What is Cryptocurrency? Introduction To The Emerging Financial Asset Class

Cryptocurrencies are digital currencies built on blockchain technology that exploded in a few years from an industry worth just millions of dollars into a booming multi-billion dollar industry.

However, understanding cryptocurrency technology and wading through all the different types of altcoins out there can be confusing and complicated.

This guide offers everything you need to know to learn about the cryptocurrency market, from the basics to beyond. Included are a number of examples of the various types of digital currencies available on the market, explanations on how to buy and sell crypto assets to make money, details on cryptocurrency mining, and much more.

Crypto Definition: What Is The Meaning of Cryptocurrency?

Cryptocurrency is a broad term that refers to any digital asset that works as a transfer of value and medium of exchange, where both the coin or token and transaction records are stored via the blockchain using cryptography for security, verification, and more.

Often, these new assets are decentralized and controlled by no central authority and without the need for a trusted third party, and feature a limited supply that gives them unique benefits that fiat cannot.

Crypto assets are stored in a digital wallet existing on the blockchain, protected by a cryptographic private key for additional security. Cryptocurrencies can be sent similar to an electronic payment system to a public address, which is an abbreviated public key.

All transactions are stored on a distributed ledger completely transparent for anyone to view over a blockchain explorer tool. Because all accounts are based on cryptography, and transactions must be validated before each new block is added to the blockchain, there is no risk of counterfeit crypto.

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The Brief History of the Cryptocurrency Asset Class, Bitcoin, and Altcoins

Bitcoin was the first ever cryptocurrency, developed by the pseudonymous Satoshi Nakamoto – a person or group whose identity is still unknown even today. From the original cryptocurrency, an entire industry was born, starting a digital currency and blockchain revolution.

After Bitcoin, altcoins were created, most with the goal of improving upon challenges with the Bitcoin network, such as its large block size, slow transaction times, and high fees. Although second-layer technologies such as Lightning now exist to improve upon BTC.

For example, Ripple and its XRP native protocol token were designed to be faster than Bitcoin and offer much lower fees. Ethereum, however, is entirely different, instead acting as a platform for smart-contracts.

Litecoin was created to be the silver to Bitcoin as digital gold and yet another form of digital cash system. IOTA was created to support microtransactions across the Internet of Things. Privacy coins let users send obfuscated transactions anonymously. Others solve Bitcoin’s scaling issues while still acting primarily as a payment cryptocurrency.

There are now thousands of different altcoins that exist, most born during the initial coin offering boom and resulting cryptocurrency financial bubble. Most of them are useless and virtually worthless. Many projects have been completely abandoned. A rare few are diamonds in the rough that will some day turn out to be the crypto counterparts of Amazon, Apple, and other tech giants that rule today, but were born during the dot com bubble.

Over the years, several additional use cases have arisen beyond merely acting as a peer-to-peer payment currency. For example, stablecoins are crypto tokens that are backed by and tied 1:1 to fiat currencies like the dollar.

Utility tokens often provide utility beyond simply transacting on a protocol. Newer crypto tokens allow token staking, where interest is earned. Even newer altcoins yet, power new decentralized finance applications where crypto tokens can be lent out, and an annual percentage yield gained.

It is the endless applications built by innovative developers that give the emerging technology and asset class its powerful potential.

It is this potential that drives the asset’s valuation. Cryptocurrencies have use cases in mind but aren’t currently widely used enough for those use cases to become realized during daily life. So for now, all valuations and price action is based primarily on speculation, with secondary effects from supply and demand.

Supply and demand in these often fixed or limited supply assets will become more critical as each unique asset becomes more adopted, and those factors are given more weight over speculation and hype.

How Does Cryptocurrency Work? What You Need To Know

Cryptocurrencies all work via different methods and consensus mechanisms. Bitcoin and several others like it, use a process called proof-of-working which involves miners that unlock additional coins through validating each block before it is added to the blockchain.

Other altcoins like Ethereum are proof-of-stake coins. Elsewhere in the crypto market, some coins are built on entirely unique technology such as IOTA’s Tangle, or Nano’s block-lattice.

Whatever the mechanism, all cryptocurrencies involve a distributed and transparent ledger where all transactions are verified and recorded.

Part of what makes cryptocurrencies like Bitcoin so attractive is the unmatched transparency blockchain provides. Because all transactions are publicly viewable and recorded, it ensures all transactions are fair and valid. No counterfeit coins or transactions, nor any double spending is possible.

Cryptocurrencies allow users to be their own bank account through a crypto wallet that exists on the blockchain.

What Determines Prices in the Crypto Market?

Valuations are primarily speculative because the asset class is so new and doesn’t yet have active use cases, nor are they widely adopted. Due to this, these assets are notably more volatile than others.

These asset valuations aren’t only speculative, however, there are supply and demand market dynamics to consider. And of course, value is in the eye of the beholder, so long as there is someone on the buy and sell side of the trade, there will always be price action taking place.

Certain events, regulation changes, and more can impact prices. Specific categories of assets may perform better than others at certain times. The impact of USD and Bitcoin can also dramatically affect the valuations of other cryptocurrencies. Bitcoin is currently the most dominant cryptocurrency, so if it crashes, even if other altcoins are soaring in value, a correction is likely.

Even things like social media sentiment, fake FUD news, hacks, or other crypto-related crime can affect asset valuations.

What Can You Do With Cryptocurrency?

There are several things you can do with or around the cryptocurrency industry. Here are some of the most common things to do with cryptocurrencies.

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Cryptocurrency Mining

Cryptocurrency mining involves utilizing sophisticated machinery to turn energy into hash power, keeping a blockchain network secure, operating, and all transactions on it valid.

Pros:

• Mining cryptocurrency has a secondary effect of helping secure and power a cryptocurrency network. By contributing to the network of your favorite cryptocurrency, you can feel more part of the movement and the solutions it provides.
• Mining provides a learning experience about a different side of cryptocurrencies.
• Mining unlocks new crypto assets once you really get going.

Cons:

• Cryptocurrency mining is hugely energy intensive, so it is essential that any crypto earned outweighs the cost of energy and equipment.
• Cryptocurrency miners generate extreme amounts of heat, requiring cooling efforts or the risk of failure is possible. This also increases energy costs further.
• Cryptocurrency mining isn’t as profitable as it used to be for individual tech enthusiasts and now requires large-scale operations to be successful.

Buying and Holding Crypto Assets

If you aren’t interested in mining for crypto assets or it is too expensive to do profitably, the next best way to acquire crypto is by simply buying Bitcoin or altcoins from a cryptocurrency exchange or trading platform. PrimeXBT, for example, allows users to buy Bitcoins right from their account dashboard.

Pros:

• Buying cryptocurrencies exposes you to the cryptocurrency market. In the past, Bitcoin has risen from virtually worthless to be worth $20,000.
• Cryptocurrencies are a great way to start investing, and because the market is unregulated, any investor can buy in at any time and at any income level.
• Owning cryptocurrencies allows you to use them in various ways, either by being a sender, receiver, or simply storing the assets for later.

Cons:

• Investing in cryptocurrencies can be risky, only invest what you can comfortably afford to lose.
• Holding cryptocurrencies only and not trading can result in losses or minimal return on investment.
• Buying crypto assets involves being your own bank account and storing crypto assets yourself in a wallet, either on an exchange through a hot wallet or via a cold storage wallet solution.

Trading Cryptocurrencies For Profit

Trading cryptocurrencies of all types, including Bitcoin or altcoins, can be extremely profitable. However, it does involve some investment in terms of time, practice, learning, and skill.

Pros:

• Highly profitable, buying high, and selling low keeps capital protected and growing.
• Take advantage of markets no matter the direction of the trend using long or short positions.
• Adding in leverage can enable even more profitably and amplified returns.
• Provides better protection from crypto market drawdowns and signature volatility.

Cons:

• Trading does come with risks, so proper risk management strategies are paramount to protecting capital from loss. Losses will deduct from your account.
• Trading also requires some natural talent, skill, and possibly education to obtain such skills. It is also essential to stay calm and keep emotions like anger and fear at bay.

Most Common Cryptocurrencies Found Across the Crypto Industry

There are several types of cryptocurrencies dominating the market, however, new categories are always emerging as developers find new ways to exploit and utilize the technology.

Here are the most common categories of cryptocurrencies found throughout the industry.

Payment currencies like Bitcoin and Litecoin are used to send and receive money, act as a form of payment system for merchants, and be a store of value.

Utility tokens act as the native token required to protocol-related economies, dApps (decentralized applications), and more.

Stablecoins are cryptocurrency tokens bound directly to a corresponding fiat currency, typically the dollar. These tokens are designed both for familiarity and stability in price and are used as a safe haven protecting capital from the crypto market’s notorious volatility. This type of token, while not entirely stable, can also be bound to other assets like gold, and therefore would respect gold prices on the XAUUSD pair.

Privacy coins like Monero or Grin hide addresses, transaction values, and more to provide full anonymity to users. However, this type of asset is not favored in countries like the United States, where know-your-customer policies are required to log all related transaction data.

However, this is precisely why these coins exist – to provide users with unparalleled financial privacy that no other asset can. Not even Bitcoin can.

Exchange tokens give traders on the platform certain benefits for holding the asset. These somewhat fall into the category of utility but deserve a class of their own as they have zero utility off those platforms otherwise.

Security tokens are tokenized equities that follow a regulatory process to ensure compliance with the SEC.

Are Cryptocurrencies A Good Investment?

Cryptocurrencies like Bitcoin are just over a decade old but still make a good investment. In fact, they make a lot better of an investment now than they did years earlier.

When Bitcoin first exploded into the public eye and became a household name, even earning it a dictionary feature and mention on TV shows like Jeopardy, cryptocurrencies were unheard of.

But as people learned of the life-generating wealth that early Bitcoin investors made just by stumbling upon the budding electronic payment system turned financial phenomenon, they rushed into the crypto market head first, and bought up any asset they could.

The altcoin market exploded just as Bitcoin became overvalued. Just as early investors began to take profit, altcoins boomed in value, and each day, new coins were created in initial coin offerings. Eventually, the market became so overinflated and valuations so far outside of reality, there was no denying the crypto market had become a bubble.

This bubble popped in early 2018, and it resulted in almost all altcoins dropping by 90% or more, and Bitcoin falling over 80% to its bottom at $3,200.

It has now been well over a year since that bottom was set, and even Black Thursday in 2020 couldn’t take the price of Bitcoin and other cryptocurrencies lower. If that couldn’t take the market down to a lower low, nothing will.

Bitcoin is once again building up pressure and ready to go on another parabolic bull run. The asset’s halving is now in the past, and all that’s left is resistance between the asset and retesting its former all time high at $20,000.

Bitcoin itself is an excellent investment once again. Altcoins that remain down by 90% or more might even be a better investment, at peak financial return.

Like any investment, however, losses instead are possible, and the crypto market is especially vulnerable to things like risk. With the economy in tough shape, there is always a chance that crypto suffers as a result.

Of course, due to the asset classes’ limited supplies, they may behave more like gold and instead act as a safe haven during times of economic distress. However, like all things with the primarily speculation driven assets, it is too early to tell if this use case comes true or not.

According to the journalistic authority CoinTelegraph, Chamath Palihapitiya, the billionaire CEO of Virgin Galactic, recommends everyone hold Bitcoin BTC as a method of “crisis insurance” due to these very same attributes.

Paul Tudor Jones, billionaire hedge fund manager, also views Bitcoin as a great hedge against inflation, perhaps even better than gold, which he compared the crypto asset to.

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Conclusion: Buy and Trade Cryptocurrency With The PrimeXBT Advanced Trading Platform

Now that you have learned all there is to know about Bitcoin and other cryptocurrencies in this guide, you can now decide if buying crypto is right for you, or if you are interested in considering other options such as mining or trading.

Trading cryptocurrencies can be especially lucrative compared to buying and holding, providing more opportunities to generate ROI from each of the crypto market’s signature price swings.

After Bitcoin fell from its all-time high at $20,000 to $3,200, for example, the crypto asset rocketed back to $14,000. However, it later fell to under $4,000 again on Black Thursday. Investors who held the entire duration would have ended up with $600 for the wild, year-long ride. Traders, however, could have profited enormously from each price swing in between.

Altcoins provide even more volatility than even Bitcoin, therefore even a wider margin for profits to be generated.

Cryptocurrencies can be traded at the award-winning Bitcoin-based trading platform PrimeXBT. PrimeXBT boasts over $800 mln in daily trading volume across forex, commodities, stock indices, and crypto assets like Bitcoin, Ethereum, EOS, Litecoin, and Ripple.

Using the powerful platform designed for new traders and experienced professionals alike, users can take advantage of built-in technical analysis software, stop loss and take profit orders, and long and short positions so they can profit from whichever way the market turns next.

The platform also offers a four-level referral program so users can build a network of commission-generating traders. A progress fee discount system also incentivizes traders to take more positions more frequently, lowering their overall fee impact.

Registration takes just 60 seconds or less, and any issues that arise will quickly be resolved by friendly support staff available 24/7.

The cryptocurrency asset class provides an incredible financial opportunity at every turn. Having a platform like PrimeXBT in your arsenal will only help to keep risks to a minimum and improve success rates using the cutting edge tools.