12 Jan, 20

What is Cryptocurrency?

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Nico Gorrono

In this article, Nico Gorrono provides details on the newest and most disruptive asset class of the 21st century to answer the question: what is cryptocurrency?

What is Cryptocurrency?

Cryptocurrencies are virtual currencies that have value attached to them. These currencies are secured by cryptography, which makes them nearly impossible to counterfeit or double spend. There are many different types of cryptocurrencies, offering a range of different utilities. 

Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value. There are, for example, ‘Governance tokens’ that provide the holders with certain voting rights that influence a protocol’s direction, and some can even be used to participate in specific software programs such as games and financial products.

Most people start their journey into crypto by first learning about the oldest and largest cryptocurrency, Bitcoin – We have a video and an article dedicated to Bitcoin here.

At Zerocap, we often say that “Bitcoin is King” – because even though over 10,000 different cryptocurrencies currently exist, it has successfully maintained its dominance as the most valuable and widely adopted asset in the crypto space.

How do cryptocurrencies work?

One of the most exciting aspects of most cryptocurrencies is they run on decentralized networks through their underpinning technology – ‘blockchain’; a record of all transactions and wallet balances on the network. Blockchain acts as a distributed ledger enforced by a dispersed network of Nodes (or Computers).  

Cryptocurrencies represent a new, decentralised paradigm for money, where centralised entities such as banks and monetary institutions are not necessary to enforce trust between two parties. This system of cryptocurrencies eliminates the possibility of a single point of failure.

Cryptocurrency transactions occur through electronic messages that are sent to the entire network with instructions about the transaction. The instructions include information such as the electronic addresses of the parties involved, the quantity of currency to be traded, and a timestamp so we know when the transaction occurred. Transactions in blockchains are immutable and therefore cannot be deleted nor edited – once it has gone through, it’s permanent. 

Types of Cryptocurrencies

Altcoins

Tokens, cryptocurrencies, and other types of digital assets that are not Bitcoin are collectively known as alternative cryptocurrencies, typically shortened to “altcoins.” 

Altcoins often have underlying differences when compared to Bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than Bitcoin’s 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin.[39] Another example is Ethereum, which has smart contract functionality that allows decentralised applications to be run on its blockchain – like decentralized apps (dApps) and NFTs. More on Ethereum in a future article and video.

Stablecoins

Stablecoins bridge the worlds of cryptocurrency and everyday fiat currency because their prices are pegged to a reserve asset like the U.S. dollar or gold. This dramatically reduces the volatility that usually comes with Cryptocurrencies and results in a form of digital money that is better suited to day-to-day commerce and transfers between exchanges.

Outro

Before investing in any type of cryptocurrency we urge you to do your own thorough research to determine if Cryptocurrency investing is right for you. The cryptocurrency space can move and develop at an incredible pace and it can often be hard to keep up with it all. Not to mention filtering through the right information. If you want to stay updated with all the important and relevant crypto news around the globe, you can join our free newsletter where we publish weekly crypto analyses and quarterly market reports.

About Zerocap

Zerocap provides digital asset investment and custodial services to forward-thinking investors and institutions globally. Our investment team and Wealth Platform offer frictionless access to digital assets with industry-leading security. To learn more, contact the team at [email protected] or visit our website www.zerocap.com 

FAQs

1. What Is Cryptocurrency, and How Does It Utilize Blockchain Technology?

Answer: Cryptocurrency is a virtual currency secured by cryptography, making it nearly impossible to counterfeit or double-spend. It can be used as a unit of exchange, store of value, or even for specific functions like governance or participation in software programs. Cryptocurrencies run on decentralized networks using blockchain technology, a distributed ledger enforced by a dispersed network of nodes. This decentralized paradigm eliminates the need for centralized entities like banks, ensuring trust between parties and preventing a single point of failure.

2. What Are the Different Types of Cryptocurrencies, and How Do They Vary?

Answer: Cryptocurrencies can be categorized into different types, such as Bitcoin, Altcoins, and Stablecoins. Bitcoin is the oldest and most valuable cryptocurrency. Altcoins include all digital assets other than Bitcoin, like Litecoin and Ethereum, each with unique features and functionalities. Stablecoins are pegged to reserve assets like the U.S. dollar or gold, reducing volatility and making them suitable for daily commerce and transfers between exchanges.

3. How Do Cryptocurrency Transactions Work, and What Makes Them Immutable?

Answer: Cryptocurrency transactions occur through electronic messages sent to the entire network, containing details like the addresses of the parties involved, the quantity of currency traded, and a timestamp. Once a transaction is recorded on the blockchain, it becomes immutable, meaning it cannot be deleted or edited. This permanence ensures the integrity and security of the transactions, making them transparent and trustworthy.

4. How Do Altcoins Differ from Bitcoin, and What Are Some Examples?

Answer: Altcoins, short for alternative cryptocurrencies, often have underlying differences compared to Bitcoin. For example, Litecoin processes blocks every 2.5 minutes instead of Bitcoin’s 10 minutes, allowing faster transaction confirmation. Ethereum, another example, has smart contract functionality that enables decentralized applications (dApps) and Non-Fungible Tokens (NFTs) to run on its blockchain. These variations make altcoins unique in their applications and use cases.

5. What Are Stablecoins, and How Do They Bridge the Gap Between Cryptocurrency and Fiat Currency?

Answer: Stablecoins are a type of cryptocurrency whose value is pegged to a reserve asset like the U.S. dollar or gold. This pegging reduces the typical volatility associated with cryptocurrencies, resulting in a digital form of money better suited for day-to-day commerce and transfers between exchanges. By bridging the worlds of cryptocurrency and fiat currency, stablecoins offer a more stable and accessible option for users.

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