What is Cryptocurrency

Crypto has shown unparalleled adoption rates over the past few years. However, many new investors, primarily motivated by fear of missing out (FOMO), lack a deep understanding of what cryptocurrencies are and their potential capabilities. 

Cryptocurrency is digital money that can be used over the internet. So what makes it different from transacting normal currency through banking applications? It’s decentralised. While cryptos have mainly been used for trading and online transactions, it has also grown to develop a few other practical use cases.  

Key Points 

• Cryptocurrency is digital money that is decentralised, primarily used for trading and online transactions, and differs from traditional currency transactions through banks. 
• The history of cryptocurrency started with Bitcoin in 2009, followed by numerous developments including Ethereum’s launch and major market events like the Mt. Gox security breach. 
• Cryptocurrencies are characterised by their decentralisation and the use of blockchain technology. 

The History of Cryptocurrency 

The first cryptocurrency, Bitcoin, was launched in 2009 by a mysterious developer named “Satoshi Nakamoto” ^[1]. The founder published a scientific paper to explain the technology and rationale behind the idea of Bitcoin. Cryptocurrencies have amassed a cult-like following ever since. This success can be seen in Bitcoin’s growth over the years alone. 

Following the success of Bitcoin, other cryptocurrencies started to emerge on the scene as well. Over the years, thousands of cryptocurrencies have been created and the community has grown to millions of investors. However, the journey wasn’t all smooth, a few key events have helped shape the crypto market the way that it is known to be today.  

• Mt. Gox Tumble ^[2]: The crypto space faced a major setback when the bitcoin exchange Mt. Gox underwent a security breach. Mt. Gox was the biggest bitcoin exchange at the time and the hackers stole a sum of 850,000 BTC leaving the exchange shaken and forced to shut. While this was a sad day for crypto adoption, this forced companies to build more secure platforms with investor insurance.  

• Launch of Ethereum ^[3]: Bitcoin inspired the launch of many currencies till 2015. However, the innovation of Ethereum overshadowed everything that came between the launch of Bitcoin and Ethereum. The new entrant brought the idea of programmability to blockchain, hence giving birth to the era of smart contracts, decentralised applications, and DeFi. This programmability of blockchains also made the creation of new tokens easier. 

• The idea of “Forking” Ethereum ^[4]: The early days of Ethereum weren’t all sunny. In 2016, a Decentralised Autonomous Organization (DAO) that was created to be an investment vehicle using smart contracts got hacked and the thieves stole $60 million from the pool of $150 million. The development team voted to hard-fork the blockchain to restore the lost funds. This fork led to the creation of two blockchains, the original Ethereum blockchain and Ethereum Classic.  

• ICO bubble: Ethereum’s massive success was a testament to crypto adoption. This period of crypto buzz created explosive development activity on Ethereum, flooding the crypto space with new tokens. These tokens were launched through Initial coin offerings (ICOs). This was the act of raising funds by issuing the project’s native tokens. While this helped some investors make life-changing money, this also invited frauds to steal investor money and vanish. This rise in fraudulent activity also pushed regulators to limit ICO activity.  

• Bitcoin’s ATH and subsequent fall ^[5]: December 2017 will always be a date to remember for early crypto adopters. This is when Bitcoin shot up to $20,000, creating immense greed and FOMO in the market. However, this peak was followed just days later by a 30% drop that shaved billions of dollars off of the total cryptocurrency market capitalization. It was one of the biggest market corrections seen to date, sending Bitcoin’s price tumbling below $11,000. 

• New wave of adoption ^[6]: The crypto space picked up momentum once again in 2020 as more projects started to focus on utility. 2020 brought an increasing interest in decentralised finance. Institutions also began to show interest in the space, triggering the next bull run. Bitcoin hit new milestones, reaching $40,000 a week into 2021, $50,000 in February 2021, and $60,000 in March 2021. After a turbulent couple of weeks in May, it dropped to less than $34,000 before soaring to another all-time high close to $69,000 in November 2021. The years to follow only aided adoption by bringing in creative use cases in the form of NFTs, metaverses, Central Bank Digital Currencies (CBDCs), and scaling solutions.  

As of now, crypto has become a household name for traders and developers alike. The retail and institutional interest is at an all-time high as the SEC has started to approve crypto ETFs. This increased activity in the crypto space has propelled the overall market cap to $2.4 trillion ^[7]. The longevity of the market suggests that the only way is up as more institutions, regulators, and businesses find interest in the use cases of these currencies and their underlying technology.  

Cryptocurrency vs. Traditional Currency 

More and more people have started to gain interest in cryptocurrencies, however, not many are aware of the differences between crypto and traditional currencies.  

Fiat currencies are government-controlled means of exchange. Since fiat is regulated by government bodies, it is accepted as legal tender. The value of these currencies is dictated by macroeconomic factors. The government also controls the supply of their native currency, which indirectly affects the inherent value and inflation.  

Crypto, on the other hand, is a digital medium of exchange which has no physical form. Unlike traditional currencies where banks are responsible for updating the ledger after every transaction, crypto is fully controlled by the network. In simpler words, crypto is digital money by the people for the people.  

Features	Cryptocurrencies	Traditional currencies
Storage	Cryptocurrencies do not exist in physical form, so they are stored in online or digital hardware wallets.	Traditional currencies can either be stored in the form of physical cash or banks.
Privacy	Cryptocurrency transactions are recorded on a public ledger, which exposes wallet addresses but not necessarily the identities of the owners.	Fiat can be traced back to the sender.
Cross-border payments	Cryptocurrency architecture is borderless. So, it is extremely easy to send crypto across borders.	Fiat cross-border payments are heavily regulated. This makes these payments slow and expensive.
Security	Cryptocurrencies are stored using cryptographic methods, making direct attacks on blockchain nearly impossible. However, individual wallets, especially if stored online, can be vulnerable to cyberattacks.	Fiat currencies are prone to physical theft and counterfeiting.

Types of Cryptocurrency 

There are thousands of currencies in the crypto market. This reflects astonishing growth considering the market had only 7 currencies around a decade ago. This exponential rise in the number of currencies has brought a number of use cases to the digital space, giving birth to different types of cryptocurrencies. These coins are categorised into one of the following umbrellas based on utility and purpose.  

Bitcoin – The Pioneer of Cryptocurrencies 

Origin and Impact  

Bitcoin was the first currency to come into being back in 2009. It was launched by a programmer or a group of programmers that operate under the pseudonym Satoshi Nakamoto. The identity of this person or group of people remains a secret to date.  

The birth of bitcoin introduced the concept of digital decentralised currencies, hence it is also known as the pioneer of cryptocurrencies.  

Being the oldest currency, bitcoin dominates the whole market by a mile. As of 29 July 2024, the global cryptocurrency market cap is around $2.51 trillion, out of which Bitcoin’s dominance is 52.51% ($1.32 trillion) ^[8]. 

Characteristics of Bitcoin 

Bitcoin serves as a store of value like gold. However, due to the ease of transfer and reliability, it is also being used as a medium of transfer. What makes this special is the key characteristics that it possesses.  

• Limited supply: Bitcoin has a total supply of 21 million ^[9]. This number is set in stone and can not change. 
• Supply and demand: The value of Bitcoin, like any store of value, is driven primarily by supply and demand. 
• Privacy: The Bitcoin network is anonymous. So, it isn’t possible to know who is behind a wallet address that made a network transaction. 
• Irreversible: A transaction made using Bitcoin can not be reversed. The only way you can claim your funds is if the receiver agrees to send them back.  

Altcoins – The Alternative Options 

Altcoin is an umbrella term that encapsulates all currencies other than Bitcoin. The term altcoin is an amalgamation of two words, alt meaning alternate and coin referring to cryptocurrencies. These currencies were created to fill the gaps created by Bitcoin and to explore other use cases and categories within this umbrella (discussed later in this article). 

The Rise of Altcoins 

There are more than 23,000 altcoins as reported by CoinMarketCap ^[10]. This number is due to the rising popularity of cryptocurrencies and the need for decentralised systems. These digital assets have also seen an exponential rise due to the unique feature sets that they offer including technical innovation, investment opportunities, programmability, and decentralisation. 

The blockchain behind Ethereum, for example, is programmable. This allows developers to code self-executing contracts. This laid the foundations for decentralised applications. Similarly, the technology associated with other currencies like Tether, XRP, Solana, and Polygon has a unique value proposition. 

Stablecoins 

Stablecoins, as the name suggests, are coins that hold their value. Usually, this value is tied to another asset class like fiat or gold.  

Fiat-collateralised vs. crypto-collateralised stablecoins 

A collateralised stablecoin is a cryptocurrency that mimics the value of an asset held in reserve. There are generally two types of collateralised stablecoins: 

• A fiat-collateralised stablecoin holds a 1:1 peg with a sovereign currency like GBP or USD. An example of such a currency is Tether (USDT), which has historically maintained a value of $1.  
• On the other hand, crypto-collateralised stablecoins mimic the price of another cryptocurrency. The prime example of such a stablecoin is Wrapped Bitcoin (WBTC). 

Collateralised stablecoins are frequently audited for compliance to avoid de-pegging. 

Algorithmic Stablecoins 

Algorithmic stablecoins rely on complex algorithms to maintain their value. This algorithm is created using transparent and auditable code which makes these stablecoins more decentralised. However, since they aren’t backed by an asset, they aren’t the most reliable in terms of stability. 

Central Bank Digital Currencies (CBDCs) 

CBDCs are centralised digital currencies issued by a central bank of a country. Since these stablecoins are regulated, they can be accepted as legal tender in a country. While CBDCs aren’t decentralised, they represent a step forward towards mass crypto adoption.  

Meme Coins 

Even if you’re new to the crypto space, chances are you have heard the name of dogecoin. Dogecoin is considered to be the pioneer of meme coins.  

A meme coin, as the name implies, is a currency that is created as a meme or a joke. These currencies generally have no intrinsic value. So, the value they hold is backed merely by a community of enthusiastic traders and believers. Examples of such coins are Dogecoin, Shiba Inu, and Pepe. 

Tokens – Beyond Currencies 

Tokens and coins are generally used interchangeably for cryptocurrencies but both have unique characteristics that make them different.  

Defining Tokens: Utility vs Security 

The term token is generally used to represent non-cash assets like ownership stake, access, utility, etc. Although these tokens have a certain value, they are more than currencies. The most common types of tokens are utility and security tokens.  

• Securities: Securities or security tokens represent shares in a company.   
• Utility tokens: Utility tokens are assets that give holders access to services, features, or preferential treatment in a decentralised product.   

How Tokens Differ from Coins 

Crypto coins are digital currencies that run autonomously on their blockchains. Coins are generally used as a store of value or a medium of exchange. On the other hand, tokens are digital assets that run on top of an existing blockchain. These tokens are generally diverse in functionality and have one or more specific utilities in a decentralised app, security, or governance ecosystem.  

Trade Cryptocurrencies CFDs with Vantage 

The crypto ecosystem has grown exponentially over the years. The competitive nature of the market has pushed service providers to provide experiences at par with traditional financial markets. This has also helped cryptocurrency exchanges and platforms improve over the years by enhancing their features as well as simplifying their UX.  

Trading CFDs 

While crypto exchanges excel in providing good on-ramps, spot trading tools, and monitoring abilities, Vantage introduces trading Cryptos via CFDs. CFD trading entails speculating on the fluctuations in cryptocurrency prices without owning the real coins. In this arrangement, each party is only required to settle the difference between the opening and closing prices of the trade. 

For example, when you buy or sell through a CFD broker, your returns or loss depends on the price movement. If the price moves as you predicted, the broker pays you. If it goes the other way, you owe the broker. Leveraged CFDs can amplify your returns when your trades are successful, but they also pose a risk as they can equally magnify your losses. Traders need to exercise caution when using leverage. 

Vantage simplifies trading CFDs through an intuitive flow. 

1. Open the browser of your choice and log in at https://protrader.vantagemarkets.com/. Alternatively, you can open an account to begin trading. 

2. After opening the trading account, navigate to the right side of your screen to see available assets. Use the dropdown menu to navigate to cryptocurrencies. 

3. Right-clicking on the charting area lets you open trades through a menu as shown below: 

4. The trading menu lets you trade using different order types like market, limit, and stop.  

The trading panel enables the setting of take profit and stop loss thresholds according to your strategic trading analysis. Furthermore, users may utilise indicator presets to evaluate the asset’s historical performance, thereby facilitating informed decisions regarding forthcoming trades. 

The Future of Cryptocurrencies 

The longevity of crypto can be seen over the years as the digital currencies have managed to stay afloat amidst turbulent macros. The bubbles have burst and only the projects that exhibit real use cases stand the test of time. The coming years may prove to be the brightest period for crypto with the potential of innovation, partnerships, and adoption. 

• Integrations: With Visa and Mastercard already exploring the crypto space to find opportunities, it is expected that fintech applications and retail giants (Amazon, Walmart, etc.) will integrate crypto into their ecosystem potentially making it the most used payment method for global payments. 

• Regulation: The SEC has softened its opinion about cryptocurrencies and it is evident in their ETF approvals. This might push regulators around the globe to keep up their pace with the US markets.  

• Technological advancements: Each year crypto has shown exponential growth in terms of technology. Moving forward, we’ve yet to see the best use cases of the crypto market with AI. These digital currencies will improve their scalability and find seamless on and off-ramp procedures with fiat.  

• Adoption: Bitcoin’s ETF has already increased the adoption rates significantly. The regulatory climate suggests that we’ll soon see more ETFs to follow in the crypto space. And with the retailers in talks to start accepting crypto payments, the adoption rates might become explosive.  

Conclusion 

The crypto market has made decades’ worth of progress in a mere few years. What started off with an idea of a decentralised finance system has converted into a movement that carries thousands of startups and currencies. As of June 2024, Bitcoin has demonstrated a Compound Annual Growth Rate (CAGR) of 102.03% over the 12-year period from August 2011 ^[11]. If the growth rate remains consistent, the coming decade might bring the crypto space neck to neck with other financial markets as well.  

Since crypto’s market cap is much lower compared to other markets, the volatility and spreads are wider. This makes it a conducive space for profit-making through short-term trading strategies. To actively engage with these strategies and explore the broader crypto market, you can open a live trading account with Vantage, where you can trade a diverse array of crypto CFDs. 

References