Bitcoin, Ethereum, Tether, Dogecoin, Binance, Cardano, and XRP are all cryptocurrencies. If you follow social media or the news, you’ve heard of at least one of these. But what are they really?
Cryptocurrencies, or crypto for short, are a digital form of currency that can be exchanged for goods and services like traditional currency. However, crypto is not owned or controlled by a central authority. They are instead created using a distributed ledger technology known as blockchain. Blockchain is a type of database that records transactions in blocks. Blocks are linked to previous blocks, creating a “chain” of records. This chain of records creates a record book called a ledger, which is then copied and stored on multiple computers in the blockchain network.
The most popular cryptocurrency, Bitcoin, was first created in 2009 by an unknown person or group under the name of Satoshi Nakamoto. Since then, over 10,000 cryptocurrencies and tokens have been created, developed, or forgotten with no end in sight.
To dive deeper into cryptocurrencies, let’s first differentiate between a “cryptocurrency” and a “token”
Cryptocurrency vs. Token
A cryptocurrency is a digital coin that is integrated into a blockchain network that is used to perform actions within that network. Ethereum, the second-largest blockchain network, has a native token called ether (ETH). ETH must be spent to transact on the Ethereum blockchain. Paying ETH to use the Ethereum network to transact is similar to paying a “toll” to use a road.
Tokens are also cryptocurrencies, however, they are developed within an existing blockchain platform, like Ethereum. Tokens can be created on the Ethereum blockchain because the network allows for the creation of ERC-20 tokens. ERC-20 tokens represent an entirely different project but piggyback on the Ethereum blockchain.
How are Cryptocurrencies Different from Traditional Currency?
Cryptocurrencies vs Traditional Currency
Traditional currencies like Canadian or US dollars represent a country’s currency while cryptocurrencies represent the currency of a blockchain network or project.
Both cryptocurrencies and traditional currency can be traded and used as a medium of exchange for goods and services. However, with cryptocurrencies, the coin is used to pay for transactions such as sending tokens back and forth or creating and using smart contracts in its blockchain ecosystem.
Instead of being held in a bank, cryptocurrencies are held within a hardware or digital wallet. A hardware wallet is a USB-like device, while a digital wallet exists as an application on your mobile device. To access funds in a cryptocurrency wallet, you only need to enter a 12-word passphrase as a password.
No Middleman or Central Authority
Crypto is usually not controlled or governed by a central authority, but instead in a decentralized manner through code and computers spread across the globe. This differs from traditional currency like dollars where monetary policy and supply is controlled and managed by a central bank.
What are the Risks of Cryptocurrencies?
Bitcoin, Ethereum, and all other cryptocurrencies are highly volatile and very risky when compared to traditional assets. Cryptocurrency prices fluctuate every minute as markets are open 24/7 and can have high double-digit moves in either direction day-to-day.
Scams, illegitimate projects, and exchange hacks are frequent due to the infancy of the industry and also because of the ease at which tokens can be created. Always do your research into any project and only put money up that you don’t mind losing.
Where Can I Buy Cryptocurrencies?
Popular cryptocurrencies like Bitcoin and Ethereum can be purchased directly in Canada with dollars through online brokerages like Newton and Coinberry.
To purchase cryptocurrencies of smaller projects, a crypto-to-crypto exchange like Binance is necessary. Crypto-to-crypto exchanges offer these smaller project coins but can only be bought with a major cryptocurrency, like BTC or ETH, instead of dollars. This adds another layer of complexity because you must first purchase BTC or ETH, then transfer to a crypto-to-crypto exchange.