Blockchain technology, first harnessed in the creation of Bitcoin back in 2009 unleashed a revolution in the financial world. To date, Bitcoin’s value has experienced a good deal of volatility and swings; however, had you bought one Bitcoin in 2010 for 0.08 cents, that same Bitcoin would today be worth upwards of $50,000.
The advent of Bitcoin into the financial market brought about major changes in how we think about currency. In a recent survey by the Pew Research Centre approximately 16% of U.S. adults said they have invested in, used, or traded cryptocurrencies. It is now expected that the cryptocurrency market will grow from USD 1.6 billion in 2021 to USD 2.2 billion by 2026.
Cryptocurrency
Given the traction cryptocurrency is getting, it is worth exploring exactly what it is and what makes it different from traditional currencies. To understand cryptocurrencies, you must first understand regular currencies, sometimes referred to as fiat currency.
A fiat currency is currency issued by a government that acts as legal tender. These currencies are regulated by a central authority, most commonly a central bank. Today’s currencies are no longer backed by a physical commodity like gold as they once were.
While the advantage of this type of legal tender is that it remains relatively stable and can be regulated by the government and central banking authorities, particularly during economic downturns or crises; it remains vulnerable to losing its value through hyper-inflation.
Cryptocurrencies are different from fiat currencies in that they are entirely digital and are decentralized. This means cryptocurrencies are not controlled or regulated by a central authority, but rather they are secured through blockchain technology.
Cryptocurrencies also differ from fiat currencies in that they can be programmed to have an innate limit built directly into the code. The number of available Bitcoins, for instance, was originally set at 21 million and that is all the Bitcoin there will ever be. This finite limit helps to guard cryptocurrencies against inflationary pressures that can impact fiat currencies. Whereas the government can at any time increase the available currency in circulation by essentially creating more money, cryptocurrencies, for the most part, do not. Increasing supply of money devalues the currency in the long run and thus, cryptocurrencies are often seen to be a hedge against inflation.
Bitcoin vs. Ethereum
Bitcoin was the first digital currency created using blockchain technology, but since its inception in 2009 many, many other cryptocurrencies have emerged—upwards of several thousand different cryptocurrencies. Given the pace of change in the last decade and the ever-increasing supply of new cryptocurrencies, it can be challenging to understand the differences between them in order to choose which, if any, might be right for you.
While at present, all cryptocurrency investments are risky, Bitcoin being the original cryptocurrency is likely the least risky currently. Having been around the longest has helped to build some degree of public confidence and this has a major impact on a currency’s value. Furthermore, as mentioned above, Bitcoin has a finite supply of coins and scarcity tends to breed price increases over time.
Bitcoin also has name recognition. While to date very few companies will accept cryptocurrency as a form of exchange or payment, those that do, would be more likely to accept Bitcoin than any other cryptocurrencies.
Ethereum is the second largest cryptocurrency, with a market cap of about a tenth of Bitcoin’s. Like Bitcoin, Ethereum operates on a blockchain network. Ethereum is however actually more than simply a digital currency and Ethereum also refers to the blockchain technology that powers it.
One of the main advantages of Ethereum is precisely that its applications extend beyond digital currencies. Unlike Bitcoin, Ethereum’s platform allows developers to create their own blockchain based programs, including the creation and execution of smart contracts.
Ethereum’s coins are themselves simply called Ether and while mining these coins was originally akin to how one mined Bitcoin, Ethereum has begun to transition away from the ‘proof of work’ concept originally shared with Bitcoin to something referred to as a ‘proof of stake’.
Mining digital coins is incredibly energy intensive. Moving towards a proof of stake allows coins to be mined without having to use the same intensive energy processes as proof of work. Ethereum may therefore provide a ‘greener’ option for those looking to invest in cryptocurrency but who are wary of the energy costs that go into Bitcoin mining.
Crypto Wallets
Regardless of which cryptocurrency one chooses, one will require a crypto wallet to store the public and private keys necessary for cryptocurrency exchanges. A cryptocurrency wallet is therefore simply a medium or service used to store these keys. Often these wallets can also function to encrypt information and act as a secure digital signature, for instance when executing a smart contract or signing a legal document.
When choosing a crypto wallet, you will first need to determine how you will be using your cryptocurrency. Most broadly, there are 2 types of wallets, one for day-to-day transactions and one for storing larger sums. Those used for frequent transactions are often referred to as hot wallets and these remain connected online. Cold wallets are stored offline which enhances their security and these are the safest option for holding larger amounts of cryptocurrency.
There are a variety of cryptocurrency wallets to choose from, so it is essential that you do your research beforehand. A mobile cryptocurrency wallet app allows you to make payments wherever such payment options are accepted, but again this carries a higher risk because you will be trading over public networks.
Some people use a desktop wallet which reduces this security risk as you will be only accessing it from a private, at home network. Other options include hardware wallets which allow for digital ‘cold’ storage of cryptocurrencies.
To make the most of any cryptocurrency and blockchain technology investments a thorough understanding the fundamentals is key to success. Online courses are now widely available and can be a significant source of information for both those new to cryptocurrency investing and those looking to enhance their knowledge of blockchain technologies. LearnDay offers a variety of course options to help kickstart your cryptocurrency journey.
Free Introduction to Blockchain Course developed by professor and blockchain expert Dr. Justin Goldston.