Even after 12 years of existence, a huge percentage of the global population does not understand cryptocurrencies. Research shows that only about 300 million people have invested in virtual currencies. Are you surprised that a small number of the world’s population ‘trusts’ cryptocurrencies? Maybe not; the riddle is whether digital currencies are safe or not still has no clear answer. But the fact that these assets have been there since 2009 should tell you something. Want to know more about crypto? This explainer will outline why millions have joined the blockchain currency bandwagon.
Cryptocurrencies are digital currencies that leverage cryptographic systems in distribution and storage. Cryptocurrencies can offer highly secured and encrypted online transactions because of their blockchain base.
The concept of crypto was born in 2009 when Bitcoin came into the fray. Generally, this coin aimed to help serve as both a medium of exchange and a store of value.
It opened a path to the rise of thousands of other virtual currencies, or rather Altcoins focused on offering different services within the financial space. This guide will explore the functioning, legality, and uses of cryptocurrencies.
How do Cryptocurrencies Work?
As digital assets, cryptocurrencies’ functionality primarily leverages online and programmed systems. They leverage systems called blockchains in holding and transferring. Blockchains store every record of a cryptocurrency transaction. These transactions come in blocks that are posted on the ledger. The blockchain ledger has the following attributes;
- Online 24/7. By being online, transaction details recorded in the blockchain are accessible to any network participant at any time.
- Public/transparent. Transaction details are public for network participants to view and audit.
- Decentralized. Blockchain decentralization means no centralized authority controls cryptocurrencies’ creation, issuance, and distribution.
- Immutable. The ledger is immutable, meaning it stores all transaction details permanently. It is almost impossible to fake crypto assets since the ledger is immutable.
Owning a code called private keys is proof of ownership of a digital currency. Private keys help you authorize any transactions within these public ledgers.
The private keys use unique storage systems called wallets. Wallets ensure the keys are safe but also easy to access for easy usage. A crypto wallet is the most fundamental tool needed to own cryptocurrencies. Once you sign-up for wallet services, you can get cryptocurrencies using the methods discussed later in this guide.
How are Cryptocurrencies Created?
The creation and generation of cryptocurrencies differ depending on the coins you are using. However, mining and staking are the most popular methods of generating these coins.
Mining in the crypto space is a process that involves solving cryptographic equations to get a particular hash, add a block and earn new coins. It leverages a heavy resource-consuming consensus mechanism called proof of work. The idea of mining is to ensure transactions are validated and added to the ledger.
Another method used in validating transactions within the blockchain ecosystem is proof of stake staking. PoS staking essentially involves holding some amount of crypto collateral to get a chance to verify, validate and add transactions onto the ledger. Staking is environmentally friendly and consumes minimal resources.
How Can You Get Crypto?
As a rookie in the crypto landscape, you may want to know the different ways to get cryptocurrencies within this space. They include;
Buying crypto in exchanges
Crypto exchanges allow everyone to gain access to digital assets. Investors can see the wide range of assets and buy at the prevailing market prices. Also, when purchasing cryptocurrency on exchanges, consider the methods of payment supported and fees.
Mining and Staking
Mining and staking crypto assets can also be an excellent way to get more crypto assets. Both mining and staking offer good rewards in the form of new coins or transaction fees.
Airdrops, giveaways, bounties, and other systems can help users access crypto. However, you may need to complete some activities to earn crypto. However, you must be very careful when dealing with giveaways, airdrops, or bounties.
Is Cryptocurrency Legal?
The legality of cryptocurrencies mainly depends on the region and the country of residence. In most countries at the moment, there is no legal framework around crypto.
Cryptos are not similar to fiat: no government or related entity controls the issuance or supply of cryptocurrencies. However, watchdogs struggle to create policies to control crypto circulation and trading.
For instance, the Financial Action Task Force made recommendations in 2019 to ensure crypto transfers are subject to anti-money laundering rules. SEC in the US has constantly been trying to take a grip of the crypto ecosystem. The constant fights against cryptocurrencies like Ripple aim to control the entire crypto landscape.
El Salvador and the Central African Republic appear to be the countries to open the doors for the crypto ecosystem fully, making BTC a legal tender. In Japan, the Payment Services Act defines BTC as a legal piece of property. Countries like China banned BTC and altcoins. Before owning a cryptocurrency, do thorough research on the legality.
Uses of Cryptocurrencies
The uses of cryptocurrencies have contributed vastly to increasing knowledge about these assets. The two use cases of cryptocurrencies include; a medium of exchange and a store of value. Aside from the medium of exchange and store of value, cryptos have many other use cases like lending, insurance, international payments, staking, etc.
Medium of Exchange
Cryptocurrencies have gained prevalence in stores where they are used as payment options. Hundreds if not thousands of stores accept bitcoin and crypto payments. Top companies that accept BTC as a payment alternative include Wikipedia, Microsoft, Burger King, KFC, Subway, Twitch, Dallas Mavericks, and others.
Store of Value
Cryptocurrencies have, in their decade-long existence, proven to be reliable stores of value. Cryptocurrencies constantly gain value, proving their ability to store investors’ wealth.
Bitcoin gained massively between 2011 and 2022. It’s not uncommon to hear investors and analysts refer to Bitcoin as Digital gold.
One protection crypto offers as a store of value is censorship resistance. It’s normal for people’s accounts to be frozen because of accusations, some of which could be false. If you use BTC as a store of value, you may enjoy freedom from censorship.
Pros and Cons of Crypto
Privacy and Security of Transactions
Cryptocurrencies offer a transaction privacy advantage. Fiat is easily traceable. It’s easy for the government to access individuals’ transaction information and records even without court orders. There is a group of privacy coins that enjoy enhanced privacy. Coin mixers/tumblers also offer more anonymity to investors.
Low-Cost Money Transfers
Another use of crypto assets is offering low-cost money transfer solutions. Local and international transfers have proven to be costly to people. A UN report shows that brokers cut nearly 7% from every international transaction as a fee. However, cryptocurrencies like Stellar offer cost-friendly international transfers.
Intermediaries like banks take up too much time and offer quite costly services. You may end up paying a fee as a charge for another fee. Every little documentation requires some fee. Crypto has no middlemen; hence, every transaction is faster and more affordable.
Ever Growing Profits
Cryptos have also proven to be a class of deflationary assets. Many coins have been gaining value and generating lots of profit for investors. This lucrative nature of cryptocurrencies makes them very beneficial assets.
Cons of Crypto
While crypto is quite relevant, it also has some cons. Among them include;
- Regulators fighting the blockchain space
- Problems associated with scalability
Should you Invest in Crypto?
Whether or not to invest in the crypto ecosystem depends solely on you. However, you’ll be happy to know that anyone can invest in any crypto asset. Cryptocurrencies have been quite lucrative in their over a decade of existence. Hence, you can invest in them.
However, before investing in crypto assets, you must do thorough research. This research can help you avoid investing in fake or failing projects or somewhat digital currencies that have very few use cases.
What is a Cryptocurrency?
A cryptocurrency is a digital currency designed specifically for use as a medium of exchange using cryptography to secure financial transactions, control the supply, and verify the transfer of funds. The first crypto coin was Bitcoin, released in 2009, and it has since become one of the most popular types of cryptocurrencies.
What is Bitcoin?
Bitcoin is a peer-to-peer digital currency system based on mathematics called blockchain technology. It was invented by Satoshi Nakamoto, who published his white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008. The source code for bitcoin was released into the public domain on January 10th, 2010, under the MIT License.
What is Blockchain technology?
Blockchain technologies are distributed databases that store information using encrypted ledgers. This allows users to quickly, securely, and inexpensively verify transactions between parties. Blockchain technology was originally developed for Bitcoin. However, it has since been adapted for use in other types of financial instruments and supply chains.
What is crypto mining?
Crypto mining is when someone uses computing power to solve complex math equations and earn cryptocurrency. The process requires a large amount of electricity, meaning miners use computers to perform these computations. This results in less energy consumption and better efficiency than running physical servers. Mining is done through specialized hardware called ASICs (Application Specific Integrated Circuits).