Today, cryptocurrency is a household name, with thousands of digital currencies and significant adoption and trading volume across the globe. But it wasn't always smooth sailing for digital assets.
The road has been paved with many regulatory challenges, criticism from governments and banks, and has been susceptible to scams and fraud. For many years, crypto was difficult to acquire. And if you wanted to trade digital currency, you had to go through hoops in order to find a cryptocurrency exchange and fund the transfer.
But how did cryptocurrency begin?
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 crypto coins available.
What is cryptocurrency?
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.
Cryptocurrencies use different types of consensus mechanisms to process transactions and verify them on the blockchain. A consensus mechanism allows a decentralized system (like a blockchain network) to come to agreement about the state of the network.
There are two main types of consensus mechanisms, and thus two main types of cryptocurrencies: Proof of Work and Proof of Stake. Let's break them down further.
Proof of Work cryptocurrency
Proof of Work (PoW) cryptocurrencies like Bitcoin utilize a mining process in validating transactions on the blockchain. In Proof of Work, miners compete to solve complex mathematical equations to produce the next block to be added to the blockchain.
Although Proof of Work is one of the most secure consensus mechanisms in cryptocurrency, it can be quite expensive and energy intensive. The computing power needed to solve a cryptographic hash function is quite high, and PoW thus has a greater environmental impact than other consensus mechanisms.
So why would miners invest in the necessary mining hardware, if it is costly for their wallet and the environment? The incentive lies in the block reward, which is given to the miner that correctly solves each hash function. This reward comes in the form of the native cryptocurrency of the respective blockchain, like Bitcoin.
Examples of Proof of Work cryptocurrencies include:
Proof of Stake cryptocurrency
Proof of Stake (PoS) cryptocurrencies like Ethereum came about as an alternative to Proof of Work in response to some of its drawbacks. In Proof of Stake, users "stake" a portion of the native cryptocurrency to become validators and verify transactions on the blockchain.
Compared to Proof of Work, Proof of Stake is much more energy efficient. In fact, the Ethereum network was able to cut its energy consumption by 99.99% after switching from PoW to PoS in an event known as the Ethereum Merge.
Examples of Proof of Stake cryptocurrencies include:
Recommended reading: Proof of Work vs Proof of Stake
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.
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 decentralize 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 cryptocurrency unique is the freedom that the lack of a middle man provides – no exchange rates, no interest, significantly lower 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? Let's take a look.
How does cryptocurrency work?
Cryptocurrency works a bit like code breaking. These digital assets use cryptography to:
1. Verify transactions
2. Control the creation of units
3. Facilitate the transfer of assets.
Simply, cryptography is what enables cryptocurrency to work without a middle man.
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.
Cryptocurrencies are made through a process called mining – but not in the old fashioned way. Cryptocurrency mining 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, usually cryptocurrency exchanges and on-ramps.
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.
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.
If you pay for something with crypto, it's transferred directly 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.
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. Since Bitcoin is the most popular cryptocurrency, with a price and market cap that dominate the competition, any other token is considered alternative by comparison.
Some altcoins are branched versions of existing blockchains (an exception is Ethereum, which is built on the original Ethereum blockchain). If a cryptocurrency splits (or forks) from the chain, it creates a new branch that is no longer compatible with the original.
Examples of altcoins include:
Stablecoins are a more recent development in the world of crypto, and really exploded in 2021. Stablecoins are “pegged", or tied, to fiat currencies or commodities as a way to mitigate some of the volatility that comes with other types of cryptocurrencies.
There are four categories of stablecoins: fiat-backed, crypto-backed, commodity-backed, and algorithmic. You can learn more about them here.
Examples of stablecoins include:
DeFi tokens are a category of cryptocurrency that can be used in decentralized finance (DeFi). This asset type has enhanced functionality compared to other tokens, and can be used across a range of decentralized applications (dApps).
For example, DeFi tokens can be used to earn passive income in liquidity pools and yield farming, and on DeFi platforms such as decentralized exchanges (DEXs). They can also be used for various purposes within decentralized autonomous organizations (DAOs), as utility tokens—more on those below.
Examples of DeFi tokens include:
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.
Examples of asset-backed tokens include:
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. As the name says, profit sharing allows token holders to split a portion of earnings within a community or organization.
Examples of utility tokens include:
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.
Examples of popular NFT collections include:
Is Cryptocurrency legal?
The short answer is yes, cryptocurrency is legal 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 you can rest assured that there's nothing illegal about them.
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 enter a Starbucks and pay with Bitcoin or Ethereum, because cryptocurrencies aren't recognized as a form of currency. That said, it's perfectly legal to buy, sell and trade crypto in the US.
In countries like Bolivia, however, there is a complete ban on Bitcoin. It is not criminalized, but is banned in order to prevent businesses from providing crypto-related services in the country.
If you're worried about the legality of cryptocurrency in your country, be sure to double-check the guidelines for where you live, so you can be reassured that if you buy or sell crypto, you're not engaging in any sort of criminal activity.
Crypto vs traditional currency: Pros and Cons
For the converted, there's no doubt that cryptocurrency is better than the traditional 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.
Security and safety
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 currencies.
No exchange rates, minimal waiting times and 24/7 trading. Cryptocurrency is unencumbered by borders, oceans or time zones.
Risk and volatility
Cryptocurrencies can make for volatile investments, so they aren't necessarily the investment choice for stable returns.
Crypto and web3 are still in their early stages, so real-world use cases aren't as plentiful as other financial assets.
Lack of education
Cryptocurrency can feel complicated for beginners, and while there's a lot of resources available, it's on the individual to go out and find them. But that's why you're here.
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 crypto and the tech that powers it, there are challenges when it comes to cryptocurrency transaction capacity.
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 cryptocurrency. This is already beginning to happen in the United States, where the Biden administration has put together a team to drive the crypto regulation process. Details on how this will look in practice, 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.
Cryptocurrency FAQs (Frequently Asked Questions)
How to buy cryptocurrency?
Buying crypto is as easy as making any other online purchase, though where and how you buy cryptocurrency will depend on the digital asset itself.
If you're looking to buy cryptocurrency like Bitcoin or Ethereum using a card, the best option is an on-ramp provider like MoonPay.
Where to store cryptocurrency?
Just as you carry fiat currency in your physical wallet, you'll need a crypto wallet to store cryptocurrency. A digital wallet is safe and easy to set up, and essential for buying, selling, and swapping crypto.
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 additional context of popularity across the different types.
Most popular tokens
* Coins are listed in order by market cap
How is cryptocurrency created?
Most cryptocurrencies are created through a process called mining. In cryptocurrency mining, miners use computing power to solve increasingly complex mathematical equations, in order to produce the next block and add it to the blockchain.
How many cryptocurrencies are there?
According to Statista, there are nearly 10,000 cryptocurrencies in existence. Some estimates put this figure much higher, though there are many insignificant cryptocurrencies out there, with negligible volume and market cap.
There are new cryptocurrencies created everyday, so this number is set to drastically change in the future.
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.
What can you buy with crypto?
At the moment, the purchases you can make with cryptocurrencies are limited, but there is a growing number of merchants across various industries that accept Bitcoin and cryptocurrency payments. You can use crypto to buy products such as electronics, entertainment services, tickets, digital goods, hotels, airlines, clothing, and more.
If you don't see your selected product available for crypto purchases, you can always buy gift cards with cryptocurrency, and use that to purchase what you want.
How does crypto gain value?
Like financial assets, 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.
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 in 2009-2011 to a high of over $65,000 in 2021.
Begin your crypto journey with MoonPay
Now you know the basics of cryptocurrency and blockchain technology, it's time to experience it for yourself.
MoonPay also makes it easy to sell crypto when you decide it's time to cash out. Simply enter the amount of the token you'd like to sell and enter the details where you want to receive your funds.
Still not sure how start buying crypto? View our beginner's guide on how to buy Bitcoin.