In this post, we'll cover the basics of cryptocurrencies and blockchains: how cryptocurrencies work. We'll analyze how cryptocurrencies first came into existence in 2009, the biggest developments in the space in a decade, and the main risks of investing in cryptocurrencies.
key terms
Cryptocurrency: all coins and tokens that have value
Crypto (Crypto): Refers to cryptocurrency or the entire encryption system (the two meanings are interchangeable)
Coins: Blockchain-native cryptocurrencies such as Bitcoin
*Coins mostly refers to Altcoins, commonly known as altcoins, referring to other cryptocurrencies after the successful issuance of Bitcoin
Tokens or Tokens: Cryptocurrencies that are not the native currency of the blockchain
Blockchain (Blockchain): the technology that supports the operation of cryptocurrencies
Miners: People who run and manage the blockchain on computers
As a reminder, cryptography, cryptocurrencies, coins, and tokens are often used interchangeably, or as substitutes for each other.
Since the world's first cryptocurrency, Bitcoin, came out on January 3, 2009, the value of the entire encryption market has risen to $1.7 trillion, equivalent to Canada's GDP. Today, the world's largest companies and asset managers are also entering the cryptocurrency market, buying, selling and trading cryptocurrencies, and even accepting them as payment methods. So, what exactly is cryptocurrency? What are the risks of using cryptocurrencies?
Birth of Bitcoin and the Blockchain
As many of you will probably remember, 2009 was the year that witnessed the worst financial crisis in history, a crisis brought on by the world's largest banks. These banks have been the beneficiaries of government bailouts and monetary easing programs (also known as money printing or quantitative easing) that have fundamentally changed the financial systems of most developed markets.
Interestingly, this financial revolution was largely foreseen by the creator of the world's first cryptocurrency, Bitcoin (BTC). He published Bitcoin's white paper in 2008, outlining a new, revolutionary monetary system based on a new form of technology: the blockchain.
Essentially, the blockchain is the "conveyor belt" on which cryptocurrencies operate. Like a giant digital ledger, the records govern all cryptocurrency transactions that take place within it. But unlike traditional ledgers, blockchains are completely transparent and 100% tamper-proof.
On the blockchain, anyone can check when a transaction occurred. This transparent ledger is stored on thousands of computers and is constantly updated, making the blockchain tamper-proof; any illegal changes are immediately spotted by this vast network of back-and-forth references.
Miners and cryptocurrencies keep this 'chain' running
The security and immutability of the blockchain make cryptocurrencies possible. No one can change the value in the blockchain without being noticed, so cryptocurrencies sitting on the blockchain cannot be counterfeited or duplicated. This all makes the blockchain an ideal environment for minting trusted "money".
Bitcoin (BTC) and its cryptocurrency counterparts are digital forms of money that, unlike other things in the "real world" or fiat currencies, cannot be counterfeited or counterfeited. This makes cryptocurrencies extremely attractive to the kind of people who work to build their own blockchains and ecosystems — blockchain miners.
Each blockchain exists with the help of a large number of miners, making the entire blockchain run on thousands of computers. Earning cryptocurrency is what motivates these miners to use their computing power and energy to validate and update the blockchain in order to ensure that the blockchain operates securely.
Enter the Era of Ethereum, Unlimited Cryptocurrencies
Bitcoin and the Bitcoin blockchain were invented at the same time, a secure system that produces a secure currency that motivates people to keep the system secure. It's an amazing invention and the first of its kind; it's just that the way Bitcoin was designed and coded limits how the Bitcoin blockchain can be used.
The bitcoin blockchain is not programmable: it can only hold bitcoins. This limitation gave birth to the second largest blockchain in the world today: Ethereum. Ethereum has been dubbed the "world computer" because it is a fully programmable blockchain whose security and open-source coding provides a platform for the development of innovative projects and chains that can then run.
Like Bitcoin, Ethereum minted its own cryptocurrency: Ether (ETH), which is used as a form of payment for all transactions on the chain (also known as "gas fee"). Additionally, projects running on Ethereum can issue their own cryptocurrencies, called ERC-20 tokens. Ethereum-based projects can independently mint tokens and then trade them across the entire Ethereum ecosystem.
It turns out that the next generation of blockchains will be more open, more dynamic, and have more use cases. Countless inspiring and creative talents in the industry are dreaming of the countless possibilities of blockchain technology. New blockchains are emerging all the time, existing ones are constantly running, and each blockchain has its own coin, programming design, and endless possibilities.
What is the value of cryptocurrency?
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(Bitcoin value change since public trade)
The answer to this question is that all "money" is conceptual, and its value is simply a product of market decisions, whether it's the dollar exchange rate or Microsoft's stock price. All these parameters are set by different participants including the central bank and investors, and then buying and selling behaviors are generated, and the final asset value is determined by this activity. The same is true for cryptocurrencies.
Like any other asset, each cryptocurrency has its own drivers that affect value. For Bitcoin, this driver is scarcity - only a maximum of 21 million can be minted. Because of its finiteness, it is as valuable as gold. For Ethereum, as the native token of Ethereum, its value lies in the fact that it is the engine of the entire cryptocurrency world.
Ultimately, the value of any cryptocurrency will be determined by the number of people buying and selling it, often driven by volatile emotions, like shares on the stock market. And like stocks, it doesn't always make sense.
Risks Associated with Encryption
When it comes to cryptocurrencies, people are concerned about the risks associated with them, and not without reason. As an "unregulated" area, the cryptocurrency world has no guarantees. If you put money in a wallet or transact on the blockchain, security will be determined and overseen by the company and/or developer who created it. And as an emerging technology, blockchain and cryptocurrencies are vulnerable to attacks and fraud.
These include some early thefts in the cryptocurrency market, most notably Mt. Gox in 2014, which cost users $460 million that could never be refunded. The initial coin offering (ICO) craze of 2018 also saw many investors being duped by developers with new projects and tokens that were completely bogus (which also led to a complete ban on ICOs by US authorities).
In addition to this, "volatility" is well known as one of the properties of cryptocurrencies, and Bitcoin is often subject to daily fluctuations. While a 20% plunge is a technical indicator of a full-blown recession in traditional finance, for Bitcoin it's just normal day-to-day volatility, and for some newer, more idiosyncratic cryptocurrencies, it hardly counts. What
The pitfalls of traditional finance
In the world of traditional finance, however, the events leading up to the global financial crisis are often not these scams. This takes into account the times we live in now. The solid and safe savings opportunities that traditional banks once offered are all but gone in most developed markets, where money printing has caused interest rates to rock bottom; Savers are effectively taking losses every year.
Indeed, for over a decade, the only way to generate a real return on capital was to invest it in the stock market. But in the stock market, investing can be just as risky as cryptocurrencies, regulated or not.
In contrast, those who have concerns about the volatility of traditional cryptocurrencies can also use stablecoins linked to fiat currencies in the "real world" and invest in some cryptocurrency asset management platforms to achieve annual returns of up to 20% ( APY).
For many, cryptocurrencies and blockchain technology are simply an extension of the global drive toward greater digitization, a world in which all people increasingly depend on their lives online. From this perspective, a currency based on a transparent, immune-to-interference digital chain is indeed easier to understand than the various complicated ledgers held by disconnected banks.
