The proliferation of cryptocurrencies such as bitcoin and Ethereum has revolutionized how we think about money. They allow for peer-to-peer transactions without the need for institutions like banks to facilitate these exchanges. And while they may seem volatile, they’ve proven to be more resilient than many people ever imagined, with an ascending value in recent years that has captivated investors around the world.
But what exactly are cryptocurrencies? And how are they different from traditional currencies like the U.S. dollar or the yen? Here’s a breakdown of what makes them unique.
Units and denominations
Cryptocurrencies are a number in a database that describes encrypted keys used to verify transactions with decentralized control through blockchain technology. They’re not printed like dollars or yen, so you can’t hold a cryptocurrency in your hand. Instead, you store it digitally on your phone or computer, in your digital wallet.
Bitcoin and other cryptocurrencies have fixed but limited supplies, as they’re designed to be deflationary and continue to climb over time. Bitcoin’s maximum supply is set at 21 million but can be changed or decreased if a hard fork occurs.
You need wallets to keep your digital coins secure and accessible to buy and sell cryptocurrencies. Wallets are software applications that allow you to manage your keys, similar to accessing your online bank account.
How are they different from traditional currencies like the U.S. dollar and the yen?
Cryptocurrencies are considered a form of digital money, just as gold is regarded as a form of real money. But unlike gold and other metals that can be mined in large quantities with relatively little effort, cryptocurrencies require an enormous amount of digital computing power to mine and secure them from hackers. This can make them very expensive to obtain.
A cryptocurrency called DigixDAO exists as a token on the Ethereum blockchain. They can be stored in a digital wallet like any other cryptocurrency or used to redeem physical gold from Digix’s reserves. They’re also decentralized and don’t subject to the oversight of a government or central bank.
And unlike traditional currencies that are backed by governments or other entities that can manage supply through tools like printing more money, cryptocurrencies are limited by design. Their production is regulated by complex computer algorithms and other mathematical equations that control the rate at which new units are introduced into the market. Bitcoins are capped at 21 million, Ethereum is designed to hold 18 million, and other cryptocurrencies will have their max supply.
How do crypto tokens work?
Cryptocurrency transactions are managed by secure blockchains distributed ledgers that record every transaction made with the token. Blockchains can also include smart contracts that make a set of actions linked with a particular asset more efficient. For example, using blockchain technology and a smart contract feature called the Augur platform, it’s possible to make qualified predictions on anything from weather to sports. The system incentivizes skilled oracles’ participation in the prediction market by awarding them tokens for accurate predictions.
Most cryptocurrencies require computers to use their processing power to secure the blockchain and confirm transactions as part of mining. It’s through this process that new coins are introduced into circulation. The same network that transfers tokens can also transfer information and data, making it possible to share encrypted documents.
How do you buy them?
Buying and selling cryptocurrencies can be complicated, requiring a digital wallet and access to an exchange where you can transfer traditional currencies like the U.S. dollar to buy them. There are dozens of token exchanges available online, but many only work with specific currencies or restrict new users altogether.
The first step is to sign up for an account, verify your identity and add your bank account (or a credit card) to deposit funds. Not every exchange allows you to trade for every cryptocurrency. Some specialize in a specific currency and only allow you to buy or sell them. In contrast, others will enable you to use fiat money to trade between cryptocurrencies instead of using your bank account directly. Here you can find more about crypto token investments and prepare yourself safely for this venture.
You can start trading on the exchange. They often have multiple currencies and trading options. However, some exchanges may have restrictions on which ones to allow trading. Major global exchanges include Coinbase, Kraken, BitFinex, and Gemini.
How can you store tokens?
Cryptocurrencies can exist in a wallet, much like a physical wallet that you might use to store cash in real life. Wallets are pieces of software that allow you to send and receive cryptocurrencies, and they come in two forms: hot and cold. A hot wallet is connected to the internet, while cold storage is not. The more secure option is using a cold storage wallet, which keeps your assets offline and eliminates the threat of being hacked or otherwise losing your assets. These wallets are usually hardware devices like USB sticks or hard drives.
Some cryptocurrencies like DigixDAO do not have a blockchain or their crypto but are backed by gold instead. You can store these tokens in a physical gold-backed Digix vault that’s kept in a secure location.
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How do you send them?
The process of sending cryptocurrencies is different for each type of coin. Some coins like Bitcoin use addresses that are long strings of numbers and letters, while others like Ethereum use account names, much like an email address. While it’s impossible to send traditional money directly to your friend on the other side of the world, you can send crypto instantly wherever they are, provided they accept it as a form of payment.
While some bitcoin transactions require fees to confirm the transaction, others only need to be confirmed once. Ethereum and other cryptocurrencies like DigixDAO allow you to create a smart contract that can send money directly to anyone with the pre-agreed amount.
The future of money is here. For now, only a few people will be able to claim their cryptocurrencies. And even more, people may be able to claim somebody else’s crypto. As cryptocurrencies become more mainstream and major companies like Microsoft add them to their products, we’ll come closer to Satoshi Nakamoto’s vision for a decentralized world with secure digital cash.
We hope that this article has covered some basic questions you might have had about cryptocurrencies. If you have any more questions, please let us know in the comments below!