What is Cryptocurrency? Learn more about how it works, its use cases, and FAQs
Updated: Jun 14, 2022
Money, as we know, is a medium of exchange for goods and services and is controlled by a federal entity, like the Federal Reserve Bank in the US, the CBN in Nigeria, the Reserve Bank of India, etc.
But this form of exchange has been seen to have a lot of faults, among which are high fees and the extremely high supply, which results in an outrageous decrease in value (inflation).
As a result of this, a man named Satoshi Nakamoto (internet name), who wanted to change the bizarre financial system with the help of blockchain technology, created the first-ever digital asset, which is also the first-ever cryptocurrency called bitcoin.
Cryptocurrency (crypto for short) is a digital or virtual form of money that is backed by cryptography and operates as a decentralized entity, not needing a government or a central bank to be distributed or regularized.
Crypto has made it easy for anyone from anywhere to conduct financial transactions like receiving or sending money via a peer-to-peer system or enabling transactions online without physical cash.
How It Works
The word crypto in cryptocurrency means concealed or hidden, while the word cryptography means writing in secret or secret writing. This includes the ability for users to send or receive messages in the form of money without a third or external party.
It is designed such that no one can see, know or trace transactions done by any two entities. It runs on a public ledger called the blockchain, which records all transactions carried out in the crypto sphere.
Units of cryptocurrency can be created through a process called mining, which involves the use of high-level computers to solve extremely complex mathematical problems that generate these virtual coins.
Users can also buy these coins and store them in an online wallet or decentralized exchange, due to the volatile nature of the assets, storing them for a long while might generate future returns. This process is called HODLing (Hold On for Dear Life).
Crypto can also be used to store value over time, make transactions online, play games (play to earn), purchase goods and services, etc.
Today many companies have adopted cryptocurrency as a medium of payment. Recently Elon Musk, the world's richest man, announced that dogecoin can be used as a medium of payment to buy Tesla merchandise.
Also, many other companies around the world have adopted another crypto as a mode of payment, and a few of these companies are Petco, AMC theatres, AXA Insurance, LVMH, Nordstrom, Off-White, etc. This is evidence of how fast blockchain technology is growing.
Uses Of Cryptocurrencies
Crypto can be used for the following,
1. Send money to anywhere in the world with very low transaction fees.
There is no limit to how much you can send on the blockchain, and fees are negligible. Examples of cryptos with the lowest fees are; Solana (SOL), Binance Coin (BNB), Dogecoin (DOGE), Polkadot (DOT), Cardano (ADA), Ripple (XRP), etc.
2. Alternative Store of Value.
Money kept in the bank is usually dormant and subject to inflation, thereby decreasing value over a long period, but cryptos, although sometimes very volatile, are a better way to store money over time. Crypto prices can soar very high over a short period creating more wealth for the holder. For example, the price of bitcoin has increased over 10,000% over the last ten years. Cool, right!?
3. Yield farming.
Yield farming is a process whereby a user lends money to a protocol called decentralized finance, or DEFI for short, and that user is being rewarded in return for their services, This is one of the best ways to earn money on the blockchain among others.
4. Play to Earn games (P2E).
With the help of cryptocurrency, gamers now can be rewarded for doing what they enjoy, playing games. You can earn real-world value or cash just for playing games, and a lot of people all over the world play games for a living with the help of P2E games.
The biggest play-to-earn game is Axie Infinity (AXS). It was created in 2018, where users collect cartoons called Axies in form of NFTs or nonfungible tokens. Users are allowed to adventure, breed, and battle their axies to earn a smooth love potion or SLP, another crypto token as a reward for battling.
5. A mode of payment.
With the adoption of crypto, a lot of companies have made it easy to purchase their services using crypto, for example, you can buy Tesla merch using dogecoin, and travel the world using bitcoin (BTC) as payment.
Frequently asked questions (FAQs)
1. Is cryptocurrency legal?
Crypto is legal in some countries like El Salvador, however, it has been banned in other countries like China. I believe in the long run laws will be made and the whole system will be regulated, which will make crypto legal across the world.
2. Where to buy and sell crypto
You can buy and sell crypto on exchanges. Exchanges are platforms that allow transactions of cryptocurrencies, examples are Binance (the world`s leading crypto exchange), Kucoin, Coinbase, crypto.com, etc.
3. What is the market cap of crypto?
Market cap means the total value of all traded stock or crypto, and the market cap for the cryptocurrency market is over 1.25 trillion dollars as of the time of writing this article.
4. How many crypto coins are there?
There are over 18,000 crypto coins in existence. However, only about 10,000 of them are active today. All coins except bitcoin are called altcoins. Examples of altcoins are Ethereum, MANA, SAND, APE coin, Terra Luna, Shiba Inu, Dogecoin, Squid coin, etc.
Some altcoins like Shiba Inu, Saitama, and DOGE are classified as meme coins. Other coins like Squid coin and Terra Luna have lost all or almost all of their value over the past couple of months, either due to scams or weak management.
There are also stable coins whose values are pegged against the US dollar. A stablecoin must be approximately one dollar all the time. Some examples are Tether USD (USDT), USDC, and BUSD.
5. Is cryptocurrency a good investment?
Yes, cryptocurrency is a good investment. However, it is unwise to invest more than what you can afford to lose in crypto as the market is still new and subject to manipulation and scams, leading to unreasonably high volatility.
6. What are the disadvantages of crypto?
Just like the saying, everything with advantages also has its disadvantages, crypto has its share of disadvantages as well. Some of which are,
Cyber security threats
It is not widely accepted yet
In conclusion, cryptocurrency has come to stay. However, one must take extreme caution trading it, as it could become very risky and unpredictable. Regardless, it cannot be stopped by anyone, not even the government. Soon, it might even replace the traditional currencies we use due to its simplicity, decentralized nature, speed, and other factors.
NFA: Not Financial Advice. IYOPS or the author(s)/editor(s) are not registered investment advisors or brokers/dealers. All investment opinions expressed are from the personal research and experience of the author/editor and are intended as educational material. Despite our best efforts to make the information available as accurate as possible, occasionally, we err, as humans do.
DYOR: Do Your Own Research before making any investment decisions based on your personal circumstances. We recommend taking professional advice before making any investment decision.
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Abdulhafeez Yusuf is an Agricultural student at Bayero University in Kano, Nigeria. He currently serves as a content writer at the International Youths Organization for Peace and Sustainability. His passions include web design, digital marketing, real estate, and Web3.
Inputs and Edits by Aswin Raghav R.