Cryptocurrency has undoubtedly been a hot topic these past few years. Whether it’s seen as the future of money or just a quick way to get rich, investors and individuals alike have poured hundreds of billions of dollars into the market. But what exactly are they investing in? What IS a cryptocurrency? Let’s take a look!
What Exactly Is Cryptocurrency?
Cryptocurrency is a comparatively new form of currency that operates entirely online and in a digital format. There aren’t any paper dollars or coins that are needed to exchange hands, and there isn’t any government or central bank backing these currencies.
Instead of being monitored and controlled by a government, cryptocurrencies use blockchain technology. Blockchains operate as a digital ledger that record and track all transactions that happen. These blockchains are essentially networks of thousands of computers all across the world that continuously verify and record these transactions. This allows the blockchain to operate completely autonomously of any central control such as a government or organization. Take a look at our What is Blockchain article for a more thorough explanation.
As adoption increases, cryptocurrencies and cryptocurrency tokens can be used to buy and sell goods and services. However, they are most commonly employed as investment asset classes. This just means people are trying to buy and sell them to make a profit instead of using them as a form of currency kind of like the FOREX market.
Bitcoin (BTC) was released as the first cryptocurrency in existence in 2008. A few years later, Ethereum (ETH) and Litecoin (LTC) were launched as well. But up until 2017, the world of cryptocurrency remained relatively lowkey. However, as popularity began to build, so did the number of cryptocurrencies and cryptocurrency tokens.
Now there are over 17,000 different cryptocurrency tokens in existence and more are being minted (created) every day. It has gotten increasingly easier to make your own cryptocurrency token on different blockchains, which can make it difficult to discern a legitimate project from someone just trying to make some easy money. Which makes it important to understand the difference between cryptocurrency and cryptocurrency tokens.
What’s the difference between cryptocurrency and cryptocurrency tokens?
Cryptocurrencies and tokens are the two of the most prevalent blockchain-based digital assets. However, it’s imperative not to mix up the concepts “cryptocurrencies” and “crypto tokens,” as there are significant variations between the two. While these terms are often used interchangeably, it’s extremely important to understand the difference.
One way to understand the difference is by knowing that cryptocurrencies are built into a blockchain, while tokens are built on top of a blockchain. But what does that mean?
As the first cryptocurrency, BTC was built into the Bitcoin blockchain. That means that the currency was integrated directly into the programming at the very beginning. Thus, bitcoin is a cryptocurrency as its programming is directly embedded into the blockchain itself.
Things get more confusing with the Ethereum blockchain though because it introduces the concept of smart contracts. Smart contracts are essentially pieces of code that can be uploaded to the blockchain and run automatically. These smart contracts allow the creation of cryptocurrency tokens on the Ethereum blockchain. So now, not only does the Ethereum blockchain have its native cryptocurrency ETH, it now hosts numerous cryptocurrency tokens as well.
Ethereum has its native cryptocurrency, ETH, that was built directly into the blockchain. However, it also provides the capability to have other currencies built on top of it. For example, bitcoin as a cryptocurrency can only exist on the bitcoin blockchain. But since many people want to trade BTC on the Ethereum blockchain, a smart contract was designed to mint a cryptocurrency token that mirrors bitcoin. This token is known as WBTC, and it essentially acts as a tradeable bitcoin on the Ethereum network.
In other words, whereas a cryptocurrency is the primary asset of a particular blockchain, tokens are developed by platforms that build on top of blockchains. And though ETH is the Ethereum network’s native cryptocurrency, the Ethereum blockchain is also home to a variety of other tokens. CryptoKitties, Chainlink (LINK), and Compound (COMP) are just a few of the Ethereum-based tokens.
Cryptocurrency tokens can be used for a variety of things including playing games, accessing platform-specific services, and participating in decentralized finance (DeFi) systems.
It’s reported that there are over 17,000 cryptocurrencies and cryptocurrency tokens in circulation as of January 2022. However, not all cryptocurrencies or tokens, are active or useful. After removing the dead (uselss) coins, there are just about 9,631 live tokens left. However, most tokens can be divided into four major categories based on their utilities.
Bitcoin, the world’s first cryptocurrency, was created for this purpose. The goal was to make cross-border payments more affordable and speedier. It has shown to be a reliable store of value and means of exchange over time. Stablecoins are another popular form of currency and they typically mirror a currency like the US dollar. For example, USDT is a stablecoin that is set equal to $1 at all times.
The most common use for cryptocurrency tokens is by looking at them as an asset. In fact, most governments will classify them this way for tax purposes as well. Essentially, these tokens are seen as an investment that can either go up or down in value. Investors typically regard these assets as something similar to a stock where they want to buy it low, and then sell it higher for a profit.
Meme coins serve no use and are highly speculative assets based on the simple concept of pumped-up community trading. The majority of them are useless. However, for the time being, a few have stood the test of time. In their early days, both Dogecoin and Shiba Inu were meme coins, but today they’re a big part of the crypto ecosystem. Despite the fact that they were made solely for fun and with no clear goal or purpose in mind, they are now worth millions of dollars. However, like with any cryptocurrency, investors should exercise caution.
If you’re looking to purchase or get into the world of cryptocurrency, you won’t be able to pick it up at your local bank. The best way to purchase cryptocurrencies is through the use of a centralized exchange or CEX. A CEX is essentially an exchange created by a registered company that allows you to use your fiat currencies (USD, INR, EURO, etc) to purchase cryptocurrency and cryptocurrency tokens.
They act very similar to a stock brokerage where you can buy and sell different stocks. However, they also allow users to exchange cryptocurrencies or one another in addition to buying them with conventional currency.
Additionally, there are also decentralized exchanges or DEXs that reside on the blockchain itself. These won’t allow you to use fiat currencies, and instead require you to use a cryptocurrency wallet to exchange different cryptocurrencies and tokens.
Centralized Cryptocurrency Exchanges (CEX) operate as a middleman between buyers and sellers of cryptocurrency. Due to the fact that they are managed and regulated by an established enterprise, centralized exchanges are typically regarded as the most reliable exchange option. Centralized exchanges handle over 99% of all crypto transactions. Centralized cryptocurrency exchanges include:
Decentralized Cryptocurrency Exchanges (DEX) enable users to conduct peer-to-peer transactions without the involvement of a middleman. They operate completely independent of any company or government, and pretty much exist as programming code. However, they don’t allow for the exchange of fiat currency. Decentralized cryptocurrency exchanges include:
- Trader Joe
The past ten years have seen a period of unprecedented growth for cryptocurrency. Robust platforms and new projects are being developed every day. These new startups can offer investors lucrative (and risky) investment opportunities.
While cryptocurrency was originally created to act simply as a digital form of money, many tokens have grown well beyond that. Cryptocurrency tokens can be used for a wide variety of different things now, from staking and earning passive income to purchasing virtual lands in a metaverse.
The world of cryptocurrency and cryptocurrency tokens is certainly packed full of opportunities, but it’s also on the bleeding edge of innovation. That means many things are being developed and discovered for the first time. This can be a good thing when things work out, but it could also mean losing money if things fall through. Always exercise caution when investing in cryptocurrency and cryptocurrency tokens, and study up on projects before jumping in.