Are you a newcomer to the crypto market or looking to refresh your knowledge? Then this article is sure to pique your interest! Here, we've gathered everything in one place: from defining what cryptocurrency is and how it works to the concepts of blockchain and mining.
What is cryptocurrency?
To start, let's shock you with some numbers. As of today, approximately 300 million people worldwide actively engage with digital assets. That's roughly 5 times the population of the United Kingdom.
People use cryptocurrencies for investments, streamlined fund transfers, and purchasing goods and services. Some countries are also actively working on adopting cryptocurrency. For instance, back in 2021, El Salvador adopted Bitcoin as legal currency. You can learn about how this bold move changed the country from our article.
Definition and basic principles
Cryptocurrencies, or digital currencies, are digital or virtual assets that serve as an alternative to traditional money.
Basically, that’s it for the definition. However, there's still so much more to explore ahead! The best way to unravel the technology underlying cryptocurrencies is to delve into its basic principles. Here they are:
1. Cryptography is the foundation of all foundations. In short, it's a method of protecting information by encrypting the original message into a secret code or cipher.
It's cryptography that ensures security. It encrypts all transactions in the blockchain, thus safeguarding them. In their encoded form, they are very difficult (practically impossible) to counterfeit or hack.
Here's how it works. The sender of the transaction uses their private key to create a unique digital signature ➝ The recipient of the transaction verifies this signature using the sender's public key ➝ Both parties ensure that the transaction has reached its intended destination and has not been tampered with. Hooray!
From these, two more basic principles emerge:
- Immutability means that no crypto transaction can be altered or reversed once it has been recorded in the blockchain.
- Transparency in our context equals public visibility – anyone can view any transaction on any blockchain. There's nothing to hide in the crypto world.
2. Decentralisation is exactly what attracts so many people to cryptocurrency. Let's think about traditional finance. Who is responsible for issuing money and controlling its circulation? Right, the central bank or government.
However, for the creation and circulation of crypto coins, no centralised entity is needed, unlike the familiar banking system. The cryptocurrency network is distributed among numerous computers worldwide, and decisions are made not by a single command centre, but by the participants of the cryptocurrency community themselves. It's the principle of decentralisation that makes the cryptocurrency market so democratic and disrupts the monopoly in the financial market.
How cryptocurrency works
The key role here is played by blockchain technology, which we'll discuss in more detail later. For now, just imagine a massive database distributed among hundreds of thousands of computers worldwide. Instead of traditional usernames and passwords, it contains records of cryptocurrency transactions. This database is called the blockchain.
Here's how the process works:
1. Mary sends one bitcoin to John. A transaction is made.
2. This transaction is broadcast to the network. Every computer connected to the cryptocurrency network receives a copy of this transaction.
3. Network participants verify this transaction. This task is carried out by special computers called miners. We'll talk a bit more about them later.
4. The transaction is added to a block. All verified transactions are grouped into blocks.
5. The block is added to the blockchain. The new block is linked to the previous one, forming a continuous chain of data, which is called the blockchain.
Key types of cryptocurrencies
As of today, the global cryptocurrency market capitalization exceeds $2 trillion, with over 2.52 million crypto coins in existence as of 2024. Of course, we can't cover them all, but let's get acquainted with the most fundamental ones – easy peasy!
Bitcoin and its dominance
Bitcoin (BTC) is the very first digital currency in the world. It was created by an anonymous individual or group known as Satoshi Nakamoto in 2008, against the backdrop of the global financial crisis. In late August, the anonymous creator published the Bitcoin whitepaper, a technical document outlining the core principles of the cryptocurrency.
In 2009, the Bitcoin network was launched, and the very first block, known as the genesis block, was generated, marking the beginning of BTC mining.
By 2010, Bitcoin made its first purchase. On May 22nd, American developer Laszlo Hanyecz famously bought two Papa John's pizzas for 10,000 BTC. At today's BTC price, this purchase would have cost him $638,633,000 USD.
As Bitcoin was the first and only coin in the crypto market at the beginning of its journey, it held 100% dominance of the digital asset market capitalization.
However, over time, other cryptocurrencies began to emerge, leading to a natural decline in BTC dominance. In fact, Bitcoin's dominance has been decreasing throughout its existence. Currently, its dominance level slightly exceeds 55%.
Other prominent cryptocurrencies
Today, the market is not only dominated by Bitcoin, as it was in 2008, but there are also many other types of cryptocurrencies. All these coins are known as altcoins.
For example, one of the earliest altcoins, Litecoin (LTC), was introduced in 2011 by former Google employee Charlie Lee. Currently, LTC ranks 19th in the list of the most capitalised cryptocurrencies and is trading at $79.83.
Another interesting cryptocurrency is Dogecoin (DOGE). Jackson Palmer launched it in December 2013. It falls into the category of meme coins, as it is inspired by the famous internet meme featuring a Shiba Inu dog. Currently, the meme token ranks 9th in market capitalization and is priced at $0.1326. By the way, this one is also Elon Musk’s favourite!
Shiba Inu meme
Additionally, in the same year, the payment protocol Ripple was launched. It is designed to address the scalability issue of blockchain. The protocol's native token, XRP, remains extremely popular and ranks 7th in the rating with a value of $0.5199.
Furthermore, we cannot overlook the second-largest cryptocurrency in the market, Ethereum (ETH). This altcoin emerged in 2015, and it was developed by the widely recognized figure in the crypto community, Vitalik Buterin. ETH consistently holds the second position in the market capitalization rankings and is currently trading at a price of $2,980.26.
You can find the other cryptocurrencies from the top 10 by market capitalization here:
Leaders in terms of market cap. Source: CoinMarketCap
The technology behind cryptocurrencies
To better understand what cryptocurrencies are and how they work, it's essential to get acquainted with blockchain and mining technologies. These are the very engines that help crypto coins come into existence and thrive.
Blockchain explained
We've already touched upon what blockchain is. In simple terms, it's an existing online database stored within a distributed ledger system. The revolutionary and appealing aspects of this technology include:
- Decentralisation. Such a data storage system is resistant to censorship and manipulation since it lacks a single centre. Copies of the blockchain are stored on multiple computers in the network rather than on a single central server.
- Transparency. All data in the blockchain is viewable and cannot be altered or deleted.
- Security. This stems from the previous point. Within such a system, data is very difficult to falsify or hack.
- Efficiency. Blockchain helps automate many routine processes, making them faster and cheaper to execute.
Blockchain is a rapidly evolving technology that is already being used in a wide variety of industries today. Yes, not just in cryptocurrencies!
For example, blockchain technology is utilised in healthcare to securely store medical records and ensure patient confidentiality. It's also being integrated into modern voting systems to make voting more transparent and secure, minimising instances of fraud. And, of course, blockchain is used in traditional finance to speed up and simplify transaction processing.
But let's get back to the crypto market. In the context of cryptocurrencies, blockchain is the technology on which Bitcoin, Ethereum, Toncoin, and absolutely all other crypto coins exist.
Blockchain is a continuous and endless chain of interconnected blocks. It's like permanent pages of a file where network data is stored. Information about completed transactions is stored in grouped form within these blocks, with each block having a timestamp and being linked to the previous one.
Anyone can review the list of transactions, but to update any data, a user needs a special private key known only to them. When the private and public keys match for a specific set of data, the modification is added and recorded in the subsequent block. Once the information is written, no further changes can be made.
If a dishonest user manages to deceive the system and make adjustments to one of the block copies, their joy will be short-lived. Other participants in the system quickly compare the fake version of the information with the original and expose the deception.
Mining: how new coins are created
We've covered where digital assets are stored, but where do new crypto coins come from? Well, that's where another process called mining comes into play.
Mining is a complex and labour-intensive process Bitcoin and several other cryptocurrencies use to generate new coins, verify new transactions, and release new coins into circulation.
Miners connect their mining machines with computation power to the coin’s network in order to conduct its operations. They receive rewards for their work in the form of new units of cryptocurrency and/or transaction fees.
The process of verifying transactions and adding blocks looks like this:
1. A user initiates a transaction, which is broadcasted to the network.
2. A miner sees the new transaction and verifies it. Their computer solves a complex mathematical problem to compute what's known as hashes. When they solve it, they determine if the transaction complies with the network rules.
A hash is a string of characters that represents and secures information in the blockchain of a digital currency.
3. The miner who solves this problem first has the right to add a new block to the blockchain. This new block contains all the transactions verified by the miner. The miner also receives a reward for attaching the block.
4. Other network participants verify the new block. If it's valid, it becomes part of the blockchain.
Now, let's talk about how miners actually acquire new crypto coins that other users can then use for transactions.
In short, the magic happens when a block is added to the blockchain. It's at this moment that a specific amount of new coins is released into the network. This process is called cryptocurrency emission.
The reward in the form of new coins goes to the miners who were able to calculate the hash faster than others. This directly depends on the computational power of the computer. Therefore, mining is a profitable but costly endeavour that requires significant investment in mining equipment.
Moreover, cryptocurrency mining consumes a lot of electricity. The cost of electricity also amounts to substantial sums for miners. It's so expensive that many miners are increasingly turning to other sources of energy. For example, hydroelectric power stations.
Investing in cryptocurrencies
If you've decided to invest in cryptocurrency, it's time to move forward and learn how to buy and store cryptocurrencies securely.
The most reliable and secure way to buy cryptocurrency is to purchase it on a popular centralised cryptocurrency exchange (CEX). Let's consider a few examples of such trading platforms.
Binance is the largest and most well-known crypto exchange in the world. It offers 350 currencies. The basic trading fee is 0.1% for both sides, but you can get a discount by paying it with the internal BNB coins.
Binance website
Bybit is another popular exchange based in Singapore. It offers access to over 100 cryptocurrencies and also features an NFT marketplace. The exchange does not require identification, allowing you to start trading immediately after a simple registration process. The trading fee for spot trading (immediate transaction) is 0.01% for both buyers and sellers, while for futures trading (deferred transaction), it's 0.025% for makers and 0.075% for takers.
Bybit website
At Coinbase, you can also buy or sell cryptocurrencies. Registration requires passport verification and a photo taken within the exchange's official app (iOS/Android). The trading fee is calculated separately for each transaction but can reach a maximum of 2%.
Coinbase website
Interesting! An exchange isn't the only place where you can buy cryptocurrency. You can also easily purchase any crypto with your bank card through itez.
To store cryptocurrency, you'll need a special wallet. A cryptocurrency wallet can be an application, a browser extension, or a physical device.
Hot wallets like MetaMask are great for those who plan to frequently make transactions. Cold wallets, such as Ledger, are designed for long-term storage of large sums of digital assets.
You can find all the necessary information on how to store crypto in our article.
Risks and rewards of crypto investment
Investing in cryptocurrency can potentially be a very profitable venture. However, it also comes with very high risks. Let's delve into whether investing in digital assets is worth it.
Advantages:
1. Potentially high returns. Cryptocurrencies are highly volatile assets that can significantly increase in value over very short periods of time. Moreover, in recent years, digital assets have been rapidly evolving. A prime example of this is the market leader, Bitcoin, which recently hit an all-time high.
2. Global accessibility. Cryptocurrency is available to people worldwide, regardless of their citizenship or income level.
3. Fast and cheap transactions. Crypto coins are not regulated by banks or other financial institutions. This means there are no physical borders for them – you can send or receive cryptocurrency from anywhere in the world. Additionally, transaction fees are typically much cheaper than those charged by banks.
4. Protection against inflation. Many digital currencies, such as Bitcoin, have a limited supply, meaning there is a finite amount available. This means they cannot be devalued due to supply surplus.
Risks:
1. Potentially high losses. This risk is also associated with volatility because cryptocurrencies can not only quickly rise in price but also depreciate rapidly.
2. Fraud and hacking. The crypto market is rife with scammers who may spread fake information to deceive other users and lure them into parting with their digital assets. In addition to them, there are hackers who frequently breach cryptocurrency exchanges or wallets.
3. Regulatory uncertainty. Currently, there is no clear regulatory standard worldwide that defines the rules of the game in the crypto market. Only the MiCA law is in development, planned to be implemented in 2024. Until specific rules are outlined, many exchanges or coins may find themselves outside the legal framework if regulatory sentiment changes. An example of this is the Tether (USDT) stablecoin precedent on the OKX trading platform.
4. Complexity. For many newcomers, the concept of cryptocurrency and its usage may seem too complex to grasp. This can be addressed with the help of the itez team. Don't forget to read our blog to understand all the nuances of the crypto market and stay up to date with all events!
Before making any financial investments, ensure that you fully understand all associated risks. Remember to adhere to security rules and only trade with money you can afford to lose.
Future of digital currencies
In recent years, the digital asset market has been evolving at a rapid pace and attracting an increasing number of users. The growing popularity of cryptocurrencies is also evidenced by the recognition from regulators — in recent times, authorities in various countries have begun to pay more attention to introducing global and understandable rules for operating in the crypto market.
As for the trends and predictions, since the SEC is also inclined towards adopting MiCA rules, a global standard of regulation can be expected. After all, decisions made in the American market often influence what happens on a broader scale in the cryptocurrency market. This could lead to even more players entering this industry, who will no longer fear being outside the law or becoming victims of unpunished cybercriminals.
If the digital currency sector can adapt to the requirements of regulators while maintaining its decentralised nature, it will reach the most balanced point in its development.
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This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
