What is cryptocurrency?
The world of crypto can be overwhelming when you’re first introduced. We cover all the basics to get you started.
By Milly Fox-Jones
Cryptocurrency is a digital currency based on the blockchain, a public transaction database that functions as a distributed ledger. Bitcoin, created in 2009, was the first cryptocurrency, and since then thousands of others have emerged.
Still confused? Don’t worry, you’re not alone. Despite being one of the most innovative technologies to have developed in the last decade, cryptocurrency continues to baffle even the sharpest of minds.
This article explains the world of cryptocurrency for beginners, covering the basics of how cryptocurrency works and the different types of coins and tokens available.
What is a cryptocurrency?
A cryptocurrency is a type of digital currency, often defined by a lack of any central authority. Crypto transactions are secured using cryptography, and are almost impossible to counterfeit or cheat as they use blockchain technology to verify transactions.
Why were cryptocurrencies created?
When most people think of cryptocurrencies, the first thing that comes to mind is Bitcoin. Bitcoin was released in 2009 and, after gaining the attention of the public a few years later, has still remained the biggest cryptocurrency by market capitalization.
But it may surprise you to know that Bitcoin wasn’t the first kind of crypto – that was something called DigiCash, which was created in 1990 by cryptographer David Chaum.
Despite the decades between the two, and all the incarnations of crypto in between and since, the driving force behind the concept has always been the same: to decentralise finance. In practice, this means taking out the “middle man” role that financial institutions play, and the control they have over our money.
Back when DigiCash was created, it was also a unique way to transfer funds digitally. While we’re now able to electronically transfer most currencies, the thing that made and continues to make crypto unique is the freedom that the lack of a middle man provides – no exchange rates, no interest, no fees, no reliance on a third party: a truly global and unrestricted currency.
But how do you take out a middle man that’s existed in some way or other for centuries?
How does cryptocurrency work?
This is where it gets a bit complicated, but stay with us.
Earlier we mentioned how the first cryptocurrency was created by a cryptographer. Cryptography is where the “crypto” in “cryptocurrency” comes from, and refers to a method of keeping something (in this case, a digital currency) safe and secure by transforming it into a form that cannot be easily deciphered.
Think of it a bit like code breaking. Cryptocurrencies use cryptography to a) secure transactions, b) control the creation of units, and c) verify the transfer of assets.
Cryptography is what enables cryptocurrency to work without that pesky middle man. What it can’t work without, though, is computers – and lots of them.
Cryptocurrencies are made through a process called mining – but not in the old fashioned way. Mining for cryptocurrencies swaps out a hammer for computers, and a rock for a lot of complex mathematical problems. The computers tap away at the problems, solving each and every one, and this process generates units of cryptocurrency, or coins.
Back in the day, your average at-home computer could mine crypto, but these days it takes an army of them, so most people simply purchase already-mined units from brokers. Acquiring crypto is just like going to a financial institution and exchanging one currency for another.
The difference, of course, is that you won’t get anything tangible, because cryptocurrencies are all digital and run on something called a blockchain. A blockchain is a type of distributed ledger (which is essentially a database of information shared across multiple places).
Blockchain technology isn't controlled by any central authority. Instead, it’s controlled by a network of computers all over the world. This is part of what makes cryptocurrency transactions so secure. If you’re wondering how exactly, read this.
When you purchase cryptocurrency, it’s stored in a cryptographic wallet and this is what you use to make purchases – we’ll get into what you can buy with crypto a little later.
When you pay for something with your crypto, it’s transferred to the seller’s wallet. This transaction, and every single one like it using crypto, is stored on the blockchain. Each one of the computers in the blockchain shares and validates that information, which is visible to everyone.
What are the different types of cryptocurrencies?
Since the explosion of Bitcoin, the crypto economy has become a whole world in and of itself. Bitcoin is kind of like the big bang in that way.
Bitcoin was followed by Litecoin, then Namecoin, then Peercoin, then Dogecoin and now there are over 18,000 cryptocurrencies. But the term “cryptocurrency” doesn’t just apply to blockchain-based digital currencies. Actually, a lot of different crypto assets fall under this term. Here’s a quick run through.
Altcoin is a term used to describe essentially any cryptocurrency that isn’t Bitcoin. They tend to be branched off of existing blockchains (an exception is Ethereum, which is built on the original Ethereum blockchain). They split from the chain, which creates a new branch that is no longer compatible with the original.
Stablecoins are a relatively recent development in the world of crypto, and really exploded in 2021. Stablecoins are “pegged", or tied, to currencies or commodities as a way to mitigate some of the volatility that comes with other types of cryptocurrencies.
There are four categories of Stablecoin: fiat-backed, crypto-backed, commodity-backed, and algorithmic. You can learn more about them here.
DeFi tokens differ from DeFi coins, which, again, is an umbrella term that could encompass everything from Bitcoin to Dogecoin, as it refers to currencies that have decentralised finance at their core.
Whereas DeFi coins act like a currency in that they transfer value in a financial transaction, the value that DeFi tokens transfer does not have to be based in finance. For example, an NFT is a kind of DeFi token, representing a one-of-a-kind piece of digital art, but DeFi tokens can also represent physical assets, or act like a VIP pass to get access to resources.
Asset-backed tokens are, as the name suggests, backed by physical assets, and the token acts as a digital claim to that asset. Any real-life asset can become an asset-backed token, but the most common are things like gold, equity or even property.
The important thing to note is that, while asset-backed tokens represent ownership, that isn’t to say you could go and swap your token for a piece of a gold bar, for example. Instead, the gold bar acts as a security, and the value of your token can increase and decrease based on the value of the backed asset.
Utility tokens, similar to DeFi tokens, are not generally finance-based in nature, but instead represent rights within a specific project or community. These rights tend to fall into two categories: voting or profit sharing (or both).
Voting rights tend to be proportionate to the number of utility tokens: the more tokens, the more votes. This gives holders the chance to have their say in governance and decision making in a project. While profit sharing, like it says on the tin, allows token holders to get a share of profits.
Last but not least are security tokens. These are essentially the digital form of more traditional investments like stocks and shares. So, if a company is looking to raise capital by selling shares, they could choose to do so by using security tokens.
NFTs, or ‘non-fungible tokens’, are units of data stored on a digital ledger (such as a blockchain) that represent a piece of digital media such as art, video, audio or text. NFTs, unlike tokens or coins, are totally unique, and therefore not interchangeable. They can, however, be sold, traded or sometimes even used as virtual currency in online games.
Is Cryptocurrency legal?
The short answer is yes, as long as you’re not in a country where cryptocurrency is expressly prohibited. Since cryptocurrencies are generally unregulated, people can assume that means they are in some way illegal, but we can reassure you that there’s nothing illegal about them.
In fact, it’s quite hard to commit any sort of crime with crypto, like money laundering, for example, because of the security and visibility of blockchains.
The longer answer is still yes, but with some caveats. Different countries have different regulations when it comes to cryptocurrencies. In the United States, for example, cryptocurrencies are not legal tender.
This is not the same as being illegal, though, it just means you couldn’t nip into a Starbucks and pay with Bitcoin or Ethereum, because cryptocurrencies aren’t recognised as a form of currency. That said, it’s not illegal to buy, sell and participate in crypto in the US.
In Bolivia, however, there is a complete ban on Bitcoin. It is not criminalised, but is banned in order to prevent businesses providing crypto-related services in the country.
If you’re worried about the legality of cryptocurrency in your country, just double check the guidelines for where you are, so you can be reassured that if you buy or sell crypto, you’re not engaging in any sort of criminal activity.
Is cryptocurrency safe?
While the use of a distributed ledger like a blockchain makes it incredibly difficult to cheat the cryptocurrency system, that doesn’t mean it’s impossible for bad actors to cheat other individuals. Just as you take steps to keep your fiat currency safe, it’s important to do the same with your crypto.
There are some that try to scam people out of their crypto. These scams can be incredibly convincing, so it’s important to know how to spot them.
There are also some basic steps you can take to protect your assets, like securing your wallet and practising good password hygiene.
Crypto vs traditional currency
For the converted, there’s no doubt that cryptocurrency is better than the current financial system, but cynics disagree. So, what are the advantages and disadvantages?
No central authority
Taking out the middleman mitigates the risk of a technical failure, increases transparency and puts your money in your own hands.
Without a middleman, there’s no one to place restrictions on your financial transactions, it’s just between you and the other party.
Cryptography plus a distributed ledger equals an inherently secure system that’s almost impossible to cheat.
There is real potential for your money to grow in crypto, whereas low interest rates make that difficult with fiat currency.
No exchange rates, minimal waiting times and 24/7 trading, cryptocurrency is the currency unencumbered by borders, oceans or time zones.
Cryptocurrencies can make for volatile investments, so they aren’t necessarily the investment choice for stable returns.
Limited real-world applications
For now, crypto can only generally be used to buy other cryptoassets.
Lack of education
If you’re new to it, cryptocurrencies can feel really complicated and, while there’s a lot of resources available, it’s on the individual to go out and find them.
It’s also important to remember that crypto is still young and has only seen its most impactful growth in the last decade.
While huge advances have been made in the tech that powers crypto, there are challenges when it comes to transaction capacity.
What can you buy with crypto?
At the moment, the purchases you can make with cryptocurrencies are limited to other types of crypto, but the assets themselves are far from limited. All of the types of cryptocurrencies we listed above can be bought and sold using other cryptocurrencies.
While your crypto purchases may be limited to other crypto assets, there’s still plenty to shop for.
What does the future look like for crypto?
The headlines may have you believe that crypto has had its day. But if one thing is for certain, it’s that the crypto economy is able to not only withstand volatile conditions, but also to evolve through them.
So what does the future hold for cryptocurrency? While no one can say for sure, there are a few possibilities:
It’s looking more and more likely that regulations will be introduced into crypto. This is already beginning to happen in the United States, where the Biden administration has put together a team to drive the cryptocurrency regulation process. Details on how this will look, exactly, aren’t yet clear.
Despite the surge in popularity, we’re still in the early adoption phase of crypto and it’s still seen mostly as a vehicle for investment or storage of wealth. As time goes on, though, we could start to see increased adoption, both from individuals and big business.
Another possibility is that cryptocurrencies could become legal tender. Other countries could follow the lead of El Salvador, which introduced Bitcoin as legal tender in 2021.
How do you buy cryptocurrencies?
Buying crypto is as easy as making any other online purchase. The only difference is that instead of carrying what you buy in your physical wallet, you’ll need a crypto wallet. These are safe and easy to set up, and essential for buying and selling crypto.
Where you buy your crypto asset will depend on the asset itself. If you’re looking to buy a cryptocurrency in the truest sense of the word, like Bitcoin or Ethereum, you’ll need an on-ramp, off-ramp provider like MoonPay. This allows you to use your fiat currency to buy crypto, and transfer your crypto back into fiat, too.
How does crypto gain value?
Like anything, the main way that crypto assets gain value is through an increase in demand. There are three main factors that influence demand: popularity, rarity, and supply. The strange beauty of it is all these factors also influence each other. The higher the popularity, the lower the supply, the lower the supply, the higher the rarity, the higher the rarity, the higher the popularity – and as each of these bounce off each other, the demand increases.
A perfect example of this is Bitcoin’s halving. Essentially, Bitcoin’s total supply is capped at 21 million, and roughly every four years, the amount released is halved. It’s predicted that the last Bitcoin will be mined in 2140 – what this creates is a sense of rarity, which pushes up the demand and therefore value. This is how Bitcoin went from being worth less than a dollar to a high of over $65,000 in 2021.
What are the most popular cryptocurrencies?
We’ve mentioned some of the most popular cryptocurrencies throughout this article, but the table below will give you a flavour of popularity across the different types.
Begin your crypto journey with MoonPay
Now you know the basics of blockchain technology, it’s time to experience it for yourself.
To get started, simply buy cryptocurrency via MoonPay using your credit card or any other preferred payment method.