Cryptocurrency 101: Definition & Technology & Types!

Are you ready to closely explore a concept that has been shaping recent financial value changes, shopping habits, and decentralized technologies? Cryptocurrencies stand out as digital assets that can be used to buy goods and services, finance a project, and raise and develop certain technologies by being launched in the form of tokens. So what sets these digital currencies apart from traditional ones? What features do blockchain technology and other DLT technologies add to cryptocurrencies?

We have prepared Cryptocurrency 101: Explained for those who want to get to know this decentralized finance world better. Here you will have the chance to examine all the details from the basic definition to the usage areas of cryptocurrencies, from its advantages to security options and technology.

KEY TAKEAWAYS

• Cryptocurrency may also appear as just “crypto” or “token” in many sources. These digital assets are financial instruments that are secured and used by cryptography technology, produced and stored in decentralized DLT ecosystems such as Blockchain, and traded digitally.
• Cryptocurrencies allow every user on the network to monitor the entire transactions via a public ledger, but it does not allow anyone to track a specific users’ financial movements (unless he shares his crypto wallet willingly). Of course, this does not apply to wallets created on centralized exchanges.
• Making investments via cryptocurrencies brings some risks and opportunities. Risks can be listed as volatility, risk of losing the private key, high competition, and the threat of regulators; while opportunities can be listed as volatility, flexible market hours, low transaction fees and no taxes, accessibility, and transparency.
• Cryptocurrencies differ from traditional ones as they are created and stored in a decentralized ecosystem, they are controlled by no financial authority, they require minimum cost for transactions and they show higher volatility.

What is a Cryptocurrency?

Cryptocurrency may also appear as just “crypto” or “token” in many sources, although there are important conceptual differences between tokens and cryptocurrencies (which we covered here). These digital assets are financial instruments that are secured and used by cryptography technology, produced and stored in DLT ecosystems such as Blockchain, and traded digitally.

Too encyclopedic?

So let’s put it this way: Imagine a money network that can’t be controlled by any bank or government. Each transfer made in this money network reaches its destination by moving through the network, which has nodes created by individual devices of the users. When Person A wants to send 10 Bitcoins to Person B, this transaction does not have to be approved by any bank, collected in a center, and then transferred from this center to the relevant account. Through a direct peer-to-peer data transfer system, Person 1’s money goes to Person 2 through the nodes that make up the network. Thanks to the powerful cryptography software that creates cryptocurrencies, and the consensus mechanisms that validate the transactions, it is possible to avoid counterfeiting or double-spend.

Cryptocurrency technology, which grows on the basis of blockchain technology, then has three basic principles:

1. Maximum security with cryptography
2. Accessibility from anywhere in the world with digitalization
3. Liberality and untraceability with decentralized technology

These three fundamental principles distinguish a cryptocurrency with its decentralized network from traditional currencies.

Key Concepts About Cryptocurrencies

In order to understand the technology on which cryptocurrencies are built and how different currencies such as Bitcoin and Ether work, it is necessary to know the meaning of a few basic concepts first. Here are the most popular of them!

Blockchain

Blockchain technology, which is completely decentralized and creates a secure, holistic, and strong chain on which cryptocurrencies are stored, transferred, and created, with each block containing a unique hash of the content of the previous one, is a kind of distributed ledger. This technology enables each user participating in the network to become a part of the network and uses individual devices as a node to perform data exchange within the network without a need for a center.

The most important feature of the network is that each node, that is, each user participating in the Blockchain network, has a copy of the entire Blockchain network. Network security is ensured by the requirement that each node approves every change that takes place in the network through certain consensus algorithms (PoW, PoS, PoB). Cryptocurrencies are assets that are generated and stored within Blockchain or similar distributed ledger technologies.

Learn more about Blockchain before moving on.

Forks

A fork is a situation that occurs when a change in the protocol occurs within any decentralized network or the network splits into two different potential paths forwards. This change may cause previously invalid blocks to become valid in a network and vice versa.

Let’s clarify that a fork;

• May cause the existing blockchain to change. The actual software update may cause changes in issues such as transaction speed, block size, and block creation process of the network.
  
• May leave the existing blockchain unaltered, causing a new chain to split. In this case, changes and updates are performed on the allocated chain. This, which resulted in the original blockchain being split, could allow for a new cryptocurrency to be created in the new chain. For example, Bitcoin Cash and Ethereum Classic are examples of cryptocurrencies created by forks.

Still want to learn more about forks? Go to the related article!

Altcoins – Types of Cryptocurrencies

The concept of altcoin, used as an abbreviation for Alternative Coin, is a common name for all non-Bitcoin cryptocurrencies produced within decentralized networks. It is possible to say that the most popular altcoin is Ethereum in terms of market capitalization at the moment. From Litecoin to Dogecoin, from HBAR to Tether, all cryptocurrencies other than Bitcoin are altcoins.

A market study conducted in March 2021 reveals that about 60 percent of the cryptocurrency market is dominated by altcoins. This causes many individuals to find altcoins that are more affordable to buy and have a higher chance of rising in order to invest.

Among the most popular altcoin variants are the following:

Types of cryptocurrencies are not limited to these. Learn more about altcoins by reading the related article!

ICO (Initial Coin Offering)

Let’s say you have a cryptocurrency project that is designed to solve a problem in the world of finance or that will add something new to the world of Blockchain with its own vision.

In order to develop this cryptocurrency project and gain value for the currency, others must believe in you and buy from your coin. The more people buy, the higher the demand, and it becomes possible for you to have funds for your technology development efforts.

So, how can you do this while it’s just launched?

You’re probably not going to try to get a loan from the bank, are you?

You need to learn how things work in this decentralized world and take this step accordingly.

This is where the ICO, the Initial Coin Offering, comes into play. You tell people:

‘’Come and invest money in my project, that is, buy my cryptocurrency during ICO. This purchase will fund me for development processes. You, on the other hand, will have received the cryptocurrency of a promising project at a very early stage. This is a win-win situation for both you and me.”

Wow. That’s exciting.

If your really promising project gains value over time, those who invested in you in the ICO will have made a really significant profit. You, on the other hand, will have the opportunity to grow thanks to these first investors.

This is the summary of the symbiotic relationship that cryptocurrencies have established with their investor’s thanks to the ICO.

Quick Info

Did you know that the first ICO in history was held by Mastercoin in July 2013? This is true. In addition, Ethereum was able to raise 3700 BTC with the ICO when it was launched in 2014. According to the value of BTC at that time, this meant an investment of $2.3 million in Ethereum.

The explosion of ICOs took place in 2017. Now everyone was more excited about cryptocurrencies and the rise of Bitcoin was saying “I wonder” for all other altcoins. In fact, at the end of May 2017, Brave’s ICO took place and $35 million was invested in this coin in less than 30 seconds.

Now, you understand that ICO does not mean “initial public offering”, it is something very different. Because in IPO, users who invest in the company during the public offering own a certain percentage of the company’s shares. In the ICO, they only have the coin.

So, how is it possible for a newly emerging cryptocurrency to attract a large amount of investment during the ICO? In other words, why would investors invest millions in a coin that is worth almost 0 and believe that it will increase in volume when the time comes?

Of course, not every cryptocurrency can get this investment. To convince people, projects have to market well both their tokens and the technologies behind their tokens. If there is no vision and technology behind the token, it is a real gamble. That’s why technology companies prepare documents, presentations, a prestigious website, and marketing tools describing the details of their projects before the ICO.

Crypto wallets – Cryptocurrency Wallets

Crypto wallets or cryptocurrency wallets are technologies that can be used as software, hardware, or both, that host your cryptocurrency by protecting them public and/or private keys. These technologies also allow you to transfer your crypto money to any address in the digital world, use it on a shopping site or receive crypto money.

To understand the working principle of cryptocurrencies, step away from the traditional concept of wallets and go digital:

Contrary to popular belief, cryptocurrency wallets do not physically keep your money in software or device. Instead, it creates a channel that allows you to access your funds already exist the DLT network, via your private key. Your assets still reside in the Blockchain.

The wallets where you keep your cryptocurrencies can be decentralized or centralized. In decentralized wallets, all custody belongs to you. So losing your private key means losing all your assets as well. Centralized cryptocurrency wallets are software that you usually log into with your password and username. The platform that offers the wallet also has access to your private key. For example, wallets offered by CEX platforms such as Binance, Coinbase, or Huobi are examples of the second type.

The most popular cryptocurrency wallets today are as follows:

There are five different types of crypto wallets that are used extensively today. Note that a crypto wallet can be counted in more than one category.

Still want to learn more about cryptocurrency wallets? Let’s make a quick trip to the related article.

How Does A Cryptocurrency Work?

You don’t have to go far to understand how cryptocurrencies work: a cryptocurrency works just like any credit card or a Dollar, well, at least in terms of their functions. When you want to buy a product, you give Bitcoin to the other party and receive the product. When you want to make a transfer, you enter the amount of Ethereum you want, type the correspondent wallet ID and send it to the other party.

In order to do these, you need to use crypto-wallets. As we explained above, the main thing a crypto wallet does is to provide you with access to your cryptocurrency in the Blockchain network with a private key and to make active use of it by transfer.

You can think of the private key as the password for your credit card.

Well, if it’s all like using a credit card, then how come everyone on the Blockchain network can view transactions transparently in a public ledger?

Here is an understandable summary:

Any transaction found in the blockchain network adds a block to the chain. In order to maintain the integrity of the chain, each transaction must be validated by nodes through certain consensus protocols. Each node has a copy of the entire Blockchain: that is, a copy of all transactions made on the network so far. Every user can see what is being done on the network at that moment. Users can see the wallet address of the person who made this transaction, but they cannot see who owns this wallet, that is, the person who uses his cryptocurrencies is always anonymous unless he shares his wallet ID with the public.

So, we are actually talking about a system that is both highly transparent and traceable, and maximally untrackable and liberating:

Cryptocurrencies allow every user on the network to monitor the entire transactions via a public ledger, but it does not allow anyone to track a specific users’ financial movements. Of course, this does not apply to wallets created on centralized exchanges.

How to Use Cryptocurrency? Making Purchases or Investment

There are two reasons why you might use cryptocurrencies: Either you want to use a decentralized method where you cannot be identified in your standard purchases, trade with cryptocurrencies, or you want to invest in coins that say hello to the future.

Well, both are good ideas.

1. Making Purchases by Cryptocurrencies: You can use cryptocurrencies to buy a membership, a coffee machine, or a coffee at Starbucks. As the popularity of decentralized technology increases, the number of institutions that receive payments with coins in daily life is increasing step by step.
2. Invest in Cryptocurrencies: Buy a cryptocurrency that you believe will increase at the support point and wait for it to rise. The resistance point is usually the value point where the purchased coin is sold and makes a profit.
3. Trade with Cryptocurrencies: You can buy and sell your assets on stock exchange platforms by following current price changes, getting help from indicators, and following certain strategies. Volatility can help you profit with the right strategies. Trading can be a good way of making money, as cryptocurrencies have a higher level of volatility than fiat currencies.

Are Cryptocurrencies Good Investments? – Is Buying Crypto Make Sense?

To decide whether cryptocurrencies are a good investment asset, we need to take a look at a few basic things:

1. Security precautions
2. Risks
3. Opportunities
4. Cryptocurrencies Differences with Traditional Currencies

Let’s talk about all this briefly and let you have an idea.

Are Cryptocurrencies Safe? – Security Precautions

Cryptocurrencies produced and stored in a decentralized network reside in distributed ledger technology. Research shows that the current Bitcoin network has 10 to 20 times higher processing power than Google servers, which increases with each new node joining. This means a strong infrastructure with integrity and strength reaching incredible dimensions.

So, can Blockchain or cryptocurrencies be hacked?

Hacking a blockchain means being able to cancel the consensus protocol that maintains the integrity of the entire chain. Because every transaction made on the blockchain, which is called block creation, has to be approved by at least %51 nodes. Considering that each block also carries the hash value of the previous one, the Blockchain is built from blocks that protect the entire chain from the bottom to the top. To hack this consensus-based transaction verification mechanism, you have to be able to hack 51 percent of users (nodes) at exactly the same time. Seems impossible.

However, the fact that the Blockchain network is highly reliable does not mean that cryptocurrency exchanges offer the same security. Hacking scandals of exchanges are frequently on the agenda. Therefore, the security of your cryptocurrencies often depends on the reliability of the exchange / DeFi platform / wallet tool you choose. For this, choose stock exchange platforms that use various security verification systems and keep their infrastructure strong.

What are The Risks of Cryptocurrency Investment?

Now that you understand that the blockchain network is almost impossible to hack, that’s good. Still, a hack isn’t the only factor that could ever hit your cryptocurrency investment. The cryptocurrency investment risks that users most frequently complain about are as follows:

Volatility

The bear market period, which is enthusiastically described by a high earner, is a period in which Bitcoin rapidly gained value between 80 and 90 percent. This is great news if you are on Bitcoin at the moment. What if you were outside? But what if you stayed indoors when Bitcoin lost 84 percent in 2015 and you threw away all your money with worry?

Such high volatility levels are never liked in the financial world. Investors look for assets that they can trust and predict their behavior. We admit volatility is a significant risk in this business. But for this, a series of regulations to be made in the future may make the market more predictable.

Risk of Losing Private Key

Especially if you are using non-custodial wallets, the decentralization of cryptocurrencies also means that if you lose your private key, you have no chance of contacting anyone to get it back? If there is no private key, your investment is gone.

Competition

There are thousands of different cryptocurrency projects currently in circulation on different blockchains. That means incredible competition. There are thousands of different cryptocurrency projects currently in circulation on different blockchains. That means incredible competition. Shitcoins, which are released at a fairly low value without immediate, discernible purpose, can affect the interest of others over a long period of time, distributing liquidity among different sources. This may mean that the market cannot get to the point where the promising coins demand for a long time, changing the path that the market should normally follow. Moreover, there are more than 10,000 altcoins in the market. It can be difficult for an investor to choose the one that will really bring profit among them.

Threat of Regulators

As cryptocurrencies have become more common, business activity and revenue growth that are not under government control have also become noticeable. In order to control this situation, some governments may press companies that offer stock exchange platforms and wallets for various regulations. Intense enough pressure can lead to significant withdrawals from the Blockchain and the very rapid depreciation of the amount you invest. However, those who closely follow developments in this field say that such a radical situation cannot happen. Today, there are even official government agencies that issue their own cryptocurrency instead of opposing these developments.

What are The Benefits and Opportunities of Cryptocurrency Investment

The very high incomes and untraceability of investing with cryptocurrencies cause many people to turn to Blockchain. Here are the key opportunities and benefits:

Cryptocurrency volatility

Volatility, which can also be listed among risks, means a great earning opportunity for those who are at the right place in the right place. While a traditional investment vehicle that can increase your holdings 10 times in just one year is quite rare, this is something that happens often in the cryptocurrency world.

Cryptocurrency market hours

You don’t have to be stuck with the working days set by official institutions. Cryptocurrency exchange platforms, in theory, operate twenty-four hours a day, seven days a week, and allow you to trade.

Low Transaction Fees & No Taxes

When you keep your money in the cryptocurrency world, there is no limit to the money transfer you can make for any transaction. In addition, wherever you send it in the world, you pay much less in transaction fees compared to traditional methods. And hey, no tax can be applied to any penny of your money.

Note that if you withdraw your funds to your official bank account or regulated exchange platform, you may be subject to current state tax laws.

Greater Access to Banking Services

New generation DeFi technologies have made lending, borrowing, and interest-earning more accessible in the decentralized world. Users do not have to prefer money-saving loans to traditional banks. Instead, an investor can loan his money to another user with P2P, or borrow another user’s money via Blockchain to pay back it with interest.

Transparency of information

In the blockchain world, every transaction that takes place on the network can be monitored, but the identity information of the transacting user cannot be accessed. This means you store your money in a privacy-safe and fraud-proof network.

Cryptocurrencies vs. Fiat Currencies: What Are The Differences?

Let’s clarify the difference between traditional currencies and cryptocurrencies in order to summarize the topics we talked about in all the content!

What are The Most Popular Cryptocurrencies to Invest In?

While writing this article, sticking to current data, we wanted to share with you the top 10 cryptocurrencies according to the total market value of a cryptocurrency’s circulating supply:

1. Bitcoin
2. Ethereum
3. Binance Coin
4. Solana
5. Tether
6. Cardano
7. XRP
8. Polkadot
9. Dogecoin
10. USD Coin

Where to Buy Cryptocurrencies?

Want to buy cryptocurrency now and move your assets to the decentralized world? There are many exchange platforms you can choose from. In the world of cryptocurrencies, exchanges are divided into centralized and decentralized.

Centralized Exchanges (CEX)

CEX stands for centralized exchanges. All of the stock exchanges such as Binance, Coinbase, FTX, Huobi, and Kraken, which serve legally in many countries today, are actually centralized. This means that they may be subject to various regulations in the countries they serve, upon the requests of the government, and may share IP information, wallet ID information, or identity information according to a court decision. In addition, it is the custody platform of your wallet that you use on these exchanges. This may mean that you do not have sole access to your assets.

The most popular CEX platforms are as follows:

1. Binance
2. Coinbase Exchange
3. FTX
4. Kraken
5. KuCoin
6. Gate.io
7. Huobi Global
8. Bitfinex
9. Crypto.com Exchange
10. Binance U.S.

Learn more about CEXs.

Decentralized Exchanges (DEX)

DEX stands for decentralized exchange. DEX platforms, where all buying and selling transactions are carried out peer-to-peer, are the areas where you can start trading by simply connecting your wallet. In DEXs, which can be categorized as AMM, on-chain order books, and off-chain order books according to the protocol they use, you are never asked for your identity information during the registration process. There is no center to match your Wallet ID with your ID. There is also no customer service to help you with a problem. The absence of any center can enable transactions to take place with lower transaction fees.

1. dYdX
2. Uniswap (V3)
3. PancakeSwap (V2)
4. Astroport
5. Kine Protocol
6. Honeyswap
7. ApolloX DEX
8. MM Finance
9. Biswap
10. SpookySwap

Learn more about DEXs.