Cryptocurrency is a new and powerful type of asset. Around the world, billions of people are beginning to understand just how powerful cryptocurrency can be. As a result, huge, global businesses are implementing cryptocurrency technology in order to stay ahead of the competition. While cryptocurrency is extremely interesting, it can be a little bit difficult to understand at first. So, to help you grasp the basics, we’ve broken some important concepts below.
What is Cryptocurrency?
Cryptocurrency is a new and exciting asset class. The vast majority of crypto-assets are created adhering to a few basic premises; blockchain technology, decentralisation, and smart contracts. The first cryptocurrency to be created was Bitcoin (2007), however, following the initial success of Bitcoin, a plethora of other developers began working on alternative coins or Bitcoin forks; these are commonly referred to as “altcoins”.
The Cryptocurrency Market
Cryptocurrency as a financial market is a relatively new concept. It wasn’t until Vanguard’s Bitcoin ETFs were approved in September 2021 that this revolutionary new sector was legitimised. Following this landmark fundamental event, Bitcoin and the wider crypto market became far more tied to the performance of the stock market. This was because there was now far much institutional money flowing in, causing periods of low liquidity during weekends and holidays. While attaching itself to the stock market was always necessary for the success of cryptocurrency, it’s only a matter of time before we lose volatility and the crypto market begins to slow down and mirror the stock market.
Bitcoin
Bitcoin is the largest cryptocurrency by market cap (total supply x price per coin), because of this, Bitcoin dictates how the rest of the market is performing. Although originally created for use as a singular global currency that can facilitate cheap, quick, cross-border transactions, Bitcoin is now more commonly used as a store of value similar to gold. The core technology behind Bitcoin is the Blockchain, a decentralised, distributed database. What makes the blockchain so attractive is its irrefutable nature. Because everyone on the Bitcoin network has a copy of the entire Blockchain, nobody can falsify a transaction on the network as it would be instantly recognized as a mistake. The only way you could falsify a transaction is to own more than 51% of the computing power on the network (a 51% attack).
Store of Value
This is just a basic overview of cryptocurrency so we won’t go into too much detail but Bitcoin’s use as a store of value can be hugely beneficial to investors, here’s why. Let’s say you worked hard over the past 10 years and have managed to accumulate a bank balance of $100k. Despite being an impressive feat, many people fail to take inflation into consideration. Typically in the US, the rate of inflation the government aims for is around 3%, however, the reality is, due to debt and money printing, this number tends to be closer to around 6.8%. This means that every single year your balance of $100k loses buying power equal to around $6.8k. After just 5 years, your $100,000 would be worth just $70,000 after adjusting for inflation, a decrease of 30%.
Deflationary
In contrast to the dollar, Bitcoin constantly increases in value as the supply is limited (21 million coins total), and demand is continuously increasing. As such, Bitcoin can be a great investment for anyone trying to accrue wealth over the mid to long term. Instead of your purchasing power decreasing, it’ll grow by around 200% each year.
Lightning Network
As we mentioned, Bitcoin was originally created to act as a singular global currency with a fixed supply. Unfortunately, slow and expensive transactions limited Bitcoin on this front. However, a new Bitcoin network was created called the lightning network. This network can process transactions far more quickly and cost-effectively than the traditional Bitcoin network. A real-world example of the lightning network can be seen in El Salvador – the first country to make Bitcoin a national currency.
Ethereum
It would be difficult to provide an accurate, comprehensive overview of cryptocurrency without mentioning Ethereum. The largest altcoin by market cap, Ethereum uses blockchain technology and smart contracts to allow people to create decentralised apps (dAPPs) on the network, similar to creating an app for the PlayStore/AppStore. These dAPPs can fulfill a multitude of different purposes: creating NFT marketplaces, Web3.0 sites, cryptocurrencies, and much much more.