Do Cryptocurrencies and Bitcoin confuse you? Do you feel out of place when your friends talk about them? Do you want to know the basics at least so that you don't come across as naive? Then you are at the right place.
We are sure you might have made several attempts to understand them, and each time you tried, it got more confusing. We feel you.
That's why we have prepared this guide to help you understand everything you need to know about cryptocurrencies.
You can thank us later :-)
Cryptocurrency has disrupted the entire global financial system. It has gained tremendous popularity and wider acceptance in the last few years. Gone are those days when cryptocurrency was an exciting area for tech enthusiasts alone.
It is gradually becoming part of our lives.
Many countries and organizations have started recognizing cryptocurrencies such as Bitcoins as a substitute for money. Quite a few banks have either collaborated with cryptocurrency companies or have developed their own digital currencies.
As you read through this article, you will know many applications of cryptocurrencies, such as long-term investment options, modes of payment, and trading.
In this guide, we will be explaining
- Cryptocurrency in simple terminology
- How is it different from the regular currency
- How does it work
- What do we understand by cryptocurrency mining
- Classification of cryptocurrencies
- What are its various types - Bitcoin, Ethereum, Ripple, etc.
- How to measure the value of cryptocurrency
- Key Takeaways
But before we get to cryptocurrency, we want to talk to you about Cryptography and Blockchain. They are the foundation of cryptocurrency.
If you get these two concepts right, then understanding cryptocurrency is a cakewalk.
Let's get started.
What is Cryptography?
Citing an example from our childhood days: whenever we played games, we created code language among our friends so that the opposition party couldn't understand our secret.
Cryptography is somewhat similar.
Cryptography = Crypto (Hidden) + Graphy (Writing)
It is a method by which you can secure all your critical information by transforming it into a language that only the target audience or recipient can read, process, and understand.
The original message (plaintext) is converted into unreadable text (ciphertext) through specific algorithms that can be cracked only by intended recipients.
Another critical terminology which we need to get right before we jump to cryptocurrency is blockchain.
What is Blockchain?
In layman's terms, blockchain is a specific kind of database. While a regular database stores data in a table format, a blockchain stores its data in blocks that are connected via a chain.
Blockchain can store different types of data. But primarily, it's used as a digital ledger for peer-to-peer (P2P) financial transactions.
P2P computing or networking is a distributed application architecture that partitions tasks or workloads between peers.
For every transaction on the digital platform, a block is created that is linked to a specific participant. Thus, these transactions form a chain of blocks. Hence the name blockchain.
For example lets look at this:
You are working on a team documentation project wherein each member is assigned a particular section. All of you prepare your sections on your own computer. Just for simple understanding, consider the sections as a block.
Compilation of these blocks is critical for the final project submission. You can assume the complete document as a blockchain. When you bring each member's task together, i.e., blocks, it becomes a blockchain (of course, there is no chain here, but you get what we are trying to say.)
Now let's say the team compiles the entire project on a google document. The advantage of google docs is that any member who has access can work on it from their system irrespective of the location.
Furthermore, any changes done to the document can be visible to all the participants in real-time. Therefore, even if one of the computers crashes, you will not lose any section/data from the document.
This functioning is somewhat similar to the blockchain.
Features of Blockchain
Here are some exciting features that cryptocurrencies leverage from the blockchain:’
- It is a decentralized or a distributed database - one of the most powerful features of blockchain. It stores all the data on a digital platform.
- Blockchain shares all these secured data across its networks and users. No central server is required to store blockchain data.
- Since it is a shared peer-to-peer network, no third party, like a central bank, is involved.
- The data is hosted by millions of computers simultaneously and is accessible to all its users. Therefore the information is entirely public.
- All the information available on a blockchain exists in the repository in a compatible format.
- Therefore, all its users are a part of this electronic ledger, and blockchain records every transaction in real-time. Thus, making the whole process completely transparent.
- Updating the blockchain requires consensus among its users. Each update in the database sends the same information across every computer in the network.
- Once a new data enters, it cannot be deleted or changed; hence it is immutable.
- Since the blockchain database is not stored in a single location, the records are public, verifiable, and not easily corruptible.
- Blockchain reduces data corruption, and ensures a detailed record of historical transactions through sequential timestamps.
With all the above features, this innovative technology increases the speed, transparency, and security of transactions, thus making it ideal for managing financial data.
Now that you have a fair understanding of blockchain let's move to the article's central topic - Cryptocurrency.
What is Cryptocurrency in Simple Words?
Simply put, cryptocurrency is a digital currency. You can use these currencies to buy goods and services online or use them for trading.
It uses a digital ledger with solid cryptography to secure online transactions. Cryptocurrency exists only in computers and is different from physical (fiat) currency.
Unlike physical currencies, cryptocurrency is digitally encrypted, decentralized, and not linked to or regulated by any government or central bank. It is based on blockchain technology.
Cryptocurrency can be bought from brokers or generated through an online process called mining (to be explained later).
What is the Difference Between Cryptocurrency and Fiat Currency?
We all know what fiat currency is. Yes, all those notes and coins in our wallets and those e-payments that we make through our cards and payment apps are fiat currencies.
We have listed some key differences between cryptocurrency & fiat currency:
Cryptocurrencies are the future of the world's economy. This revolutionary currency has gained broader acceptance in a short period.
- Singapore-based DBS Bank has launched Asia's first cryptocurrency trust service. It offers its clients the ability to invest and manage up to four assets through the bank's wholly-owned, licensed trust company, DBS Trustee.
- In June, Elon Musk announced that car manufacturer Tesla would resume transactions with cryptocurrency when mining is done with more clean energy.
- Credit card company Visa has started accepting payments in the cryptocurrency USD coin directly.
- Many other companies like eBay, Paypal, Xbox are accepting payments in cryptocurrencies.
- Some companies such as Google and Amazon plan to issue their cryptocurrencies for transactions involving goods and services specifically provided by them.
Why have Cryptocurrencies Gained so much Attention?
It is because of its two core functionalities
a) Cryptographical Technique
Cryptographic functions help conduct financial transactions in a secured environment
b) Blockchain Technology
Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.
Because of the above two, cryptocurrencies come with some unique and amazing properties:
1. All the transactions are anonymous
The real identity of the account holder is unknown. In simple words, you will see transactions happening between A and B, but you can't know the real identity of A or B.
2.Transactions are quick and independent on geographies
Let's say you are in Singapore and transacting with someone in Europe. You will have to deal with two different currencies: Singapore's SGD and euros.
And this entire process is time-consuming. Cryptocurrency is independent of geography. Bitcoin in Singapore is the same as Bitcoin in Europe. As the transactions happen in a global network of computers, they are instantaneous.
Since they use cryptography functions to conduct financial transactions, they are safe and hidden from hackers; hence they are highly secured.
Cryptocurrencies can be sent directly between two parties via the use of private and public keys.
4.Financial Transactions are Irreversible
It is the blockchain that processes all cryptocurrency transactions. Once these transactions are confirmed, no one can reverse them under any circumstance.
It is a shared platform and involves lots of different people/companies. There is not one entity with the power over this platform, and you don't need to trust one institution (like a bank) for your money.
How Does a Cryptocurrency Work?
As mentioned previously, every cryptocurrency consists of a network of peers. Additionally, these peers are spread across the globe, independent of geographies, since it is all about computers (just a reminder for you).
They have a record of all the historical transactions. Hence, they know the balance of each account in that network.
Wondering how? Well, all the peers have a public key and a private key. While the public key is common among the users, a private key is exclusive, and only that particular user can decrypt it.
Assume 'A' sends money to 'B.' Now, the system will broadcast this transaction across the entire network, and everyone can view it using their public key. However, only 'A' and 'B' can decrypt the transaction using their private keys.
After the confirmation of the transaction by the miners, the record can not be changed or reversed. It is immutable. Remember blockchain?
Interestingly, to make any of these transactions, you don't need to have a bank account. Likewise, you don't need to share your details, such as name, address, and contact information.
All you need are - the two keys mentioned above. They are like your login credentials. You can't function without any one of them.
Since the users do not share any of their identities, they are entirely anonymous. But transactions are not.
Anyone in the network can see all the details of transactions on the Blockchain. However, they are clueless about who are the actual people behind these transactions.
Now with a fair understanding of cryptocurrency, another often-used term among these virtual currency users is Mining.
Welcome to Cryptocurrency Mining
Mining is the process of creating/adding new cryptocurrencies to circulation by auditing cryptocurrency transactions on the blockchain.
By now, you know that there are no central authorities to regulate cryptocurrency transactions. In fact, that is one of the biggest USPs of cryptocurrencies.
So how do you verify each transaction?
Here is where miners come into play.
Who are Miners?
Miners are the ones who verify these transactions, just like the banks do in the case of fiat currencies.
Mining is critical for several reasons, one of them being preventing the double-spending problem.
Let us explain it this way:
When you deal with fiat money, physical cash is gone once you sell or buy something. You can't use it again. Even in the case of online transactions, once the money is debited from your account, it's gone.
However, cryptocurrency is virtual and present only on the computer. Therefore, if there are no checks on the users, they may end up double-spending and counterfeiting.
Anybody can be a miner.
A miner's primary job is
- to verify whether the transactions are legitimate or not,
- bundle those transactions and
- then add them to the blockchain.
It is a critical component of the maintenance and development of the blockchain ledger. By verifying transactions and adding new blocks to the blockchain, miners earn block rewards denominated in crypto-currencies such as Bitcoins.
It is only through this process of cryptocurrency mining that new currencies enter circulation.
How is Cryptocurrency Mining Done?
Cryptocurrency mining conceptualizes on Proof-of-Work.
Proof-of-work is an algorithm used to confirm transactions and add new blocks into the chain. Miners are the players in the ecosystem who execute proof-of-work.
Since blockchain is a distributed network, it is shared across thousands of powerful computer systems. They are called nodes/miners. After verifying a transaction, a miner adds the next "block," or record of transactions, to the chain.
This process adds only the correct information to the blockchain. Once transactions are confirmed, they can't be changed or deleted.
To know whether a miner has verified the transactions, proof of work is essential. A new block is accepted by the network only when a miner comes up with a new winning proof-of-work.
How do Cryptocurrencies Enter into Circulation?
Just like real-world mining requires manual labor, cryptocurrency mining requires high computational power. Running these powerful computers involves a lot of electricity. Therefore, mining comes with an operational cost.
Cryptocurrency is a reward for the miners for these operational costs. It is the cryptocurrency mining process that adds cryptocurrencies into circulation.
But are all the miners rewarded? The answer is NO. It isn't that simple.
It may make you eligible to earn currencies, but there isn't any surety yet.
The second criterion other than verifying transactions is that you have to be the first miner to arrive at the correct answer, or closest solution, to a numeric problem.
That means the miners have to compete with each other to come up with a 64-digit hexadecimal number - cryptographic hash that is less than or equal to the target hash.
Let's say that the target cryptographic hash is 50 in numeric (ignore the 64-digit hexadecimal part just for simplification). Miners need to come to a number that is less than or equal to 50.
If one miner guesses 52, which is >50, he loses his eligibility. Another miner who guesses the number 45 and is quicker than the others is the one who gets the reward coins.
Now you can well imagine the difficulty of this process when the target hash is a 64-digit hexadecimal number something like this 0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4pq598mn
So, whoever reaches the nearest number first, wins their cryptocurrency.
Once the winner is declared, the cryptocurrency protocol creates a new value that miners need to hash, and the race for finding the winning proof-of-work starts again.
Many of you may think cryptocurrency is all about Bitcoins. It is definitely the most popular one, but you will be surprised to know that thousands of cryptocurrencies are available in the virtual market.
The latest figures show there are 10,000 different types of Cryptocurrency. The total value of all cryptocurrencies on May 27, 2021, was more than $1.7 trillion — down from the April high of $2.2 trillion, according to CoinMarketCap.
Classification of Cryptocurrencies
You can classify cryptocurrencies into two categories
Coins refer to cryptocurrencies that have an independent blockchain. They are primarily used as money. They can be mined, stored in wallets, to buy or sell things, or for trading purposes.
E.g., Bitcoin on Bitcoin blockchain, Ether on Ethereum blockchain
Altcoins also fall under this category. Altcoins are any coins that are an alternative to Bitcoin, such as Litecoin and Dogecoin.
Tokens are created on existing blockchains. The most common being the Ethereum blockchain. Tokens that are built on the Ethereum platform are known as ERC-20 tokens.
However, there are several other platforms such as NEO, Waves, Lisk, and Stratis.
Instead of money, tokens are used for many other applications. For example, they can represent a piece of artwork or an educational certificate.
PS: Tokens are not used to reward miners. Tokens are created and given out through an Initial Coin Offering (ICO), very much like a stock offering.
E.g. of tokens: Tether on multiple blockchains
UNI and LINKs token on Ethereum blockchain (also called ERC20 tokens).
Different types of tokens
Security Tokens - Anyone who buys a security token invests their money in the ICO to gain profit.
Equity Tokens - It is a token that represents some stock or equity in the company that issues it.
Utility Tokens - They are also called application tokens since they provide people with access to either a product or service.
Payment Tokens - Payment tokens are only used to pay for goods and services
Let us look at some popular cryptocurrencies.
List of popular cryptocurrencies of today’s times
Honestly, it's not possible to talk about every cryptocurrency, so we have randomly decided to explain a few of them. If you wish to know about anything, in particular, you can leave a comment below in the comments section.
Types of Cryptocurrencies
Let us look at the different kinds of cryptocurrencies:
Bitcoin is one of the most common and popular cryptocurrencies. It dominates the cryptocurrency market and is considered the first cryptocurrency.
Bitcoin was created in 2009 as open-source software by Satoshi Nakamoto. No one knows who Satoshi Nakamoto is. It's no rocket science to guess it is a pseudonym.
Bitcoin allows users to make transparent peer-to-peer transactions. All users can view these transactions through a 'public key.' However, only the owner of that Bitcoin can decrypt it with a "private key."
It is decentralized; hence there is no central authority in Bitcoin. It is the users that control the sending and receiving of money. While the transactions are actual, the identity of the people behind these transactions is unknown.
It is easier to convert Bitcoin into cash like dollars and euros. Bitcoin has wider acceptance as compared to other cryptocurrencies. So, it is here to stay.
As per the Bitcoin protocol, it will cap the total number of Bitcoins to 21 million.
At the time of writing this article, there were 18,660,000 Bitcoins in circulation. Since Bitcoin entered into circulation, its price has increased from zero to more than 34,000 dollars.
Ethereum is a type of cryptocurrency that is a decentralised software platform based on blockchain technology. It was created in 2015 by Vitalik Buterin. The whole idea behind Ethereum was to create a platform that could be more than a digital currency.
Other than tracking ownership of digital currency transactions, Ethereum also enables smart contracts and decentralised applications (dapps) to be built and run on it.In addition, it ensures that there is no fraud or any interference from a third party.
A smart contract is a self-executing contract in which the agreement between buyer and seller is written in codes. It helps in different types of transactions. including cryptocurrency trading. You can use it for a company's payroll disbursement, purchase of a house, and so on.
Dapps, on the other hand, are just like regular apps (an Uber or Amazon app), with the only difference that it runs on blockchain and not on the central server.
One of the advantages of Ethereum over Bitcoin is that there is no cap on its supply.
In the 'Token' section, we have already mentioned that the Ethereum blockchain itself hosts several tokens.
Currently, Ethereum is valued at $1,983.64.
Litecoin is an altcoin (an alternative to Bitcoin). It was launched in 2011 by Charlie Lee. Like other cryptocurrencies, Litecoin is also an open-source, decentralized global payment network. It is known for faster transaction times.
The coin limit for Litecoin is 84 million. It operates on the 'scrypt' algorithm.
Currently, it is priced at $135.75.
Ripple is a technology that acts as both a cryptocurrency and a digital payment network for financial transactions. Ripple is the company's and network's name, and XRP is the name given to its cryptocurrency token.
It was first released in 2012, and Chris Larsen and Jed McCaleb created it.
Ripple is a bank's best friend as it helps make their payments faster. That's one of the reasons that a lot of banks have joined the Ripple network.
There is no mining in Ripple, unlike Bitcoin and Ethereum. Instead, all the coins are pre-mined.
The primary role of the XRP token is to serve as an intermediary between two currencies or networks.
XRP is currently valued at $0.66.
Jackson Palmer and Billy Markus created Dogecoin as a response to a joke without any serious intentions in 2013.
In recent times, Dogecoin has gained a lot of attention because of Elon Musk, the Tesla chief executive. He has openly declared his love for the currency in his tweets on several occasions.
Just like Bitcoin, Dogecoin is an open-source, decentralized peer-to-peer network that utilizes a proof-of-work consensus algorithm. The network, therefore, relies on miners to validate transactions and secure them.
However, one key difference is, there is no cap on Dogecoin supply.
It is based on a fork of the Litecoin code and often finds its usage in tipping internet users who create or share digital content.
Dogecoin’s latest valuation is $0.24.
Has this article inspired you to invest in cryptocurrencies? If you are nodding your head in affirmation, you must not miss out on my next section -
How to Measure the Value of Cryptocurrencies?
Cryptocurrencies are measured in terms of their market capitalization. For all you aspiring investors out there, check the formula below
Market capitalization is the overall value of a currency taking its price and supply into consideration.
The market cap of any other currency is compared to that of Bitcoin because it has the highest market cap.
Market cap of a cryptocurrency = Total no. coins in circulation * Current price of each coin
For instance, when writing this article, there were 18,660,000 Bitcoins in circulation for 34,000 dollars.
Therefore, Bitcoin’s current market cap = 18,660,000 * 34,000 = $ 634,440,000,000.
When you plan to invest, do take these points into account.
The final section before we conclude this guide is about cryptocurrency for everyday business.
Cryptocurrency for Businesses
Are you a small business owner and keen on doing your everyday business transactions using cryptocurrency?
Well, your wait comes to an end here.
Deskera, a leading cloud-based business solutions provider has recently announced that all its users can accept and pay for their invoices in Bitcoins using Deskera-all-in-one.
Want to know more about it? Why don’t you go through this video here?
The video showcases how you can connect to OpenNode and receive payments from customers in Bitcoin.
Deskera’s all-in-one solution is a cloud-based software suite consisting of Deskera Books, Deskera CRM, and Deskera People modules. It allows businesses to run their operations and processes smoothly.
Deskera all-in-one also comes in a mobile app version for both iOS and Android users. Organizations can track all the relevant information on the go through this app in real-time and make informed decisions.
Last but not least, cryptocurrency has opened new doors for investments, trading, and online transactions. It has changed our way of looking at money. In other words, there is a whole paradigm shift. Based on new-age technology, cryptocurrency has many advantages over fiat currencies and it is here to stay.
As we end this guide, we hope by now you are aware of the importance of cryptocurrency. Here's a quick recap of all the topics discussed above:
- Cryptocurrency is a digital currency that uses a digital ledger with solid cryptography to secure online transactions.
- It is based on blockchain technology.
- Cryptocurrency is digitally encrypted, decentralized, and not linked to or regulated by any government or central bank.
- Mining is the process of creating/adding new cryptocurrencies to circulation by auditing cryptocurrency transactions on the blockchain.
- Cryptocurrency is divided into two categories-Coins and Tokens.
- The most popular and widely accepted cryptocurrency is Bitcoin.
- Ethereum, Ripple, Litecoin, and Dogecoin are some other important cryptocurrencies.
- Cryptocurrencies are valued in terms of their market capitalization