The concept of money as we know it has evolved in recent years from purely physical money to a combination of the physical; digital representations of physical money; and now cryptocurrencies. Cryptocurrencies are designed to work on electronic equipment such as computers, mobile phones, or even specialized USB devices. Blockchain technology underpins their entire structure, where the data stored is immutable.
By creating a record of all transactions and establishing a decentralized method of validation, blockchain technology allows instant transactions without the need for intermediaries. Most cryptocurrencies are decentralized and are not backed by any government or central bank.
Why Are Cryptocurrencies Valuable?
Unlike physical money, cryptocurrencies are not created by printing, they are created through a process called mining. Mining can be described as a method of solving mathematical problems to produce new crypto coins. Bitcoin, for example, has a maximum supply of 21 million coins which is forecast to be mined around the year 2140.
In addition, transactions that involve cryptocurrencies are considered to be secure and rapid. Transfers can be carried out in a matter of minutes with much lower fees than traditional bank transfers, which can take up to 5 days.
All transactions are recorded in the blockchain, and data cannot be modified. Once the data is validated, the block is completed and added to the chain. Every block contains a unique digital signature, and the network will not accept any changes to existing blocks on the blockchain. When new data is added, it is stored in a subsequent block, continuing the chain.
Not All Cryptocurrencies Are the Same
Bitcoin was launched in 2009 when it didn’t have any competition in the market. By 2011 however, new types of competitors emerged using blockchain technology to launch their own platforms and cryptocurrencies. Today, there are thousands of different cryptocurrencies that can be divided into two categories:
- Coins. Coins are built on their own blockchain. For example, Bitcoin operates on the Bitcoin blockchain and NEO operates on the NEO blockchain. Coins are used for digital transactions of any kind. Coins can be used as a form of money, as a store of value, or as a unit of account (you can price goods and services in them). Some coins, such as Bitcoin, are all three but other coins such as Ethereum (ETH) are used as gas for transactions on the Ethereum blockchain. Other tokens can operate on the Ethereum blockchain, but ETH is used to pay transaction fees.
- Tokens. Tokens are also created on an existing blockchain. For example, tokens created on the Ethereum blockchain are called ERC-20 tokens. If tokens are created on Ethereum, the creators need to spend some ETH to get the networks minters to validate the token transaction.
Most tokens are created to be used with decentralized applications (dApps). The tokens are then used to activate various features of the dApps such as allowing a person to trade with discounts fees (Binance does this with BNB) or other tokens are created to represent a physical thing such as real estate or electricity (WePower). The token in this case would represent the property in the creation of a smart contract.
Investing in Cryptocurrencies
Investing in cryptocurrencies has grown in popularity because it is an investment option available to anyone with an internet connection. Cryptocurrencies are becoming a conventional means of payment across the globe, as there is no other technology that allows money to be transferred without the need for central banks. It is safe to say that digital currencies are shaping the future. However, virtual currencies are high-risk financial assets due to their high volatility. For this reason, if you decide to invest in them, you must do your own research and develop a cryptocurrency investment or trading strategy.
It is essential to understand the fundamentals of their technology to have the basic knowledge of their performance. Many investors and traders diversify their portfolios to balance their investment and reduce potential risks.
