Cryptocurrencies… blockchain… Bitcoin… Ethereum… altcoins… stablecoins.
A decade ago, these words barely existed, if they existed at all.
Yet these days, if you don’t understand what they mean, you are behind the financial curve.
Today, I have a single objective…
To help you understand the basic vocabulary of the cryptocurrency conversation.
And to help you decide whether to buy into the crypto boom.
Cryptocurrencies first burst onto the scene following the global financial crisis of 2008.
They offered an innovative and libertarian vision of money free from central bank control.
The idea of cryptocurrencies is somewhat older. Entrepreneur Peter Thiel’s original objective when he founded PayPal (Nasdaq: PYPL) in the 1990s was to establish a digital currency.
As he put it, the difference between Bitcoin and PayPal is that Bitcoin succeeded in developing a currency while it has failed to create a payment system. PayPal succeeded in developing a payment system but failed to create a digital currency.
What Is a Cryptocurrency?
Cryptocurrencies are parts of digital code that trade as an asset. They are created by computers solving complex equations. This process is known as mining.
Cryptocurrencies are built on blockchain.
Blockchain is a decentralized ledger technology that offers a permanent, immutable record of all transactions. It is also how all cryptocurrency transactions are logged and verified.
Launched in 2009, Bitcoin is the oldest and best-known cryptocurrency.
Cryptocurrencies have steadily crept into the mainstream over the past year.
As Bitcoin has gained popularity, its price has soared.
In the first few months of 2021, Bitcoin rose 116% to a high of more than $60,000 per coin before crashing around 40% since mid-April.
Today, Bitcoin has a market value of nearly $675 billion. That makes it more than twice as valuable as PayPal.
What Is the Difference Between Bitcoin and Altcoins?
You can divide cryptocurrencies into two camps: Bitcoin and “everything else.”
Everything else consists of thousands of altcoins created after Bitcoin.
A handful of altcoins have gained traction among investors.
Ethereum, the second-largest cryptocurrency, has emerged as a contender for Bitcoin’s crown. With a market cap of $296 billion, it is worth less than half what Bitcoin is.
Ethereum is used in the rapidly growing world of decentralized finance, or DeFi. DeFi uses computer codes known as smart contracts to conduct and settle transactions in real time.
Among the thousands of digital coins available to buy and sell, only a handful – such as Bitcoin and Ethereum – are traded on key exchanges.
Coinbase became the first major cryptocurrency exchange to go public, listing on the Nasdaq stock exchange in March.
In the altcoin universe, Dogecoin has exploded in popularity.
Dogecoin was launched as a joke in 2013 and named after a popular meme of a Shiba Inu dog.
Tesla (Nasdaq: TSLA) Chief Executive Elon Musk has plugged the coin, causing its value to rise 5,900% since the start of the year.
What Is a Stablecoin?
Unlike most cryptocurrencies, stablecoins see their values pegged to the values of other assets.
These assets include traditional fiat currencies, such as the U.S. dollar.
As their name suggests, these cryptos are more stable. Stablecoins have seen an enormous surge in popularity, mainly because they are used in DeFi transactions.
The downside is that stablecoins provide patchy, frequently unaudited accounts of the reserves that back them.
Tether, a stablecoin with a $61 billion market cap, was fined $18.5 million by the New York attorney general over allegations that it lied about its reserves.
What Is a CBDC?
Central bank digital currency (CBDC) is a mainstream effort to create a digital version of money using blockchain technology – and to keep control of monetary and payment systems.
As such, CBDCs would be more like stablecoins – reserve-backed currencies.
In most countries, CBDC plans are at an early stage.
The most advanced projects are in China, Sweden and the Bahamas. In recent months, discussions have picked up in the U.S., Europe and the U.K.
Consider These Before Buying Crypto
Cryptocurrencies face a long road to live up to their highfalutin expectations.
First, cryptocurrencies are incredibly volatile. A currency’s purpose is to serve as a means of exchange. As such, it should be stable. But Bitcoin and altcoins aren’t. Today, they are mere speculative instruments.
Second, the process of mining Bitcoin has an enormously negative impact on the environment. As of mid-May, electricity demand for Bitcoin is hovering around 143 terawatt-hours. That’s far more than the electricity consumption of Argentina – a country with a population of more than 45 million.
Third, crypto’s anonymity fosters fears about possible market manipulation, scams and the use of digital assets to finance illegal activities.
DarkSide, the hacker group behind the recent Colonial Pipeline ransomware attack, received a total of $90 million in Bitcoin ransom payments.
Fourth, as CBDCs confirm, traditional central banks aren’t going to give up without a fight.
Finally, the cryptocurrency debate has devolved into a full-fledged mania that is driving crypto “investors” crazy.
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