Crypto 101: All about cryptocurrency

Recently, we published an article by our co-founder Andrew Berezin titled «Why it is Profitable to Invest in Cryptocurrencies in 2024». Today in our #simplyCrypto column, we will explain cryptocurrencies and how blockchain works.

What is cryptocurrency?

Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Unlike traditional currencies issued by governments (like the US dollar or euro), cryptocurrencies operate on blockchain, a decentralized network of computers that ensures the security and transparency of transactions.

Key points about cryptocurrency:

• Decentralization: Cryptocurrencies are typically not controlled by any central authority, such as a government or financial institution. Instead, they rely on a decentralized network of computers to verify and record transactions on a public ledger known as the blockchain.

• Blockchain Technology: The blockchain is a digital ledger that records all cryptocurrency transactions across a network of computers. Each transaction is grouped into a block and linked to the previous block, forming a chain. This technology ensures that transactions are secure and cannot be altered.

• Mining: Some cryptocurrencies, like Bitcoin, are created through a process called mining. This involves using computer processing power to validate and secure the blockchain. Miners are rewarded with new cryptocurrency coins for their efforts.

• Usage and Investment: Cryptocurrencies can be used to buy goods and services, though they are not widely accepted everywhere. Many people also invest in cryptocurrencies, viewing them as a potential for high returns.

• Security and Risks: While blockchain technology is secure, the cryptocurrency market is susceptible to hacks, scams, and high volatility. Investors should be aware of these risks and take measures to secure their digital assets.

Popular cryptocurrencies

Bitcoin

Bitcoin is one of the most popular cryptocurrencies in the world, but it is far from the only one. It was the first cryptocurrency in the world, appearing in 2009. Satoshi Nakamoto developed it, although it is unclear if such a person really existed. Some believe it’s a pseudonym for another person or even a group of people. Initially, Bitcoin had no value, but with the creation of the first crypto exchange in 2010, its price increased to $0.0025.

Ethereum

Ethereum is a blockchain technology platform designed to perform various functions. A popular comparison is that if Bitcoin is like mail, then Ethereum is the entire internet. Vitalik Buterin, who became interested in Bitcoin in 2011 as a 17-year-old programmer, recognized the limitations of Bitcoin and created Ethereum as a technology that surpasses the traditional blockchain.

However, besides these two types of cryptocurrency, there are many different altcoins. Forbes compiled a list of the leading cryptocurrencies by market capitalization as of June 2024. Apart from Ethereum, which tops the list, it includes nine more altcoins:

• BNB. Market cap: $89.8 billion
• Solana. Market cap: $68.5 billion
• XRP. Market cap: $26.7 billion
• Dogecoin. Market cap: $19.9 billion
• Toncoin. Market cap: $16.8 billion
• Cardano. Market cap: $15.1 billion
• Shiba Inu. Market cap: $12.7 billion
• Avalanche. Market cap: $12.3 billion
• Tron. Market cap: $10.2 billion
• Polkadot. Market cap: $9.3 billion

Benefits and risks of Cryptocurrency

Before discussing the downsides of cryptocurrencies, let's look at their advantages. So, what are the benefits of cryptocurrencies?

• Potential for high profit: Cryptocurrencies can significantly increase in value over a short period, creating an excellent opportunity for investment returns. However, it is important to approach investments consciously and consider the risks and popularity of a particular cryptocurrency.

As an example, let's look at how the price of Ethereum changed from June 2023 to June 2024:

As shown in the chart above, the price nearly doubled in just one year.

• Portfolio diversification: Diversification is always important, especially during market uncertainty or crisis. It acts as insurance, protecting your investments from unexpected surprises. By diversifying with cryptocurrencies, you add variety to your portfolio.

• Revolutionary technology. The blockchain technology is becoming a true revolutionary power, especially since it’s spreading widely across numerous industries, including shipping, supply chains and healthcare. Investing in cryptocurrency is a good way to support and participate in the advancement of cutting-edge technology.

However, there are also several risks connected to investing in cryptocurrencies. They include:

• Risk of speculative trading. Cryptocurrencies, like other assets such as tech stocks, precious metals, and real estate, are susceptible to speculative bubbles. And critics like Warren Buffett, Bill Gates have warned of a potential crypto bubble. However it can be argued that some speculative behavior is expected in the cryptocurrency space, especially as blockchain technology continues to develop and mature.

• Theft remains one of the most common threats to cryptocurrency users, and hackers have stolen tokens worth billions of dollars from exchanges, wallet software, and ordinary users.

However, there are many ways to protect yourself from this kind of risk. They include using VPN, two-factor authentication, avoiding public Wi-Fi spots and so on.

Overall, cryptocurrencies represent a revolutionary advancement in digital finance, offering potential high returns and new opportunities for portfolio diversification. Technologies like blockchain, which underpin cryptocurrencies, promise to transform various industries by providing decentralized solutions.

However, as with any other type of investment, it's important for investors to stay informed and cautious. By understanding both the advantages and the challenges, individuals can make more informed decisions and potentially increase their capital several times.

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