What Is Cryptocurrency? (Cryptocurrency for Dummies)
Of course, you’ve heard of fiat, stocks, or commodities trading, but cryptocurrency might be something new. To help you understand what cryptocurrency is all about, we highlighted some essential crypto facts and the hypes circulating the crypto space. We dissect the differences of Bitcoin, altcoins, blockchain technologies, and the latest projects, including Decentralized Finance (DeFi), to help you get better clarity on cryptocurrency. To start, start by understanding what cryptocurrency is all about.
A cryptocurrency refers to a digital or virtual currency. Cryptocurrencies usually operate using decentralized blockchain technology, are created through mining, and use cryptography to store transactions. Crypto is often used for a variety of functions, ranging from everyday transactions to money transfers.
How Does Cryptocurrency Work?
Bitcoin is by far the most popular cryptocurrency with the most significant market cap. But there are over 5,000 altcoins in existence, including ETH, XRP, LINK, and more. However, these cryptocurrencies do not share the same goals, and certain elements set them apart.
Essentially, a blockchain is a public ledger that records transactions onto a decentralized, peer-to-peer network. Because of blockchain’s decentralized nature and the absence of any central authority, through cryptography transactions, nodes are validated and recorded before blocks are added to the blockchain.
As well as utilizing blockchain technology, most cryptocurrencies are created through the process of mining. Most also have a finite supply. Bitcoin has a supply of 21 million, with the last scheduled to be mined by 2140.
For transactions to be verified, there needs to be a consensus on the network. And these most used consensus mechanisms include the Proof of Work and Proof of Stake.
Proof of Work: Proof of Work (PoW) is used by Bitcoin and other cryptocurrencies such as Litecoin. Miners compete to validate transactions to create blocks and get rewards as an exchange for the service (in the form of new units of cryptocurrency.) And the rewards for miners will vary between cryptocurrencies. For instance, a Bitcoin miner will get 6.25 BTC for every successful validation of a block.
Proof of Stake: Proof of Stake (PoS) is used by cryptocurrencies such as Ether. The Ethereum blockchain initially used PoW, but this has been replaced with PoS for Ethereum 2.0 hard fork. With Proof of Stake, the blocks are rewarded on a random basis. However, the consensus depends on the coins a miner has. The more tokens a miner holds, the higher their chance of being rewarded for validating a new block. For instance, if a miner owns 2% of the available Bitcoin, they can, in theory, be awarded 2% of the available blocks.
However, not all cryptocurrencies utilize blockchain technology and mining. Take XRP, for example, which is minted by its parent company Ripple. For every 100 billion coins that were minted initially will be released on a gradual basis. At this stage, there are around 38 billion are currently in circulation.
What Is Cryptocurrency Used For?
Cryptocurrencies are in demand for their decentralized nature. Plus, the broad pool of acceptance beyond the crypto communities makes cryptocurrency accessible for many things. Let’s take a look at some of their uses.
Cryptocurrencies are becoming the norm for everyday transactions, although volatility is still a significant factor in why more merchants don’t accept them as a payment method. However, there have been major developments in this area in 2020. For example, Visa and Mastercard softened their crypto stance, and Paypal is announcing plans to launch crypto sales to its 300 million user base.
With such major payment providers on board, it could potentially open the floodgates for merchants accepting cryptocurrency on a wide scale. Check out our guide on Where Can You Spend Bitcoin? for a run-through on what online and offline merchants currently accept Bitcoin as a form of payment.
Meaning decentralized finance, DeFi has been a critical buzzword dominating the conversation in the world of crypto in recent times. It is a movement intent on recreating traditional centralized financial services, such as loans and insurance, through decentralized blockchain technology and the use of smart contracts and decentralized apps (DApps).
Some cryptocurrencies can be used for the facilitation of money transfers. One such currency is the XRP, using the Ripple network. Many central banks such as Barclays and HSBC now accept XRP for money transfers. This approach is replacing the hefty transfer fees with ultra-low transaction fees and processing times for a more efficient money transfer system.
Store of Value
The question of cryptocurrencies – particularly Bitcoin – being stores of value or ‘digital gold’ has been debated for several years. Although volatility continues to be a barrier in this respect, many industry analysts believe that Bitcoin and crypto’s continuing rise in popularity is a good signal for the future. Renowned trader and crypto analyst Tony Veys had this to say to the Coin Telegraph:
“Bitcoin might be the greatest store of value in the history of the world. Yes, it’s volatile – as it’s only been useful for about seven years – but its ‘un-confiscatability’ property is unmatched. That is its actual store of value, as gold is confiscatable and all other assets even more manageable.”
Cryptocurrency also opened up numerous opportunities for beginners and advanced traders to diversify their trading options. While stocks, forex, and commodities trading may be the norm, crypto trading helps broaden one’s investment portfolio. Of which, Bybit is an ideal cryptocurrency derivatives exchange offering perpetual contracts, to begin with. Similar to futures contracts, crypto trading possesses the only difference of no expiry date.
Besides, one of the advantages of perpetual contracts is that they offer up to 100x leverage. In the regular spot margin market, 3-5x leverage is commonplace, with borrowing costs often being high. While the usual leverage offers on crypto exchanges are only 5-20x for regular futures contracts.
To Fight Against Corruption and Poverty
Cryptocurrencies give a financial identity to some of the 40% of adults around the world who don’t have a bank account, of which most are from developing countries. While in some countries, such as Myanmar, the figure is as high as a whopping 95%. A few reasons are living too far from a bank, not having enough assets, or lacking the necessary documentation.
What cryptocurrency and blockchain technology can do for these people is to bring them financial inclusion. This is important to build up savings and credit, receive loans, pay for goods and services online, and make investments, something they couldn’t have done previously. These things can, in turn, help to reduce poverty.
With cryptocurrency, an unbanked individual can finally own digital identity. There are also some Ethereum based projects which are already putting this into practice. OmiseGo is one such example. Although still in its early stages, the ambitious network aims to promote financial inclusion by creating a secure, accessible, and scalable platform by which transactions across eWallets can be done quickly and safely.
How Do You Send and Receive Cryptocurrency?
To send and receive cryptocurrency, you need a crypto wallet.
On Bybit, you can send and receive BTC, ETH, XRP, EOS, and USDT.
Check our help center article on How to Make a Deposit and Withdrawal.
You can also use our Asset Exchange function to swap between BTC, ETH, EOS, XRP, and USDT for just a 0.1 fee.
Check out our help center article on How to Convert Your Assets.
How Do You Buy Cryptocurrency?
You can buy cryptocurrency on Bybit in just a few clicks, and it can be in your wallet in a matter of minutes.
On Bybit, you can buy BTC, ETH, and USDT in over 40 fiat currencies, all for ultra-low transaction fees. You can buy crypto using a variety of major payment providers, using Visa and Mastercard.
How Do You Start Trading Cryptocurrency?
Before you start trading on Bybit, you’ll need to set up a Bybit account.
With no KYC, it’s a quick and easy process. All you need is a valid email address or mobile number. If you don’t already have an account, then what are you waiting for?
Is Cryptocurrency Safe?
Cryptocurrency has had its fair share of safety threats over the years. Primarily the volatility, price fluctuations, disappearance of altcoins, and more. However, when volatility comes opportunities. And the surge of BTC, ETH, XRP, and LINK’s price proves that there is safety in the crypto ecosystem. However, preventions are better than cure. That is why it is paramount to take measures to keep your cryptocurrency safe.
What Security Threats Do Cryptocurrencies Face?
Although their decentralized nature gives users control over their money, that also gives them responsibility for maintaining their security. Security keys can be lost, or worse, hacked. Hacking and phishing have been issues for as long as crypto has been in existence.
Attacks on the blockchain can occur, such as a 51% attack, where hackers control 51% of a network’s mining power. When this happens, hackers can reverse transactions or even double-spend cryptocurrencies. Thankfully, the sheer hashing power needed to conduct such an attack means such incidents are improbable, especially on the Bitcoin network.
Let’s look at some of the most significant security incidents that the world of crypto has faced:
- Probably the most infamous crypto security incident of all time was the Mt. Gox hack. At the time, it was the world’s leading Bitcoin intermediary and exchange, with over 70% of all Bitcoin exchanges occurring on the platform. In February 2014, operations ceased after allegations arose that 850,000 Bitcoins had been stolen. It transpired that 750,000 of those belonged to customers, with the other 100,000 belonging to Mt. Gox. In April 2014, it filed for bankruptcy. 200,000 BTC was later found, but the additional 650,000 remain missing. The hack’s fallout had a profound impact on the crypto industry and raised the issue of heightened security.
- In May 2018, the Bitcoin Gold network suffered a 51% attack. This led to the overspending of $18 million on crypto. And the subsequent delisting of Bitcoin Gold on the exchange Bittrex. In January 2020, a 51% attack reoccur with around $70,000 worth of losses.
- In May 2019, hackers stole $40 million worth of Bitcoin from Binance. This was the result of a phishing scam using malware. Binance stepped up security measures in response to the hack.
How Do You Keep Cryptocurrencies Safe?
At Bybit, it is of paramount importance to us to keep the funds of our users safe. Our industry-leading HD cold wallet system ensures the safety of your funds.
Bybit also applies 2-factor authentication. So, only legitimate users can access their accounts.
All wallet addresses should need to be kept safe and never given out to anybody. Learn how to trade cryptocurrency here.
List of Major Cryptocurrencies
Let’s look at some of the major cryptocurrencies out there and some new ones on the scene.
Bitcoin was the first cryptocurrency to be created in 2009 and is the biggest by market cap. It remains the most likely contender to take over the fiat-based centralized monetary systems we see today. You can trade BTCUSD and BTCUSDT perpetual contracts on Bybit.
Ether is the coin of Ethereum, the second-largest cryptocurrency by market cap and the most well-known and one of the best altcoins in existence. It runs on an open-source blockchain using smart contracts, which supports DApps. With the demand for ETH on the rise, and the hard-fork rolling out, the Ethereum price predicts to soar in the upcoming months too. You can trade ETHUSD and ETHUSDT perpetual contracts on Bybit.
Although it can be used for transactions, the primary use for XRP is to facilitate payments through its centralized Ripple network. It is the third biggest cryptocurrency by market cap. You can trade XRPUSD perpetual contracts on Bybit.
USDT, also known by its parent company, Tether, is the most well-known stablecoins. Its value is pegged to the US dollar, which keeps it immune from the volatility that other cryptocurrencies can face. It took over Bitcoin’s mantle as the most prominent cryptocurrency by trading volume in 2019. You can trade BTCUSDT, ETHUSDT, LINKUSDT, LTCUSDT, and XTZUSDT perpetual contracts on Bybit.
EOS is another cryptocurrency running on a smart contract platform, which supports Dapps. These Dapps have a variety of functions, including gaming, social, and DeFi. You can trade EOSUSD perpetual contracts on Bybit.
Litecoin was part of the first wave of cryptocurrencies, having originated in 2011. Technically, it is practically identical to Bitcoin. However, its Lightning Network can process transactions much faster than Bitcoin originally could.
A spin-off of, or ‘fork’ of Bitcoin, Bitcoin Cash was created in 2017. It then split into two separate cryptocurrencies in 2018: Bitcoin Cash and Bitcoin SV.
Chainlink came from nowhere to become one of the top five cryptocurrencies by market cap in 2020, riding the wave of the DeFi boom. It acts as a decentralized oracle network that connects external data to smart contracts on the blockchain.
Binance Coin is used for trading cryptocurrencies and paying for transaction fees on the Binance exchange. Released in 2017, it operates on the Ethereum blockchain and is in the 10th cryptocurrency by market cap.
Quite possibly the most talked-about cryptocurrency in history (bar Bitcoin) is Facebook’s Libra coin – and it’s not even a coin yet. Indeed, there is some debate if it will ever get off the ground. It has been the subject of much controversy due to regulation and data privacy concerns, with significant initial backers such as Mastercard and Visa pulling out of the project. A second white paper was released in April 2020 to address some of these issues.
The Bottom Line
The idea of cryptocurrencies may seem confusing at first, but in essence, their basic premise is straightforward. They are revolutionizing the way we think about money – no longer does your money have to be at the mercy of a private entity. However, they are not a physical asset and can be sent worldwide quickly and for a low cost. Their variety of uses – ranging from transactions to facilitating money transfers – to helping fight poverty – gives them unlimited potential. Cryptocurrencies are here to stay.