Résumé
Cryptocurrencies are digital currencies based on blockchain technology that enable peer-to-peer (P2P) transactions.
Bitcoin, Ether, BNB and USDT are known examples of the main cryptocurrencies by capitalization.
Cryptocurrencies are accessible through crypto wallets or exchanges. Although people often say they are “stored” in wallets, they are actually stored on a blockchain.
They have specific characteristics, including decentralization, transparency and immutability.
What is a cryptocurrency?
Cryptocurrencies are decentralized digital currencies that use cryptography to provide security. They can operate independently of intermediaries such as banks and payment processing companies.
This decentralized nature facilitates peer-to-peer (P2P) transactions directly between individuals. But instead of physical wallets and bank accounts, people access their cryptocurrency through crypto wallets or exchanges.
You may have heard that cryptocurrencies are “stored” in wallets. However, cryptocurrencies do not actually exist in crypto wallets or exchanges, in reality, they always remain on the blockchain. In the case of a crypto exchange, it holds the private keys which allow users to access these funds.
The first and most well-known cryptocurrency is Bitcoin, created in 2009 by an individual or group under the pseudonym Satoshi Nakamoto. Since then, thousands of cryptocurrencies have emerged, each with unique characteristics and purposes.
Just like traditional fiat currencies, cryptocurrencies can be used as a medium of exchange. However, the use cases for cryptocurrencies have expanded significantly over the years to include smart contracts, decentralized finance (DeFi), stores of value, governance, and non-fungible tokens (NFTs).
How Do Cryptocurrencies Work?
We mentioned that cryptocurrencies use cryptography for security purposes, but what does that actually mean? Simply put, cryptocurrencies use advanced mathematical algorithms to secure transactions and protect data from unauthorized access or manipulation. These algorithms perform two main functions: preserving the confidentiality of user identities and verifying the authenticity of transactions.
Blockchain transactions are public and addresses (public keys) are pseudonymous, but not completely anonymous. In other words, if the transactions are visible on the blockchain, the users who are behind them are not easily identifiable. Cryptocurrencies achieve this through the use of cryptographic techniques such as hash functions and digital signatures.
Cryptocurrencies achieve autonomy through a distributed network of computers known collectively as a blockchain, which is essentially a decentralized digital ledger that stores transaction data across many specialized computers in the network.
Each of these computers, or nodes, maintains a copy of the ledger, and a consensus algorithm preserves the blockchain by ensuring that false or inconsistent copies are rejected. This distributed architecture increases network security because there is no single point of failure, like a bank vault, that malicious actors could exploit.
Cryptocurrencies allow individuals to transfer funds directly to each other. In a typical crypto transaction, the sender initiates the transfer by creating a digital signature using their private key. The transaction is then sent to the network, where nodes validate it by verifying the digital signature and ensuring that the sender has sufficient funds.
Once verified, the transaction is added to a new block, which is then added to the existing blockchain. Although it may seem complicated, miners take care of these steps and the user does not have to worry about it.
What makes cryptocurrencies unique?
Cryptocurrencies have impacted diverse ecosystems, from finance to technology, by introducing innovative features that set them apart from traditional protocols and currencies. Some of the main characteristics of cryptocurrencies include:
1. Decentralization
The decentralized architecture of cryptocurrencies eliminates the need for a central authority. This allows for greater autonomy, as well as less vulnerability to manipulation or control by a single entity.
2. Transparency and immutability
Blockchain technology records all transactions on a transparent and tamper-proof ledger. Therefore, once a transaction is added to the blockchain, it can be viewed by anyone and cannot be modified or deleted.
3. Programmability
Many cryptocurrencies, such as ETH, are programmable, allowing developers to deploy smart contracts to create decentralized applications (DApps) and other innovative solutions on these blockchains. Additionally, because permissionless blockchains are open-source, anyone can start deploying code on a blockchain and create their own DApps.
4. Without borders
Cryptocurrencies are easily transferable and exchangeable globally, allowing people to use them for international transactions and remittances.
5. A predefined supply
Many cryptocurrencies have a limited supply, meaning that project teams will only ever create a finite number of units. This deflationary aspect of cryptocurrencies can prove positive in the long term, because scarcity stimulates demand.
In contrast, fiat currencies are often inflationary because central banks can print more money. However, with a limited supply, cryptocurrency inflation can be better controlled because the total number of units is predetermined.
Types of cryptocurrencies
Among the myriad of cryptocurrencies in existence, four notable examples are Bitcoin (BTC) and the popular altcoins Ether (ETH), Binance Coin (BNB), and Tether (USDT).
Bitcoin (BTC)
BTC is the most popular cryptocurrency. It uses a consensus mechanism called proof of work (PoW), in which miners compete to validate transactions and keep the network running. Additionally, the limited supply of 21 million units of BTC makes it relatively rare and helps maintain its value over time.
Ether (ETH)
ETH is the second most popular cryptocurrency, launched in 2015 by Vitalik Buterin and his team. In addition to value transfers, it allows programmability thanks to smart contracts.
Like BTC, ETH initially used a PoW consensus mechanism, but moved to the more environmentally friendly and energy efficient Proof of Stake (PoS) model. This development allowed users to validate transactions and secure the network by staking their ETH rather than by nodes using their computing power.
BNB
Formerly known as Binance Coin, BNB (which stands for Build and Build) was introduced in 2017 by the Binance exchange as an ERC-20 token on the Ethereum blockchain. In 2019, it migrated to its own blockchain, BNB Chain, as the BEP-2 token.
Later, the Binance Smart Chain (or BSC, now called BNB Smart Chain) was created and today the BNB cryptocurrency exists both on the BNB Chain as a BEP-2 token and on the BSC as BEP-20 token. It is also worth noting that the BNB Chain consists of two blockchains: the BSC, which is compatible with EVM, and the BNB Beacon Chain (formerly called Binance Chain), which covers governance, staking and voting.
BNB Chain provides an environment for creating smart contracts and DApps, and is characterized by lower transaction fees and faster processing times than many other blockchains.
BNB has various use cases, some of which include paying transaction fees on BNB Chain and trading fees on Binance, participating in token sales, and staking for network validation on BNB Chain. Binance also uses a periodic token burn mechanism, which limits the overall supply of BNB.
Tether (USDT)
USDT is a USD-backed stablecoin launched in 2014 by Tether Limited Inc. Stablecoins are cryptocurrencies designed to maintain a constant value relative to an underlying reserve asset, such as a fiat currency. In the case of USDT, each token is backed by an equivalent amount of assets held in the company's reserves. Therefore, USDT offers the benefits of a cryptocurrency while minimizing price fluctuations.
What is the capitalization of a cryptocurrency?
The term “crypto capitalization” is a metric used to determine the size and relative value of a cryptocurrency. To calculate it, simply multiply the current price of a crypto by the total number of units in circulation. However, you don't need to do this as many crypto platforms calculate it for you.
Capitalization is often used to classify cryptocurrencies, with a higher capitalization generally indicating a more stable and more widely accepted cryptocurrency. Conversely, a lower capitalization generally indicates a more speculative or volatile asset.
It should be noted, however, that this is just one of many factors to consider when assessing the potential of a cryptocurrency. Several other factors, such as technology, team, tokenomics, and use cases, should also be considered when studying cryptocurrencies.
How to invest safely in cryptocurrencies?
Like other financial assets, investing in cryptocurrencies can be risky and result in financial losses. Here are five essential tips to make buying and selling cryptocurrencies safer:
1. Do your own research (DYOR)
The acronym DYOR stands for “do your own research.” It is important to understand the basics of blockchain technology, such as the different types of cryptocurrencies and market dynamics, before investing in any cryptocurrency.
Books, blogs, podcasts, and online courses are good places to start. You should also learn about the projects, teams and technologies behind the different cryptocurrencies in order to make informed decisions.
2. Start small and diversify
The cryptocurrency market can be volatile and unpredictable, especially when it comes to less popular cryptocurrencies. That's why it's a good idea to start with small investments that won't put a dent in your wallet. This approach allows you to gain experience and better understand market trends without risking significant financial loss.
Diversification can also be useful when investing in cryptocurrencies. Instead of focusing on a single cryptocurrency, investing in different cryptocurrencies can reduce your overall risk and increase the chances of long-term growth of your holdings.
3. Stay involved
As the cryptocurrency landscape is constantly evolving, it is important to stay abreast of news, technological advancements and regulatory updates so that you can make timely decisions. Joining a crypto community is a great way to do this.
4. Choose a reputable crypto exchange
Choosing a reputable and safe crypto exchange for your investments should be your top priority in terms of security measures. The right crypto exchange can be found by researching different options and comparing their fees, customer service, interface and available cryptocurrencies.
5. Apply good risk management
Before investing in a cryptocurrency, it is essential to implement certain risk management techniques. For example, investors should only invest what they can afford to lose. Additionally, putting stop-loss orders in place to limit potential losses and making gains at predetermined levels to secure gains can make a big difference.
Conclusion
The cryptocurrency ecosystem represents a revolutionary approach to finance and technology. However, the future of cryptocurrencies is uncertain, and everyone has a different opinion on the matter.
Some believe that Bitcoin will replace gold and disrupt the existing financial system, while others say that cryptocurrencies will always remain a secondary system and a niche market. Others believe that Ethereum will become a decentralized computer that will serve as the backbone of a new Internet.
There are many possible scenarios: it’s simply too early to say with certainty what will happen even a year from now. Nevertheless, we cannot deny the already visible effects of cryptocurrencies on various sectors, which are expected to further develop in the coming years.
More information
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