What are cryptocurrencies?

More and more people are becoming interested in cryptocurrencies in the United States and around the world. Before you start investing in cryptocurrencies you need to know something about them and how they work, here we explain what cryptocurrencies are, how they work and the main cryptocurrencies that exist.

Cryptocurrencies evolve at great speed and we can find today thousands of different cryptoassets divided mainly into cryptocurrencies, tokens and NFTs. The offer is so large that many small investors do not know where to start.

We give you some basic definitions to start understanding cryptocurrencies, to know their usefulness and their basic functioning.

What is a cryptocurrency?

By way of summary we can say that a cryptocurrency is a digital currency that does not depend on any country or central bank, so they are usually defined as DeFi (Decentralized Finance), which use digital cryptographic methods to secure transactions.

The decentralized system they use is blockchain technology in which each network agent guarantees the security and veracity of transactions. This implies that it is a decentralized model that eliminates central banks, governments or other institutions from the equation.

Cryptocurrency investors see it as a store of value and a means of payment or exchange, like other forms of currency, but without relying on the policies of a central government.

Bitcoin and other cryptocurrencies allow entities anywhere in the world that are connected to the Internet to transfer value in a matter of minutes without the need for a bank or other intermediary.

Although the idea of cryptocurrency may sound like currency to someone who knows nothing about it, the truth is that cryptocurrencies are currently being used more as an investment or store of value than as currency, with currency being understood as a common payment instrument.

It is true that there are more and more places and businesses in which we can pay with cryptocurrency, but today it is still not used in that way for the most part.

How do cryptocurrencies work?

The birth of cryptocurrencies came with Blockchain technology, which is based on the previous P2P systems, but now to validate economic transactions. They are open source decentralized systems that anyone can join.

Thus, transactions do not depend on a bank or entity, they depend on all the machines in the network, which provides transparency, but above all security.

Transactions in Bitcoin, Ethereum and other leading cryptocurrencies are verified and protected through a blockchain that uses a network of nodes that independently records each transaction and updates a public ledger.

This accounting system creates many different copies of the same transaction record, providing a high level of security. The blockchain software is "open source," meaning that anyone can download the software and contribute to the public ledger. Once all computers on the network agree to a transaction, it is permanently recorded on the blockchain.

The copy of each transaction is replicated on all nodes (computers) and if someone were to try to fake a transaction they should be able to fake it on at least more than half of those nodes, which is unthinkable. Imagine a network distributed all over the world with thousands and thousands of nodes, that is the strength of the system.

Different blockchains use different methods to verify transactions, but we will leave that for another article. The members of the blockchain are usually called "miners", and those miners receive a reward for each transaction they validate and/or a commission for validating it, the reward is received in newly minted cryptocurrencies or in the form of a commission for the people who perform the transaction.

If you buy a cryptocurrency it will be the miners who validate that transaction, and to access your cryptocurrencies you will do it through a private key, that private key is what you store in what is called a wallet.

Generally you will do it through a cryptocurrency exchange where you will be able to buy, exchange and deposit cryptocurrencies. There are also cold wallets, which are a kind of USB sticks where you can deposit your cryptocurrencies outside the online wallets.

How does blockchain technology work?

We are going to give you a practical example so that you can understand the operation and advantages of this technology, its main virtue is security and anonymity.

Let's imagine that you have to pay for a meal that has cost you $30, and to send that $30 let's suppose that you do it with a bank transfer. At this point you connect to the bank and make the transfer, the bank is the only intermediary and the control is only done on its side.

Moreover, the bank in turn can inform the government that I have sent a payment with the concept "food" for $30. Those would be CENTRALIZED finances.

However, blockchain technology gets all users of the network to validate this transaction, but with the particularity that both the sender and the receiver will be anonymous, represented by the numbers and letters of our wallets.

In addition, all members of the Blockchain will keep a copy of this payment, increasing security. It is no longer just the bank that says that the payment is true, it is the thousands of connected nodes that say so. This would be DECENTRALIZED finance.

The security of a blockchain network depends on its size, the larger it is, the more difficult it is to hack it. The Bitcoin network is the largest and it would be impossible to attack it, it would require shutting down the Internet worldwide.

A similar network of very small size would be possible to attack, complicated but possible. In that sense if you want to invest in secure cryptocurrencies it is best to invest in the largest ones such as Bitcoin, Ethereum and similar.

What is Bitcoin?

To begin to understand cryptocurrencies we cannot begin to explain the thousands of them that exist, nor all the protocols and functionalities they have, so we focus on Bitcoin to introduce the world of cryptocurrencies.

Bitcoin is the most popular cryptocurrency in the world, with a market capitalization that has sometimes reached one trillion dollars. Bitcoin was the first cryptocurrency, as it began trading in 2009.

Since its launch, Bitcoin's price has skyrocketed, but has experienced several periods of declines along the way. In addition to being the most popular cryptocurrency, Bitcoin is also the most useful.

Bitcoin is accepted as payment at more than 7,600 global merchants, according to Cryptwerk. Bitcoin also made history in June 2021 when El Salvador became the first country in the world to make Bitcoin legal tender.

The manifesto gives some of the keys to its operation: "the system will allow online payments to be sent directly from one party to another without the need to go through a financial institution".

Bitcoin's own manifesto states that "we propose a solution to avoid the problem of duplicate spending by using a peer-to-peer network, which marks each transaction and includes it in a chain where a record is formed. This cannot be changed without redoing each record of each transaction anew."

Bitcoin at its inception was never intended as an investment product and its objective was to decentralize and anonymize finance, but the truth is that today it is used as an investment and store of value rather than as a means of payment.

To get an idea of the size and importance of Bitcoin in the United States, suffice it to say that there are more than 29,000 Bitcoin ATMs throughout the country.

Bitcoin was the first cryptocurrency and after it appeared others called altcoins, the most important being Ethereum, but there are many others such as Litecoin, Solana, etc.

What are the stablecoins?

Another very important group of cryptocurrencies that have emerged are the so-called stablecoins, which are a subgroup of cryptos that link their value to an asset of stable value, usually the dollar, gold or the Euro. The main stablecoins are referenced to the USD, and therefore their value is always $1.00.

The stablecoin have become the most traded cryptocurrencies, and this is because they are used to enter and exit from one cryptocurrency to another, for example in a bearish period instead of changing your cryptocurrencies to USD you change them to a stablecoin because it has less costs and because this way you remain within anonymous and decentralized systems.

The second reason for the great growth of stablecoins is because most cryptocurrency loans are made in stablecoins.

There is a third reason, and it is that with the evolution of cryptocurrencies have appeared systems to monetize cryptocurrencies that are very profitable and with little risk systems such as staking or yield farming can be very profitable, but we explain them in other articles.

The main stablecoin are Tether and USD Coin, which are always worth, with small variations, 1 USD.

What are digital tokens?

Tokens or digital tokens are assets similar to cryptocurrencies, but they are issued by a specific project to fulfill a purpose within that project. A token can represent an ownership stake in the project, a method of payment within the project's ecosystem, or a right to participate in the project's network.

Like coin tokens in an arcade, digital tokens have little value or utility outside of the specific project for which they were created. A non-fungible token, or NFT, is a type of token that represents ownership of a unique item, such as a digital collectible or a work of art.

One thing tokens have in common is that they do not have a blockchain network of their own and use someone else's network. So we can say that a cryptocurrency has its own network and a token uses the network of a third party.

Most of the tokens currently circulating do so under the Ethereum network, under the ERC-20 protocol, it is a way to create a cryptoasset under a network that will follow, functional and cost little money. It would be impossible for every small project to have to set up its own blockchain.

From this initial article to begin to understand cryptocurrencies, we will go deeper into them in different articles. It is necessary to have a minimum knowledge of cryptocurrencies because it is clear that it is something that exists, that is on the market and that we must understand, even if we do not intend to invest in them.

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