What Is Cryptocurrency? Definition and Types

Cryptocurrencies are digital currencies that utilize specific encryption methods for regulating currency generation and verifying fund transfers. These actions and cryptocurrencies themselves are operated independently of central banks. Just like traditional forms of currency, cryptocurrencies follow market trends.

Cryptocurrencies do not exist in physical form. Instead, they are represented by entries of token in decentralized databases that are operated on consensus, which means they possess an algorithm mechanism that is fault tolerant. This mechanism ensures a necessary agreement is achieved on a single state of the network (or a single data value) among distributed processes or systems. The cryptography used in the securing of the consensus-keeping process gave rise to the name “cryptocurrency”.

Because of their reliance on cryptography, cryptocurrencies are generally considered to be among the safest forms of currencies in existence. Although a Bitcoin address can theoretically be compromised, the chances of this occurring are quite slim. Currently, there are more than 2,000 types of cryptocurrencies.

History of Cryptocurrency

Bitcoin was the first type of cryptocurrency to have ever been developed. Although there have been numerous attempts to create a digital money system prior to the emergence of Bitcoin, none of these systems have prevailed.

Bitcoin’s inventor is a mysterious and enigmatic figure who goes by the name “Satoshi Nakamoto”. Interestingly enough, “Nakamoto” didn’t set out to invent Bitcoin as a currency. Instead, upon its debut in 2008, he referred to Bitcoin as a “peer-to-peer electronic cash system.”

Established as a decentralized digital cash system, Bitcoin was a huge success, and many other cryptocurrencies have since been developed in its wake.

Coin vs. Token

When used in reference to cryptocurrency, the term “coin” refers to cryptocurrencies that are associated with their own distinct blockchain. In this same context, the term “token” (also known as “digital tokens”) refers to cryptocurrencies that are connected to existing blockchains.

To illustrate, it’s helpful to think of a coin as part of a building’s framework or foundation. Tokens are simply added to the framework or foundation. As part of the framework upon which the cryptocurrency system is built, coins are generally considered to be more complex and resource-intensive to produce.

Types of Cryptocurrency

As noted before, there are many types of different cryptocurrencies around nowadays, many of which are even covered by the leading trading news sites. Here are some of the most prominent types of cryptocurrencies at present.

Bitcoin

Bitcoin was the cryptocurrency, and it is still the most widely known. It is generally considered a form of electronic cash or decentralized type of digital currency that is not regulated by a central bank or single administrator.

Bitcoins can be bought, sold, and otherwise exchanged freely over the Bitcoin network without having to go through any intermediaries. Bitcoin transactions are conducted by means of a digital signature, which consists of 16 encrypted symbols.

Ethereum

Ethereum is a blockchain-based open software platform similar to the Bitcoin blockchain network. Although the two are often compared with each other, they have some important differences. Bitcoin essentially supports only a single blockchain application for making online payments and tracking ownership of the Bitcoin currency. Ethereum, on the other hand, is more about running the programming codes of decentralized applications.

Ethereum also relies on mining to generate currency, in this case, Ether. This particular form of currency can be traded in the same manner as Bitcoin, or used as payments over the Ethereum network.

Litecoin

Lіtесоіn is another form of cryptocurrency. One distinct characteristic of this cryptocurrency is that its creators openly admit that it is a Bitcoin clone. Also known as LTC or “Ł”, it is a peer-to-peer form of cryptocurrency, as well as an open-source software project.

Lіtесоіns are created and transferred via an open-source cryptographic protocol. Like Bitcoin, it is not subject to regulation by a central authority. Litecoin is generally considered to be a faster and lower-cost alternative to Bitcoin.

Ripple

“Ripple” refers to a real-time gross settlement system, or RTGS, that is based on the Ripplepay that was introduced in 2012. Unlike the Proof-of-Work protocol associated with Bitcoin, Ripple relies on a common ledger managed by independent validation servers. These networks – which can be owned and operated by anyone – are tasked with comparing transaction records pertaining to the use of Ripple. As such, this type of cryptocurrency does not have the same energy and computing requirements of Bitcoin.

Ripple makes it possible to directly transfer currencies between two parties in a near-instantaneous transaction. Anything from currencies to gold can be exchanged over the Ripple network.

Bitcoin Cash

Bitcoin Cash, or BCH, is a form of cryptocurrency that came about after a hard fork of the Bitcoin blockchain. Its origins can be traced to August 2017 when Bitcoin holders were automatically granted ownership of an equivalent amount of Bitcoin Cash.

Although an independent currency, Bitcoin Cash is fully supported by the Blockchain network. Bitcoin Cash can be freely exchanged for Bitcoin and even Ether, or stored securely.

How to Get Cryptocurrency?

Mining

For cryptocurrencies that rely on the Proof of Work protocol, mining is the most universally-recognized method for obtaining that particular currency. This method is only possible with cryptocurrencies that follow this protocol.

In order to mine cryptocurrency, you will need a suitably powerful computer or a series of powerful computers linked up in a network. The startup costs can be substantial, especially since you have to factor in the cost of electricity and high-end computer equipment. Nevertheless, there is considerable potential for measurable long-term income.

Short-Term Trading

Cryptocurrencies may also be obtained by engaging in short-term trading with an associated margin. Those who have built up a substantial amount of cryptocurrency may trade it similar to how foreign currencies are traded on the forex market.

As with forex trading, profiting from short-term cryptocurrency trading requires knowledge in leveraged trades. This basically involves taking advantage of market trends and developments. Like most types of financial market trading, there is a considerable potential to make a profit, as well as incur substantial losses.

Long-Term Holding

One way to potentially mitigate the risk is to engage in long-term holding. Best suited for those with the patience to wait for returns on their investments, this method is based on the informed belief in the appreciation of a particular cryptocurrency over time.

One good example is Bitcoin, which started out as an extremely undervalued currency. In fact, one early user attempted to auction off 10,000 Bitcoin with a starting bid of $50, but failed to generate any interest. By 2017, the same 10,000 Bitcoin had a value in excess of $190 million.

Buying

If all that seems too complicated, you may simply opt to purchase cryptocurrency. This is by far the simplest and easiest method to acquire cryptocurrency, although there is very little chance of making a significant profit.

Purchasing cryptocurrency simply involves setting up an account at a digital exchange service, which will give you your own digital wallet. You can then fund your wallet via your credit card or debit card, or via bank wire transfer. Once your wallet is funded, you can then buy or sell cryptocurrency as you wish.

Is Cryptocurrency Part of the Currency Trading Market?

Forex and cryptocurrency trading share many similarities, although they differ considerably in terms of use and application. While forex may be entered into as a short-term investment opportunity, trading in cryptocurrency is generally seen as a long-term endeavor that requires plenty of patience and a steely resolve.

Some forex trading platforms actually already support cryptocurrencies at present. The main similarities between both are that:

1. You are essentially exchanging one form of currency for another.
2. It is next to impossible to determine whether or not your risk will pay off.

It’s important that you check out various major forex broker reviews to learn which ones allow you to trade with cryptocurrency.

You could also theoretically utilize forex trading practices when trading in cryptocurrency, although you will need to be aware of the differences between both markets in terms of structure, behavior, and size in order to maximize the returns on your investment.

In terms of accessibility, cryptocurrency platforms tend to be more accessible than forex platforms. Unlike forex markets that mostly operate only during the work week, cryptocurrency markets remain operational at all hours.

One other important characteristic that both markets have in common is that trades usually take effect immediately. Unless a computer malfunction or a software glitch occurs, there is very little chance of significant price slippage, whether trading in forex or cryptocurrency.

Conclusion

The cryptocurrency market is still in its relative infancy, although its growth over the past several years has been significant. Over the next few years, the market in cryptocurrency is expected to grow exponentially, making it an inevitable feature of the financial landscape. There is undeniably a huge potential for profit in the cryptocurrency market, so anyone looking for trading opportunities will do well to look into the possibilities that it offers.