive a commission for the transactions made in exchange for the work they perform.
It is important to know that the detailed operation of each cryptocurrency can vary, since not all of them are dedicated to the same thing.
Cryptocurrencies allow us to carry out transactions around the world without having a central organism that regulates it. That is, when making a bank transfer, you need to have an account at a bank to carry it out and have that same bank confirm it. In the case of cryptocurrencies, you only need the amount you decide to send. Cryptocurrencies allow you to send unlimited funds, anywhere in the world and whenever you want with just one click.
The process when carrying out a transaction begins when a sender decides to send an amount of funds to an address (it may or may not be theirs). After verifying that the sender has the necessary funds, miners are responsible for confirming and including said transaction in a blockchain block.
Advantages and disadvantages of cryptocurrencies
The main advantages that characterize cryptocurrency are:
- Low transaction costs, as a consequence of the absence of intermediaries.
- Security, since each coin belongs only to its owner.
- Anonymity, the transactions that are carried out are anonymous.
- Transparency, since transactions are incorporated into a freely accessible record.
- Ease, you can make a transaction of any amount, to anywhere in the world and at any time or day.
- It can be stored in a minimal space such as a USB.
On the other hand, the disadvantages are:
- Price volatility.
- Current lack of acceptance by some companies.
- By not needing a regulator like the Government or Central Bank and providing privacy, they can be used for illegal transactions.
Types of cryptocurrencies
Since the creation of the first cryptocurrencies, more than 10,000 different cryptocurrencies have been created. All of these could be classified into 4 categories:
Bitcoin
As we mentioned earlier, Bitcoin is the origin of the cryptocurrency world. It was created by Satoshi Nakamoto in 2009, with the objective of decentralizing finances globally. Its supply is limited to 21 million BTC and it is not possible to increase this number.
Altcoins
Altcoins are all cryptocurrencies different from Bitcoin. There are thousands of altcoins in circulation, each with their unique characteristics, technologies, and use cases. This type of cryptocurrency seeks to eliminate the limitations that Bitcoin has. Some of these limitations are scalability, number and speed of transactions, privacy, security, or interoperability. The best-known altcoins are: Ethereum (ETH), Cardano (ADA), Polkadot (DOT), Ripple (XRP), or Solana (SOL).
Stablecoins
Stablecoins are cryptocurrencies that maintain their constant price or value to provide the user with security and stability. Stablecoins are usually backed by FIAT money or by some other cryptocurrency. We could liken it to having euros or dollars in our wallet. Many investors prefer to own a stablecoin rather than dollars or euros. The best-known stablecoins are USDC, USDT, BUSD, or DAI.
Shitcoins
Shitcoins or junk cryptocurrencies are coins without utility or without technology and with a value created by speculation. Junk coins are usually characterized by disproportionate supply, unfair distribution, an unreliable development team, or lack of transparency. The lack of utility and the little real value they possess makes this type of cryptocurrency extremely volatile and can make you earn a lot of money or lose it all in a matter of minutes. The best-known shitcoins are Dogecoin and Shiba Inu.
Risks of investing in cryptocurrencies
The main risks of investing in this type of financial products are:
- High volatility: Cryptocurrencies are known for their high price volatility. Values can experience massive fluctuations in short periods of time, which can result in substantial gains or significant losses. This, added to the fact that we are facing a market that remains open 24 hours a day, 365 days a year, makes investing in this type of assets carry a lot of risk.
- Little regulation: The regulatory landscape for cryptocurrencies is still in development and can vary by country. Changes in regulation can have a significant impact on the value and availability of cryptocurrencies. Additionally, there are legal and compliance risks related to the use of cryptocurrencies, such as the risk of being a victim of illegal activities or of failing to comply with tax and money laundering laws.
- Lack of liquidity: This problem or risk does not exist in the large well-known ones, such as Bitcoin, Ethereum, or Solana, but it is in the day-to-day of small altcoins with limited liquidity. This makes it difficult for investors to buy or sell at desired prices.
- Security: The lack of regulation makes this market unsafe if proper precautions are not followed. Exchange platforms and digital wallets can be vulnerable to cyber attacks and theft. If certain security precautions are not taken, such as correct passwords, secure wallets and platforms, there is a risk of losing your assets.
- Scams and fraud: Being a young market with barely any regulation, there are a large number of scams. Some of the most common methods are through false guaranteed returns, obtaining investor data, or through pyramid scams (Ponzi schemes).
It is important to do thorough research and get well-informed to understand the risk being assumed before making an investment in a cryptocurrency.
How is the value of a cryptocurrency determined?
The value of a cryptocurrency is determined mainly by supply, demand, and the commitment of the users who hold it. The price of cryptocurrencies, like those of other assets, fluctuates based on different factors such as:
- Supply and demand: The law of supply and demand always works the same way. If the demand for an asset is higher than the supply, its price will rise, since it could be qualified as a limited good. On the contrary, if a financial product has less demand than supply, there will be excess, so the price falls. The same thing happens with cryptocurrencies.
- Adoption and utility: Mass adoption and use of a cryptocurrency by people, companies, or governments can increase its value. When a cryptocurrency is widely used for conducting transactions or as a store of value, its price tends to grow.
- Development and technological updates: Updates and technological progress in cryptocurrencies to increase their functionality, scalability, security, or operability increase their value.
- Competition: The emergence or improvement of cryptocurrencies directly influences the price of others. If a new cryptocurrency offers superior features or technology, investors may be attracted to it, which could reduce demand for other cryptocurrencies and affect their value.
- Ease of purchase: There are certain crypto assets, such as Bitcoin or Ethereum, that can be bought through many platforms, which makes it simpler and more accessible for the general public.
How to buy cryptocurrencies?
To buy or invest in cryptocurrencies, you should follow these steps:
-Choose a platform. There are quite a few platforms or exchanges for investing in crypto assets. To know which one best suits your needs, you should research and analyze the conditions and policies of each one.
-Select the desired cryptocurrency. You should do market analysis and research and choose the cryptocurrency that may interest you most.
-Deposit funds. When buying or making an investment in cryptocurrencies you need funds, so if you don’t have them you will need to make a deposit. To make a deposit, it is generally done through bank transfer, credit/debit card, or other payment options accepted by the platform.
-Make the investment. Choose the cryptocurrency and open a buy order.
-Purchase completed. After making the purchase, it may take a few minutes for the invested amount to be reflected in your account.
-Store the cryptocurrencies. After making the purchase you should store your crypto assets securely in a wallet.
Where are cryptocurrencies stored?
Cryptocurrencies are stored in what are known as digital wallets or wallets. A cryptocurrency wallet is a program or application that allows users to manage, store, and conduct transactions with their cryptocurrencies securely.
There are different types of wallets and these can be classified into 3 categories:
Online wallets
This type of wallet is found in the cloud and is accessible through the internet. Online wallets are the best known and are usually easy to use, since they can be accessed from any device connected to the Internet. However, because they are online, they are more exposed to security risks, such as cyber attacks, so certain security measures must be taken. This type of wallet is used by the main cryptocurrency exchange companies, also known as exchanges.
Software wallets or hot wallets
These are computer programs that are installed on devices. Software wallets give users greater control over their crypto assets, since private keys are stored on the user’s device.
Hardware wallets or cold wallets
This type of wallet consists of physical devices designed for storing cryptocurrency private keys securely. Hardware wallets offer a high level of security, since passwords are kept offline and are not exposed to the Internet. Users can connect hardware wallets to their computers or mobile devices when they need to make transactions. These wallets are considered a secure option for storing large amounts of cryptocurrencies long-term.
When choosing what type of wallet to use, you should consider the use and number of transactions you intend to make with your cryptocurrencies. If what you’re looking for is to trade daily with your crypto assets, the most recommended option would be to keep your assets in an online wallet from which you will make transactions. On the other hand, if your objective is to maintain your investment for a long period of time, it would be more advisable to use a hot wallet or a cold wallet.
Finally, to limit the risk of losing your assets, it is recommended to:
- Two-step authentication.
- Secure passwords.
- Not share your keys with anyone.
- Store your cold wallet in a safe place.
Platforms for investing in cryptocurrencies
Binance
Binance is one of the most well-known cryptocurrency platforms worldwide. It was founded in 2017 by Changpeng Zhao. Binance offers a wide catalog of services related to cryptocurrencies, including cryptocurrency exchange, futures trading, utility token offerings, and more.
The main advantage of Binance is that its fees are lower than those of its main competitors. At the same time, its biggest drawback is that its use is prohibited in certain places in the United States.
More information on: Binance Platform Review
Kraken
Kraken is one of the oldest and most well-known cryptocurrency exchange platforms in the ecosystem. Founded in 2011 by Jesse Powell, the company began operating in 2013, offering digital asset trading services and becoming one of the first exchanges to achieve verifiable audits through proof-of-reserves. It’s worth noting that Kraken emerged as a response to the Mt. Gox hack, as it was at that moment that Powell realized the need to create a much more secure and efficient platform.
More information on: Kraken Platform Review
Bitpanda
Bitpanda has established itself as a leading European cryptocurrency exchange, known for its ease of use and wide range of available assets. Founded in 2014 in Vienna, it offers a user-friendly trading experience in a secure and regulated environment.
The platform stands out for its intuitive interface and variety of assets. Furthermore, its regulatory-compliant approach has made it a popular choice for retail and institutional investors in Europe.
CEX.io
CEX.IO has established itself as a versatile cryptocurrency exchange, known for its ease of use and variety of services offered. Founded in 2013, it provides a comprehensive trading experience in a secure and regulated environment.
The platform stands out for its intuitive interface and offering of advanced crypto financial services. Furthermore, its compliance-oriented approach has made it a popular choice for users looking for a reliable and legally compliant exchange.
More information on: CEX.io Platform Review
