Cryptocurrency – Along with the development of digital currency technology, it is important for you to understand what cryptocurrency is thoroughly and in depth.
Why ?
Because the use of digital currency is even more possible in the future, with various central banks of the world working to develop it.
Get to know Cryptocurrencies
Definition of Cryptocurrency
Cryptocurrency is a digital currency that functions as a medium of exchange, unit of account, or store of value, but does not have legal tender status.
The name cryptocurrency itself comes from a combination of two words,namely the word cryptography which means secret code, and currency which means currency.
The concept of cryptography has been known since the era of World War II.
At that time, Germany used cryptography to send secret codes so that they were not easily read by the opposing party.
Although cryptocurrency has been developed since the 1990s, it was only in 2008 that it became known to the global community. Several types of crypto assets are currently being used, including Litecoin, Ethereum, Monero, Ripple, and of course Bitcoin.
There are currently over 10,000 crypto assets in circulation worldwide,
and this number will continue to grow in the future.
Cryptocurrencies are also based on blockchain, a system that records transactions across a network of computers to maintain traceability and security. This makes it possible for cryptocurrencies to be decentralized.
Therefore, no individual company, such as the government or central bank, has to issue it or can change it.
How Does Blockchain Work?
Blockchain itself is a type of digital record keeping system that verifies, records, identifies, and stores important information, such as date, time, amount, or anyone who conducts cryptocurrency transactions in virtual blocks using a decentralized worldwide computer network.
To distinguish between blocks, each block in the chain has an identifier known as a hash.
More specifically, here's how blockchain works in a simple way:
When you transfer Bitcoins to other cryptocurrency wallets, information from your transactions, such as nominal amount and time will be recorded in a block which then becomes a chain or record of your transactions.
Furthermore, with a decentralized computer network system around the world. Then the transaction verification process will occur.
With so many transactions taking place, the virtual blocks that cover each transaction are given the ability to identify each block automatically which is called a hash (auto-identifying code).
After each block generate a hash. The chain of blocks is also placed into the blockchain as a record of all the transactions you make.
so that we can understand better. Let's get acquainted with some important terms in cryptocurrency.
Important terms in Cryptocurrency
Here are other important cryptocurrency terms that you need to know.
a. Altcoins (Alternative Coins)
Alternative coin is another type of cryptocurrency that is also blockchain-based and inspired by Bitcoin. Examples include Litecoin (LTC), Ethereum (ETH), Ripple (XRP), and Dogecoin.
b. Bullish/Bearish
A term for traders of cryptocurrencies and other types of investments or markets (stocks, bonds). Bullish is a call for traders who think Bitcoin is going up. While the Bears think otherwise, they believe that the Bitcoin price will eventually fall.
c. Crypto Exchange
Just like trading stocks through an exchange on the New York Stock Exchange or Nasdaq. Cryptocurrencies are traded on a platform that connects buyers and sellers.
d. Forking
Forking occurs when you make a copy of the blockchain code, and update your cryptocurrency network by modifying it. Simply put, forking is the fork that occurs in the blockchain and forms a new crypto asset.
e. Token
Coins in each cryptocurrency are considered tokens. More specifically, each coin (token) is a digital code that represents a small part of the cryptocurrency being traded.
Cryptocurrency Types and Categories
The cryptocurrency universe is of course very large. How not, there are about 10,000 more crypto assets contained in it.
Of the many crypto assets in circulation. Maybe, you already know the king of crypto assets, namely Bitcoin. Or Ethereum, the main altcoin after Bitcoin. However, there are also other types of cryptocurrencies that have different names and you may not have heard of before.
With the above circumstances, it must make you wonder: Are all cryptocurrencies the same? What makes one crypto asset different from another?
The answer, of course, is that all cryptocurrencies are not the same. Each crypto asset has different characteristics and uses. Therefore, in cryptocurrency there is a categorization for crypto coins based on their use value.
However, before we go there, it helps us understand the reasons behind the large number of crypto assets in circulation today.
The Reasons Behind The Many Types Of Cryptocurrencies
In 2008, we only know one cryptocurrency. None other than Bitcoin, the first crypto asset developed by Satoshi Nakamoto.
At that time, the developer, whose identity is unknown, hoped that Bitcoin could become a digital currency that could be used for online transactions.
All transactions are built on a blockchain, a technology that allows users to transact and utilize financial services without having to go through the role of intermediaries, for example in conventional financial services.
This technology is also quite safe. Although freely accessible, blockchain technology can only be changed through one particular algorithm. For example, Bitcoin's algorithm is named Proof of Work.
However, over time, blockchain technology is not only used for transactions. However, it is also used for financial services projects, personal data storage, machine learning, and more.
Therefore, each of these blockchains eventually has its own cryptocurrency that functions as the driving force for the technology.
In essence, today's crypto assets represent the diversity of their respective blockchain functions. However, there are several other reasons that underlie the many types of cryptocurrencies today.
a. Huge Returns
Some opinions say that the rise of cryptocurrencies is caused by the success of Bitcoin. This success can be seen from the fantastic increase in the price of Bitcoin, which reached in the range of 33,000 dollars.
Initially, many people were skeptical about Bitcoin. In the end, they also saw a lot of parties who made money just by holding this one crypto asset.
Because of this, many developers are “riding” on the success of Bitcoin by launching many other crypto assets. Unfortunately, some of them still exist that do not yet have a clear benefit or use value.
b. Forking
Another reason why there are so many types of cryptocurrencies today can also be due to forking. As we know, forking occurs when a developer feels that there is an aspect of the current blockchain system that needs to be changed.
For example, starting from the factor of security issues, use value, and others.
The changes made were divided into two categories, namely soft forks and hard forks. It is the hard fork process that usually creates new crypto assets, where changes to the new blockchain protocol make it impossible for users to re-access the old version of the protocol.
For example, Ethereum, a crypto asset that has hard forked and produced new crypto assets, namely Ethereum Classic and Ether Zero.
Bitcoin also did forking which resulted in Bitcoin Cash and Bitcoin Gold.
c. New Innovation
The increasingly diverse blockchain technology innovations have also led to new crypto assets to be used in it.
Usually, the emergence of a new blockchain is used to cover the shortcomings that occurred in the previous blockchain.
For example, Cardano's Proof of Stake blockchain algorithm is considered to be able to cover the shortcomings of Bitcoin or Ethereum's Proof of Work algorithm.
Get to know 5 types of cryptocurrencies based on their uses
Well, all the circulating cryptocurrencies are then classified into certain categories which are arranged based on their use cases and benefits.
a. Store of Value
This type of cryptocurrency is considered to be able to maintain the value of one's wealth much better than money in the real world. In fact, when compared to gold even once. Crypto assets that fall into this category are Bitcoin and Bitcoin Cash.
This is because the nature of this crypto asset is almost like fiat money and its supply is quite rare. There are three advantages to why cryptocurrencies can function as a store of wealth.
The storage is cheap and secure, requiring only a crypto wallet to store the coins.
Scarcity of supply. The price of this type of cryptocurrency is determined by supply and demand.
However, because the supply is running low every year, in the law of economics the price will usually be of high value in the future. As long as the demand and liquidity is also increasing.
Although until now, there has been no research that explains the correlation between the price of crypto assets and the inflation rate. The public can still invest their funds in the current crypto asset category when inflation is high.
b. Digital Currencies
As the name suggests, this type of cryptocurrency is designed to meet the needs of everyday transactions. Of course, this digital currency is not so concerned with maintaining the purchasing power of its owners for long-term storage.
For example, such as Litecoin, Dash, Monero, and Zcash.
Even so, this type of cryptocurrency has a major competitor that is quite heavy, namely digital transactions fronted by Mastercard and Visa.
Two very famous payment gateways. Indeed, it looks difficult for digital currencies to compete with both.
However, digital currencies can be superior because transaction costs are more efficient than using a Visa or Mastercard credit card.
Crypto assets that function as digital currencies also have the potential to make users more efficient, compared to these digital banks. Especially when transferring large amounts of money.
c. Utility Coins
A utility coin type cryptocurrency is used to maintain the reliability and security of blockchain systems that feature smart contracts.
For example, Ethereum requires its users to pay a certain amount of Ether (ETH) to maintain the reliability of its network system.
Similar to Polkadot, which also requires users to pay a transaction fee in order to have the smart contract feature.
For this reason, each developer is competing to seduce crypto asset lovers and create cutting-edge blockchain or smart contract technology, so that their utility coins will eventually have a higher use value.
The utility coin supply itself is uncapped. Other examples of crypto assets that fall into the utility category are Binance Coin and Cardano.
d. Security Coins
Securities coins are digital representations of assets that exist in the real world, which are then recorded in the crypto blockchain. Securities crypto assets are one example of the current regulation. For example, USDT and BCap.
This one cryptocurrency is used to increase liquidity in the majority of private sector assets. Let's take the example of using real estate and private securities which are usually very expensive to trade.
It usually takes a long time to find a suitable buyer or seller partner to execute a transaction. Meanwhile, with securities coins, it will be relatively direct to trade on the exchange.
Ownership is also spread in the form of fractions (fractional). When the real estate is tokenized, or other valuable asset.
So the ownership can be divided into many parts (fractional pieces). This allows this type of asset to be more affordable and accessible to retail investors, as they can buy a small portion of the asset at a lower price.
Management can also be separate (unbundling). Tokenization of securities can allow asset types to separate certain features and ensure greater privacy.
e. Meme Coins
The emergence of this one coin is quite controversial. Crypto assets that are included in the meme coin type are Dogecoin and Shiba Inu. Dogecoin is a pioneer of the meme coin type cryptocurrency.
This type of cryptocurrency is inspired by the doge meme that is spreading across the internet. Even though it has its own blockchain.
There are still many who doubt the value and main benefits of meme coin type crypto assets. However, lately its value has skyrocketed thanks to endorsements from influencers, excessive media coverage, and social media posts.
Conclusion
In essence, cryptocurrency is now one of the digital currencies that is not only used for daily transactions.
But also as a new valuable asset that allows us to invest in it. The main purpose of cryptocurrency itself is actually just to make digital transactions between two groups as smooth as possible without intermediaries.
If at this time, you bought something using your credit card. There are several intermediaries or third parties that are part of the transaction, ensuring you have enough balance to pay and the merchant has a digital wallet to receive.
Well, wallets used in cryptocurrency transactions can also help eliminate these middlemen, and can reduce certain transaction fees.
Then, even in cryptocurrencies there is no centralized authority, such as a government or company that regulates and manipulates most crypto assets.
Then, for those of you who want to invest in crypto assets. Get to know the use of the crypto first.
Whether to store wealth long term, or just as a digital currency. However, crypto assets are generally not recommended for certain types of important investments in your life, such as retirement savings, emergency funds, or online loan accounts.