What are cryptocurrencies: A comprehensive guide
What are cryptocurrencies? Cryptocurrencies are digital, decentralized money for exchange, based on blockchain technology.
There is no central authority that manages and maintains the value of the digital currency, instead these tasks are widely distributed among cryptocurrency users across the internet.
You can use cryptocurrency to buy some regular goods and services. Most people invest in cryptocurrencies as they would in other assets – such as stocks or precious metals. While cryptocurrency is an exciting new asset class, buying it can be risky. You should do a lot of research to understand what cryptocurrencies are, how each one works, and the system they are based on.
The emergence of digital currencies:
Bitcoin was the first cryptocurrency, and was first introduced by Satoshi Nakamoto in a 2008 paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described the project as “an electronic payment system based on cryptographic proof rather than trust.” This cryptographic proof comes in the form of transactions that are verified and recorded on the blockchain.
What is blockchain?
Blockchain is an open, distributed ledger that records transactions in code. In practice, the technology is like a checkbook that is distributed across countless computers around the world. (This sentence should be explained further.)
Transactions are recorded in blocks that are linked together on a chain of previous cryptocurrency transactions.
“Imagine a book where you record every day all the money you spend,” explained Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax. “Think of each page as a block, and the pages of the book together as a chain of blocks.”
With blockchain technology, everyone who uses a cryptocurrency has their own copy of this book to create a unified record of transactions.
Every new transaction is recorded as it occurs, and every copy of the blockchain is updated simultaneously with new information. All records are kept identical and accurate to prevent fraud.
How can you mine cryptocurrencies?
Mining is the way new units of cryptocurrency are created in the world, while it is theoretically possible for the average person to mine cryptocurrencies.
But as the Bitcoin network grows, mining becomes more complex and requires more processing power. The average consumer used to be able to do this, but mining is now so expensive that many people who do the mining have to upgrade their equipment and techniques to stay ahead of the competition.
Some cryptocurrencies also require massive amounts of energy to mine. For example, Bitcoin mining currently consumes an annual average of 127 terawatt hours (TWh) of electricity.
How can cryptocurrencies be used?
There are a number of goods and services that can be purchased with digital currencies, especially using Bitcoin or Ethereum. Digital currencies can also be used as an alternative investment option away from stocks and bonds, taking into account the risks involved and the Sharia ruling on investing in them.
“Bitcoin, the most popular cryptocurrency, is secure and decentralized, and has become a store of value like gold,” says David Zeller, a cryptocurrency expert at financial news site Money Morning. “Some people even call it digital gold.”
How to invest in cryptocurrencies?
Understanding how to buy and store cryptocurrencies is crucial as some brokerage platforms like Robinhood, Webull, and eToro allow you to invest in cryptocurrencies.
With many exchanges similar to traditional investment platforms, creating an account is quick and easy. However, it is advisable to do thorough research on each cryptocurrency before investing in it.
For beginners wondering how to get started, follow these five steps:
Choose the cryptocurrency you want to invest in.
Choose a reputable cryptocurrency exchange.
Explore storage and digital wallet options
Select the amount you want to invest.
Stay informed and manage your investments wisely, following risk management strategies that work for you.
It is worth noting that the Sharia rulings regarding trading and investing in digital currencies must be reviewed. For more information, please see the ruling on dealing in digital currencies.
The most popular and traded digital currencies:
Bitcoin (BTC)
Bitcoin is still the currency that people generally refer to when talking about cryptocurrencies as the foundation of digital currencies. Its mysterious inventor, the alleged “Satoshi Nakamoto,” first launched the currency in 2009 and has had a rollercoaster ride since its launch. But in 2017, the cryptocurrency gained public awareness and became a focus for traders. Later in 2024, the Securities and Exchange Commission approved the launch of exchange-traded funds that invest directly in Bitcoin, giving investors a simple way to bet on Bitcoin.Ethereum (ETH)
The closest cryptocurrency to Bitcoin is Ethereum, symbolized by the symbol “Ether.” The Ethereum network aims to replace traditional financial services companies such as banks and brokerage firms with decentralized applications called “DeFi” for financial applications.Taysir (USDT)
The price of Tether is fixed at $1 per coin, which is why it is called a stablecoin. Stablecoins are tied to the value of a specific asset and Tether is tied to the US dollar.
Tether often acts as a middleman when traders switch from one cryptocurrency to another, instead of going back to the dollar they use Tether.USD Coin (USDC)
This coin is the second largest stablecoin, and like USDT, USDC is centralized and backed by cash and US treasuries.Binance Coin (BNB)
It is the cryptocurrency of the Binance platform, which is one of the largest cryptocurrency exchanges in the world.
It was originally created as a token to pay for low trades.Solana (SOL)
Launched in 2020, Solana is an independent blockchain network. It also has a native cryptocurrency of the same name. Solana is often used for smart contracts and non-fungible tokens (NFTs).XRP) Ripple )
Created in 2012, Ripple (XRP) provides a way to pay with many different real currencies. Ripple can be useful in cross-border transactions and uses a trustless mechanism to facilitate payments.Dogecoin (DOGE)
Dogecoin was originally created as a joke after the rise in the price of Bitcoin, and takes its name from an internet meme featuring a Shiba Inu dog. Unlike many cryptocurrencies that limit the number of coins in existence, Dogecoin has an unlimited supply. It can be used to pay or send money.Cardano (ADA)
Cardano is an open-source, decentralized public blockchain. Although it has been around since 2017, it began development in 2015 with the help of one of the founders of Ethereum.
What are the advantages of cryptocurrencies?
Cryptocurrencies have gained great popularity among investors worldwide, especially after technological intervention and manufacturing, while Bitcoin has achieved a satisfactory position compared to other currencies.
Cryptocurrencies facilitate the transfer of money without any intervention from banks and other financial institutions. The most important advantages of these currencies are:
Accessibility:
An investor only needs a computer or smartphone with internet access to use cryptocurrencies for purchase or trading. The identity verification process is very easy and fast, and there is no need for credit verification to open a cryptocurrency wallet.
So it is much faster and easier compared to the old financial institutions. Cryptocurrencies also allow individuals to make online transactions or send money to someone without any hassle.Cryptocurrencies are also considered safe and secure as no one can access your funds unless they have access to the private key to your cryptocurrency wallet. However, if you forget or lose your key, you will not be able to recover your funds.
In addition, transactions are secured by the blockchain system along with a large network of computers that verify them. Therefore, it is safer if investors keep crypto assets in their own wallets.Inflation protection:
Many currencies have been devalued due to inflation. Many people see cryptocurrencies as a hedge against inflation. Bitcoin has a cap on the number of coins that will ever be minted, with only 21 million bitcoins ever being issued and all bitcoins being mined by the year 2140.Transaction speed:
If you want to transfer money in the USA, for example, there are several ways to move assets or funds from one account to another very quickly. However, cryptocurrency transactions are completed within minutes, which is attractive to many.
It is worth noting that within US financial institutions, most transactions are settled within three to five days, while bank transfers take at least 24 hours.Cost effective transactions:
Cryptocurrencies help you transfer money globally, and the cost of transactions using cryptocurrencies can be minimal or non-existent as they eliminate the need for third parties such as VISA to confirm transactions.Decentralization:
Cryptocurrencies represent a new model of decentralized money. They also help combat currency monopolies and free cash from control. No government organization can determine the flow of currency or its value, which crypto enthusiasts believe is what makes cryptocurrencies safe and reliable.Ease of currency exchange:
Investors can buy cryptocurrencies using currencies like US Dollar, Euro and many other currencies, as various cryptocurrency exchanges help investors trade cryptocurrencies and transfer currencies with the lowest and lowest transaction fees across multiple wallets.
What are the disadvantages of digital currencies?
Investing in cryptocurrencies may seem attractive and profitable, but investors should also consider the risks and threats surrounding them:
Price fluctuation:
Cryptocurrency prices that are high can turn sharply lower the next day. Although the rise and fall of cryptocurrency prices is similar to what happens in the stock market, these fluctuations in cryptocurrencies tend to be more severe among digital assets.Unfair ratings:
When you invest in the stock market, stock prices can be based on the underlying company's sales, earnings, growth rates, cash flows, dividend yields, and many other factors, but this is not the case in the cryptocurrency market.
In many cases, cryptocurrency investors do not have the appropriate financial framework to correctly determine market value.Lack of regulations:
Governments and regulatory bodies around the world are still trying to figure out how to govern cryptocurrencies.
While some countries like El Salvador and the Central African Republic are moving full steam ahead to adopt Bitcoin as an official currency, officials in India and China have declared cryptocurrencies illegal.While the US government is currently grappling with the issue of regulating cryptocurrencies and wondering whether these digital currencies should be treated as a currency similar to the dollar or a financial asset, this classification will set the rules for the operation, trading, creation and taxation of digital currencies.
There are no easy choices here as a one-size-fits-all solution may be wrong because different cryptocurrencies have different goals and features, and may require a variety of treatments and regulatory rules on a case-by-case basis.
Decentralization:
Many investors and crypto enthusiasts see decentralization as an important feature of digital assets. Removing intermediaries such as banks and financial service providers from the equation reduces transaction fees and speeds up processing times.
Verifying data across a global network increases the security of blockchain systems.But decentralization can be a double-edged sword, as decentralized blockchain networks are managed by consensus and voting among a global community, which creates a number of potential problems. Proposed changes to the blockchain technology may not be popular, delaying or even preventing useful or necessary modifications altogether.
Losing crypto wallet keys: Cryptocurrency holdings are kept in a digital wallet, you can set up a digital wallet on your smartphone, you may even buy a special device just for storing cryptocurrency keys.
But what if you forget your digital wallet password? Worse, what if you lose your smartphone or the physical wallet that holds your Bitcoin and Ethereum assets? In this case, recovering your digital funds will be difficult or even impossible.
Read more: What are meme coins?
Central banks and digital currencies:
Many governments have banned the use of digital currencies in their countries since their inception due to the ambiguity surrounding digital currencies and dealing with them. They have even gone so far as to enact laws criminalizing those who deal with or mine these currencies.
But in light of this technical revolution, rapid technological development, and digital decentralization revolution, most governments have begun to enact laws and regulations to regulate dealing in digital currencies.
We have recently seen central banks working on issuing their own digital currencies. According to a survey conducted by the Bank for International Settlements, 94% of the 86 banks surveyed are considering issuing their own digital currency. The BIS has expressed its concerns that these centralized digital currencies will disrupt the conduct of monetary policy in the coming years.
Frequently Asked Questions:
What is the difference between digital currencies and cryptocurrencies?
Cryptocurrencies are digital currencies that rely on blockchain technology to secure data and transactions, making them more secure. It is worth noting that all cryptocurrencies are digital currencies, but not all digital currencies are encrypted.How are cryptocurrencies used?
Digital currencies are used in buying and selling some goods and services, and can be invested in like stocks and bonds, and are used for payment and sending money.What are the risks of cryptocurrencies?
The significant fluctuation of cryptocurrency prices over short periods, as well as the decentralization of these currencies and the lack of international regulations and rules for dealing with them, make them a risky investment compared to investing in stocks and bonds.