Cryptocurrencies Deconstructed: A Simple Guide


Let’s face it – a decade ago, no person would have thought that they would see digital currencies accepted on a global scale in the future.

The virtual coin has picked up quite the popularity for itself through the years, and for a good reason. In addition to providing security against inflation, cryptocurrencies have also managed to gain consumer confidence.

In fact, in a study by Binance (a cryptocurrency exchange platform online), it was found that 97% of consumers are confident when it comes to cryptocurrencies.

There are quite a few interesting things to know about the famous-infamous Bitcoin, Dogecoin, Ethereum, Tether, and the like.

Let’s dig in.

What is Cryptocurrency?

Cryptocurrency is, in thoroughly generalized terms, digital money. If you have ever played a game online and collected “credits” or “game coins,” you can draw an analogy from there.

While the coins in your games don’t hold any value in the real world, cryptocurrencies like Bitcoin and Ethereum have a good market value. You can use cryptocurrencies to trade in exchange for other cryptocurrencies or as digital tokens for real estate or other digital assets.

Much like you use physical money to buy things, you can use cryptocurrency online as an investment – whether for your future, your dreams, or purely for trading purposes.

Are There Many Cryptocurrencies?

crypto list from Yahoo Finance
10,000+ cryptocurrencies listed on Yahoo Finance

Yes, there are 21,422 cryptocurrencies being traded as of 20th October 2022, according to the data on CoinMarketCap.

The number is genuinely surprising, given that Bitcoin was the first cryptocurrency to be publicly launched not too long ago – in 2009. Between that span of roughly 13 years, cryptocurrencies have carved their own niche in the market.

The good thing to note about cryptocurrencies is that you can freely enter or leave the crypto trading world according to your convenience. There are plenty of online crypto exchanges like WazirX and Binance where you can register for a crypto trading account and begin trading.

How Did Cryptocurrencies Come Into Existence?

The story that talks about the inception of Bitcoin is actually pretty interesting. Have you heard of the name “Satoshi Nakamoto”? This was the pseudonym that Bitcoin’s creator(s) went by.

Intriguingly enough, the time between 2007 and 2009 was when the financial universe in the US was at its peak turmoil – and in the midst of this churn, Bitcoin was birthed.

It was then that the person/team involved in creating Bitcoin first described the technology that formed the backbone of cryptocurrency. You guessed it right – blockchains.

The anonymity revolving around Satoshi Nakamoto reigned supreme for some time; however, as time went by, more concrete evidence was found that established Dr. Craig Wright as the inventor of Bitcoin.

Why Go Crypto at All?

As technology kept improving by leaps and bounds, businessmen and traders from around the world found the legacy money-transmission ecosystems lacking.

The cycle times associated with cross-border money transactions were too long, too inefficient, and required multiple touchpoints and approvals that didn’t resonate with the needs of the time.

The involvement of financial institutions as middlemen for every transaction was also a major cause of attrition that demanded a better mechanism.

This is where blockchains step in – they bypass the legacy and traditional money transaction channels just by being what they are.

Let’s understand what blockchain technology actually is.

Understanding Blockchain: Super-Simplified

Let’s understand blockchains through an analogy from the physical world.

Consider that you are the bookkeeper at a company. You record every penny that steps in or out of your company in a ledger that you always keep with you. This ledger, in simpler terms, contains information about all the transactions that have happened at your company on any given day.

This ledger, in crypto terms, is the blockchain. Blockchain, thus, is a digital ledger that securely stores the transaction data pertaining to all the cryptocurrency transactions that are executed.

If you take your Bitcoin today and purchase a vacuum cleaner with it (just an example), the information of this transaction will be stored on the blockchain.

Why are Blockchains So Cool?

Blockchains are cool because they are everywhere. Explained more accurately, blockchain is a decentralized, distributed technology.

Consider this scenario:

You, being the bookkeeper, hold singular authority over the company’s ledger – you can modify it at will and hold it over the company’s head for exploitation.

However, you can’t do that with blockchains. Since blockchains are decentralized, the information regarding crypto transactions is scattered over hard drives and servers across the globe. There is no isolated, ultra-secure hub that you can hack into and siphon out the data for ransom.

In fact, once created blockchains can neither be modified nor the data contained in them be deleted.

Let’s just say blockchains are written in stone, like Moses’s ten commandments.

Furthermore, being digital, blockchains are faster than traditional transactions that occur through banks. This technology can easily sidestep the fixed working hours and working days of financial institutions.

You can successfully complete a crypto transaction over blockchains in the middle of the night on a Saturday – no problem. This is especially helpful with cross-border transactions, which require authoritative approvals before they can succeed. On blockchains, verification happens in parallel, saving the traders a load of precious time.

Being immutable, unchangeable, and decentralized, blockchains are thus hailed as a secure technology suitable for cryptocurrency.

Transaction Verification Over Blockchains

Blockchain transactions, as mentioned earlier, are verified in parallel. The way this happens brings in more characters to the crypto story: The Miners.

What is cryptocurrency mining?

Miners are just a bunch of people like you or your friends – only that they have computers with Avengers-level computing power. This computing power helps miners solve complex mathematical equations generated from the encryptions that protect a blockchain transaction.

It’s like a race – for every encryption, there are multiple miners with their own supercomputers running toward the finish line to solve it. The first miner who unravels the solution gets a reward.

This reward is – take a wild guess – a handful of virtual coins. This entire process is referred to as “Proof of Work” and is actually how verification happens with blockchains.

Are Blockchains Public? Are They Private?

Here’s the interesting thing about blockchains: they were invented to be public, but if you so wish, you can have your own private blockchain as well.

The major difference between a public and a private blockchain is related to access restrictions. If you are a regular consumer who wishes to dabble in the crypto space, you would go to a crypto trading platform and engage in something like Bitcoin or Dogecoin – both of which are based on public blockchains.

However, if you are the CEO of a global enterprise and wish to base your company’s transactions on a more secure foundation, you would go for Enterprise Ethereum, which is a private blockchain based on Ethereum. Private blockchains give you more control over the transactions happening at the company and data access.

So, What Can You do with Virtual Coins?

So, you’re interested in Bitcoins? Whichever cryptocurrency you are considering investing in, here are a few ways you can use your virtual coins.

You can Buy Technology or eCommerce Products

One of the best examples where a major tech company accepts Bitcoins is Microsoft. If you shop online on Microsoft’s websites, you will discover BitPay as the facilitator of cryptocurrency-based purchases during checkout.

The fact is that a lot of online merchants have begun to accept the major cryptocurrency as payment for their goods.

A few major eCommerce giants like Shopify and Rakuten have also begun to accept Bitcoin as a payment method for shopping on their online stores.

You can Buy Premium Watches and Jewelry

If you haven’t already heard of the world’s first made-in-gold, diamond-studded, Bitcoin-enabled premium watch by Frank Muller, you should check it out soon.

Many premium watchmaker brands across the world now accept Bitcoin as payment. You can also purchase jewelry with your Bitcoin.

You can Buy Insurance

If you are thinking of term insurance, it’s still out of the ambit of cryptocurrencies. However, you can now successfully purchase other insurance products using your Bitcoin.

One of the pioneering insurance providers was the Swiss company AXA which announced it would be accepting Bitcoin as payment for all its insurance products aside from term insurance.

What About the Valuation of Cryptocurrencies?

The valuation of cryptocurrency, unfortunately, is as unpredictable as the weather. Many variables are involved in determining how high or low a crypto coin will cost and whether it would sustain that number.

Truth be told, it is similar to the dynamics of the stock market to some extent. Listed below are some factors that may influence the value of a cryptocurrency:

  • Whether or not businesses adopt blockchain technology quickly
  • Whether or not merchants are open to accepting virtual coins as payment for their products and services
  • Whether or not cryptocurrency would be recognized as legal tender by the government

Another influencing factor is the cohesiveness between the underlying blockchain technology and the purpose that the product is intended for.

A good example is the XRP crypto by Ripple. The coin focuses on establishing partnerships with financial institutions, facilitating faster cross-border transactions by speeding up conversions and associated formalities between the concerned parties. This purpose-driven behavior enhances the quality and value of a cryptocurrency.

Okay, So What’s All the Hype?

The answer isn’t all black and white – there are quite a few factors at play that determine the hype around cryptocurrencies. According to research by Triple A, between 2020 and 2022, the increase in the number of crypto-asset users was to the tune of 217%.

The increase in cryptocurrency adoption is mostly driven by the retail industry. These players seem to have wholeheartedly adopted the concept of cryptocurrency. On the other hand, institutional players seem hesitant to adopt virtual coins, probably because of internal policies.

While these are the factors that drive crypto up, the lack of apparent ownership of a blockchain through investment may work to bring its favourability down.

If you purchase enough stocks in a company, you can claim a stake. However, a public blockchain remains public, and investors can’t claim stakes or ownership of it. Additionally, the dynamics of blockchain make it difficult for it to be profitable when the prices are lower.

Benefits of Cryptocurrencies

Cryptocurrencies, for all the uncertainties they exist with, have certain excellent benefits that set them apart from fiat currencies:

  • They provide unparalleled speed for cross-border transactions. If you wish to transfer money overseas, there are few options other than cryptocurrency to achieve it faster.
  • Cryptocurrencies offer comparatively lower transaction costs if you compare them with other services in the finance industry.
  • The best part is that cryptocurrencies can be accessed by anyone and can be traded by anyone. All you need to do is register on a trading platform.
  • Blockchains are known for their immutability and security; all transactions on blockchains are safe.
  • Since all cryptocurrencies are transacted on a public, decentralized ledger, there is high transparency.

Reasons to Say “No”

Looking for reasons not to invest in crypto? Every “coin” has two sides: here are a few things to be cautious of:

  • In case there is a loss in data of any virtual coin ecosystem, you could be looking at financial losses.
  • Although the entire public blockchain system is decentralized, some company still owns the whole setup. For example, Ethereum.
  • Although it was created for noble purposes, there have been instances of blockchain usage for illegal transactions in the past. The government can’t regulate cryptocurrencies as of yet, and the transactions are secure and immutable, making it impossible to drill down on illegal activities.

Long Story Short

Cryptocurrency is the purebred-digital cousin of fiat currencies.

There’s a lot of promise in cryptocurrencies if they are made mainstream. However, there’s a need to regulate them better and to create policies that help implement this ecosystem universally to eliminate the disparity in trading.