What is cryptocurrency?
By now, you've heard of blockchain technology, NFTs and cryptocurrencies. In recent years, the cryptocurrency market has become an important part of the global financial ecosystem, with many types of cryptocurrencies being developed. Cryptocurrencies have been trending on social media and have started making their way to the real world, with more and more companies, retailers and even bars, accepting crypto as a means of payment. But what exactly is crypto, and how does it work?
Cryptocurrency is a digital currency, also called virtual currency, that uses cryptography to secure and verify transactions and to control the creation of new units. Cryptocurrencies are decentralized and operate on a peer-to-peer network, which means they do not require a central authority or central bank to function.
Blockchain technology is the foundation of cryptocurrencies. It is a distributed ledger that records and stores all cryptocurrency transactions. Each block in the blockchain contains a list of transactions that are validated by computing power and cryptography. Once validated, the new block is added to the existing chain of blocks, creating an unalterable record of all transactions.
How does cryptocurrency work?
Cryptocurrencies differ from fiat currencies such as the U.S. dollar, in that they are not physical and do not have legal tender status. Traditional currencies are kept in bank accounts, while cryptocurrencies are kept in digital wallets.
As mentioned above, cryptocurrency transactions are secured using cryptography, which involves the use of a private key to sign transactions. The private key is a secret code that only the owner of the digital wallet knows. This makes cryptocurrency transactions secure and virtually impossible to counterfeit.
One of the biggest benefits of cryptocurrency is that it operates independently of traditional financial institutions and credit cards, making it an attractive option for people who do not have access to a bank account.
In order to purchase crypto, users will need to head over to crypto exchanges. Cryptocurrency exchanges such as Binance and Coinbase allow users to buy, sell, and trade cryptocurrencies using different fiat currencies, including USD, or different cryptocurrencies. As an example, one could purchase BTC using either their credit card, their PayPal account, or ETH.
Cryptocurrencies can be used as a medium of exchange for goods and services. They are known for their volatility, which refers to their tendency to fluctuate in value over time. This volatility can be attributed to various factors, including market demand, news events, blockchain halvings and more.
Users can invest in crypto and make money in the same way they can make money on the stock market: they can purchase a digital currency at a certain price and sell it when the price rises. However, stablecoins such as Tether and USD Coin (USDC), are designed to have a stable value and are pegged to a fiat currency or commodity.
While cryptocurrencies offer many benefits, they also pose risks, including scams, hackers, and capital gains taxes. The IRS considers cryptocurrency to be property and taxes it accordingly. It is important for beginners to understand the risks and potential rewards of cryptocurrency investment.
Bitcoin, the first cryptocurrency
Bitcoin (BTC) is the first and largest cryptocurrency in the world, with the highest market capitalization. In fact, any cryptocurrency that isn't bitcoin is referred to as an altcoin. Bitcoin was designed for its most important use case: to decentralize control of money and remove the need for a central authority (for example, banks).
The original 2008 Bitcoin white paper that first described the blockchain system and its set of computational rules - that would serve as the backbone of the entire crypto market - was written by a person or group of people known as Satoshi Nakamoto. The Bitcoin protocol was officially released in 2009 as open-source software.
Bitcoin is a trustless form of money that removes the need for a trusted third party to keep a ledger, because everyone part of the Bitcoin network has a copy of this ledger. A copy of the blockchain can be downloaded, and any user can inspect the path of bitcoins from one transaction to another with public data being accessible through an API. Bitcoin transactions are pseudonymous, meaning users are not required to provide proof of their identity.
Bitcoin uses the Proof of Work consensus mechanism, which requires members of the network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system, guaranteeing a secure blockchain.
Ethereum is the second largest blockchain and cryptocurrency.
It is an open-source blockchain network with smart contract functionality, designed to be scalable, programmable, secure, and decentralized. Ethereum blockchain users can build apps, dApps, DeFi apps, NFT marketplaces, hold assets, make transactions and communicate, with no central authority or intermediaries involved. Ethereum has its own cryptocurrency, Ether (ETH), which is used to pay for certain activities on the Ethereum network. Like on the Bitcoin blockchain, Ethereum transactions are public.
Until September 2022, Ethereum also used the Proof-of-Work (PoW) consensus algorithm. With the Ethereum Merge, the network moved to the Proof-of-Stake (PoS) consensus mechanism. This transition was included in a series of upgrades called Ethereum 2.0. With PoS, Ethereum is secured by a global network of validators running Ethereum's software while staking a certain amount of ETH tokens, removing the need for miners.
The Stacks blockchain provides a blockchain technology that uses Bitcoin's high security while allowing the creation of smart contracts. Stacks uses a consensus mechanism called Proof of Transfer (PoX). It relies on the Bitcoin blockchain, like a layer 2 would, but it is distinct from Bitcoin and is maintained by and for Stacks nodes. It has its own cryptocurrency, STX.
Bitcoin-secured NFTs, unique digital assets on the blockchain, can be created on the Stacks blockchain. Gamma.io, Stacks' leading NFT marketplace, lets users purchase, sell and trade Stacks NFTs, view their Ethereum NFTs, and create their own NFT collections in minutes, no-code needed.