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Crypto Explained

Know your Bitcoin from your Doge: An Introduction to Crypto

March 22, 2022

Christina

Know your Bitcoin from your Doge: An Introduction to Crypto

By now, it's almost impossible not to have heard about cryptocurrency, although you may not be familiar with precisely what it is and how it works. Don't worry, you're not alone.

With more than 13,000 different cryptocurrencies currently available, even those purporting to be "experts" on the matter can't keep track of them all. Yet, despite their multiple differences and raisons d’étre, all cryptocurrencies have the same thread in common: They rely on underlying blockchain technology to enable transactions between two peers without needing an intermediary like a bank. 

In this article, we'll take a look at how cryptocurrency works and how it was invented, as well as examine some of the most popular coins, and see who's investing in this brave new world. Let's dive in.

What is cryptocurrency?

Cryptocurrency is a digital (or "virtual") currency that uses cryptographic blockchain technology to enable direct transactions between two parties, either individuals or corporations. The word "blockchain" is derived from the mechanics behind it. Each "block" consists of transaction data and, once transactions have been verified, new blocks are added to the existing chain (the blockchain).

You can think of a blockchain as a ledger or a recordkeeper that is either openly viewable (public) or viewable by selected parties (private or "permissioned"), depending on the project. For example, cryptocurrencies like Bitcoin and Ethereum make use of public blockchains. Anyone can examine the entire history of all transactions on the chains by using a block explorer like blockchain.com or Etherscan, making the technology highly transparent and open. 

However, having all transaction data available does not suit the needs of everyone (imagine banks or private and public corporations that must protect individual privacy), which is why some blockchain transactions are viewable only by permissioned parties. Some of the most popular private blockchains include Ripple, R3 Corda, and IBM's Hyperledger Fabric. Despite being permissioned and designed for corporations, they still share other key characteristics of blockchain technology.

For starters, blockchains are immutable, meaning that no records entered on the ledger can be removed or tampered with, unlike in existing databases. This makes them a universal source of truth and an excellent tool for tracking and tracing the many different parties involved in industries like supply chains, energy, and finance.

Because blockchains are distributed over various nodes (the Bitcoin blockchain currently has almost 15,000 nodes), they are decentralized. This makes them inherently more secure than companies that use centralized servers and legacy internet technology to secure records, as there is no single point of failure in the case of an attack. Should one node go down, the ledger keeps going undeterred.

Cryptocurrency has often gotten a bad reputation for being pseudonymous (each wallet address is represented by a long string of numbers and letters rather than personal information) and accused of being a vehicle for criminals to launder money. However, law enforcement officials are increasingly discovering that blockchain's immutability and intact transaction history is actually helping them solve many crimes and deterring criminals, as it's much more traceable than fiat money like the US dollar.

How cryptocurrency works

To verify that transactions are valid and that no malicious transactions or double transactions are added to the chain, blockchains must come to a consensus. Depending on the blockchain in question, transactions are added in several different ways. For simplicity, let's take a look at the two most common. 

A blockchain like Bitcoin uses a consensus mechanism called Proof of Work (PoW). This follows process called "mining," in which miners solve complex mathematical puzzles by lending computing power to the network.

In Proof of Stake (PoS) blockchains, the process is different. Each block is added by validators lending capital ("stake") to the network. This is far more energy-efficient as it does not require extensive computing power but has come under criticism for being less decentralized (a PoS chain like Cosmos Hub, for example, has 150 nodes, compared to Bitcoin's 15,000). Ultimately, both systems have pros and cons, but transactions are added to an open ledger that verifies transaction data and cryptocurrency ownership. 

To incentivize miners and validators to stay online and lend time and resources to the network, the first one to add a block to a chain receives block rewards, which are comprised of cryptocurrency and a portion of the transaction fees for the block. The Bitcoin block reward is currently 6.25 BTC and is reduced every four years in a process called a Bitcoin Halving

Different cryptocurrencies have different ways of issuing their supplies. Bitcoin has a hard cap of 21 million, which means it has scarcity built-in, unlike inflationary fiat currency, which banks can reproduce at will. This makes BTC an efficient store of value over time, as it won't devalue like the US dollar. Other cryptocurrencies like XRP also have a capped supply, while others have unlimited supplies. It's certainly worth checking this out before investing, as cryptocurrencies that periodically release more units into circulation risk devaluing the price for all investors and may not make sense for a long-term investment.

How cryptocurrency was invented

The first cryptocurrency as we know it, Bitcoin, came about with the initial whitepaper that was released on October 31, 2008, by an unknown author using the pseudonym, Satoshi Nakamoto. It was called Bitcoin: A Peer-to-Peer Electronic Cash. The first BTC block was mined in January 2009. 

Bitcoin initially remained in the sphere of computer scientists and enthusiasts known as cypherpunks, and it wasn't until a few years later that more people heard about Bitcoin and infrastructure like data aggregators, online casinos, and cryptocurrency exchanges began to appear. 

Further cryptocurrencies also started to emerge, and markets began to take shape. These became known as "altcoins" ("alt" meaning "alternative," basically any coin that is not BTC). Some popular altcoins today include XRP (XRP), Ethereum (ETH), and Polkadot (DOT)

Cryptocurrency has suffered its ups and downs over the years, experiencing epic bull markets and savage bear markets that have led many to declare Bitcoin and its ilk as "a bubble" and pronounce it dead time and again. Yet, 13 years later, Bitcoin is still going strong, major institutions are investing and contributing to the ecosystem, and more than 13,000 altcoins have emerged.

Who invests in cryptocurrency?

While cryptocurrency was widely shunned in the beginning and even up until a few years ago, many people now invest in cryptocurrency, from retail traders who simply buy and hold (HODLing) to professional traders who profit using financial instruments like perpetual swaps and dated futures contracts.

Institutional investors also hold cryptocurrencies for many reasons, from an inflation hedge to a speculative vehicle and even a balance sheet asset. Global macro investor Paul Tudor Jones first publicly purchased BTC in 2020, calling it the "fastest horse" in an uncertain macro-economic outlook, and Elon Musk's Tesla made a significant $1.5 billion purchase in 2021, joining other public companies like MicroStrategy and Square. 

Many financial institutions like JPMorgan and BlackRock are also recognizing alternative assets like cryptocurrency for effective portfolio diversification and giving clients access to a high-growth market. While large, consumer-facing businesses, including Microsoft, PayPal, and Whole Foods, now also allow cryptocurrency to be used as a form of payment. 

Much of the action from large-scale investors surrounds Bitcoin as it has become sufficiently regulated to allow for the participation of strictly regulated institutions. However, there is a lot of promising innovation in the altcoin field, with decentralized finance (DeFi) and NFTs proving to be particularly popular.

With so many digital assets on the market, you can pretty much find one for just about any use case you can think of. Crypto is new and volatile, and there are still many tantalizing opportunities to get in before it hits the moon. But always do your research first, and use a trusted exchange like EQONEX to trade your crypto assets.

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