Cryptocurrency 101 Blog

Cryptocurrency 101: 4 Types You Should Know

As of June 2021, there are 10,000 types of cryptocurrency. Yes, really. What’s even more shocking is that this number is up from just 4,000 in January 2021. Cryptocurrency is exploding in popularity and value. So I decided to do a deep dive into what some are calling the future of money. I researched as many definitions as I could find and explored four popular types. Here is what I learned.

What is a Cryptocurrency?

Cryptocurrency is a digital currency in which transactions are verified and recorded by a decentralized blockchain system instead of a centralized authority like a bank.

Still, confused? It’s ok; that’s a normal reaction. When Elon Musk attempted to explain cryptocurrency in an SNL sketch, the whole punchline centered around the principles being too hard to grasp.

The concept goes over our heads because it’s based on technology that ordinary people don’t interact with or have a frame of reference for. To understand cryptocurrency, you need to understand the blockchain. 

The Blockchain

Blockchain technology allows a system to securely record information in a way that makes it difficult or impossible to cheat, hack or change. The security features of the blockchain make it ideal for secure financial transactions. 

Blocks in the blockchain are records that are linked together using cryptography. Each block contains a one-way algorithm or “hash function” based on the block that comes before it. For this reason, a block is permanently linked to the blocks that come before and after it. The data is resistant to modification because it cannot be altered retroactively without altering other blocks in the chain.

If you want to buy, sell or exchange cryptocurrency, you can do so by adding a new record to the blockchain. Once the record is verified (more on that in a minute) the transaction is complete and irreversible.

Cryptocurrency gets its name from cryptography, which is the practice and study of techniques for secure communication. 

By Gary Fox

The Inventor of Cryptocurrency

Cryptocurrency was created by Satoshi Nakamoto. The name is Japanese and likely a pseudonym for a person or group of people. Nakamoto devised the very first blockchain database, which was introduced in a white paper in late 2008 called Bitcoin: A Peer-to-Peer Electronic Cash System.

The anonymous creator(s) then collaborated with other developers refining the technology until the mid-2010s when they turned over control of the source code repository and network alert key to David Andersen and related domains to other prominent bitcoin community members. 

Why Create Cryptocurrency?

The most straightforward answer you’ll find is to remove reliance on banks or other third parties to make digital transactions. Digital transactions using traditional currencies force us to interact with an intermediary. Although this seems normal to us, Nakamoto envisioned a system that could eliminate reliance on a third party and make transactions exclusively peer-to-peer.

Think of digital transactions like handshakes. Anytime we purchase something with a bank card, our money must pass through the bank before it goes to the retailer. Essentially, we must shake hands with the bank, who then shakes hands with the retailer. 

The entity that benefits most from this system is the bank. Banks profit when we entrust them with our money; they also charge us all sorts of fees depending on how we want to use it. Likewise, retailers pay credit card processing fees, and banks get richer and richer.

By being peer-to-peer, cryptocurrency eliminates that dynamic and does so in a way that is as secure, if not more secure, than what traditional banks offer. It also liberates currency from governments and international borders. The ethical and political implications are a big part of the development of cryptocurrency.  

4 Types of Cryptocurrency You Should Know

I couldn’t explore all 10,000 types of cryptocurrency but instead reviewed the history of four popular forms. For context, crypto-assets are sorted into two categories: native coins and crypto tokens. 

Native Coins: These compete with traditional forms of currency and are designed to pay for goods and services from any business that accepts that type of coin. A crypto coin is part of an original blockchain. 

Crypto Tokens: These are issued for a specific purpose and are usually a part of an existing blockchain. For example, a business can issue tokens to investors to represent its share of a business. In some sense, tokens are easier to create but more complex than coins because they are used in many different ways.

1. Bitcoin

Bitcoin is the very first and oldest cryptocurrency. As of June 2021, over 18.7 million bitcoins are in circulation, with a total market cap of around $689 billion. The value is fluctuating and recently exceeded 1 trillion (the first cryptocurrency to do so) before coming back down.  

You can obtain bitcoin in three ways. It can be bought on an exchange, received for goods and services, or mined. 

“Mining” is slang for the discovery of new bitcoins. In reality, mining is verifying bitcoin transactions in exchange for new coins not previously in circulation. Users can mine bitcoins by performing an essential maintenance service for the bitcoin ledger. 

Downloading bitcoin software and dedicating server space and time to verify and publish bitcoin transactions to the blockchain will earn you newly minted coins. New bitcoins are minted into circulation when new blocks are added to the blockchain. 

Bitcoin has a maximum supply of 21 million, and there are 18.9 million in circulation. Approximately 900 news bitcoins are minted every day as the blockchain grows. The system is designed to enter new coins into the system at a fixed rate to avoid the pitfalls of inflation. At this fixed-rate, all 21 million bitcoins will be in circulation by 2140.

Fortunately, bitcoin is also designed to be infinitely divisible to adjust for fluctuations in value.  

2. Ethereum

Ethereum is a digital blockchain that records transactions of digital tokens. After bitcoin, it is the second largest in the market. Still, it is significantly smaller than bitcoin, with a current market cap of $307 billion. There are currently over 116 million tokens in circulation.

The native token type is called Ether, but many others are developed for use in specific contracts that can be recorded on the Ethereum blockchain.

Tokens used within Ethereum, excluding Ether, are stored in smart contracts and can be traded or exchanged for Ether value (fungible) or something with a unique value, like artwork (non-fungible).

Ethereum was founded in 2013 by programmer Vitalik Buterin and was crowdfunded into existence in 2014. It went live in 2015. The platform allows developers to create financial applications and services without involving brokerages, exchanges, or banks. It has also become a marketplace for the exchange of digital assets via non-fungible tokens. 

3. Ripple

Ripple is a system that acts both as a digital payment network for many different types of currency and as a cryptocurrency. The native coin, called XRP, is pre-mined, and there are currently 99 billion in circulation with a total market cap of $96 billion.

Unlike Bitcoin and Ethereum, XRP is pre-mined, and new coins are issued by Ripple, which acts as a centralized authority. It is common for a new cryptocurrency to be pre-mined to distribute more coins. For example, Ethereum distributed pre-mined Ether in Initial Coin Offerings (ICOs) to reward investors before switching to a mineable model.  

Ripple founders Chris Larsen and Jed McCaleb created and released XRP in 2012.

4. DogeCoin

DogeCoin was created in 2013 as a joke by software engineers Billy Markus and Jackson Palmer. They wanted to poke fun at cryptocurrencies and used a popular internet meme as the brand for their satirical cryptocurrency. Dogecoins feature the face of the Shiba Inu dog from the famous “doge” meme. 

Despite its sardonic origins, DogeCoin has become a legitimate currency and investment. It has a current market cap of $47.8 billion, and there are 129 billion coins currently in circulation. Like bitcoin, dogecoin can be mined and infinitely divisible. However, unlike bitcoin, the supply is not limited, so it is considered an inflationary cryptocurrency. 

Challenges Facing Cryptocurrency

In the past, the challenges facing cryptocurrency were centered around government regulation and efforts to prevent it from being used for illegal transactions. In the early 2010s, bitcoins were the only form of currency allowed on a darknet marketplace called Silk Road. After an FBI investigation, the marketplace was shut down for criminal activity, including drug trafficking and money laundering. The association between cryptocurrency and criminal activity tarnished its reputation. 

However, the effects of the scandal were not permanent. Cryptocurrencies continued to grow and experienced a surge in 2020, driven mainly by financial institutions and investment whales. 

Rapid growth invites new challenges. Speculative trading causes market values to fluctuate wildly. For example, the market cap for bitcoin recently surpassed $1 trillion before falling back to $689 billion in a span of a few weeks. 

As these currencies grow in popularity and value, governments are working to regulate them. Regulatory challenges make an already complex financial system even more difficult for investors to navigate. 

Lastly, the inner workings of cryptocurrency and the blockchain are still relatively unknown and misunderstood. This creates a considerable barrier to entry for most investors and consumers.  

Start Trading Cryptocurrency

Despite the complexity, everyday investors have shown a growing interest in cryptocurrency. Online marketplaces for buying, trading, and selling coins, called crypto exchanges make it easier to get started.

Some cryptocurrencies can be purchased and traded on single currency exchanges like bitcoin.org. You can also explore in a wide variety of cryptocurrencies on exchanges that buy, sell and trade more than one type.  

Concerns about scams are legitimate and intimidating, so it’s essential to research these exchanges and do business on reputable sites like:

  • Coinbase and Coinbase Pro – Good for managing a diverse portfolio
  • Cash App – Good for Beginners
  • Binance – Good for “altcoins” (cryptos other than bitcoin)
  • Bisq – Good for those who want to trade anonymously on a decentralized exchange

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