Digital currency, cryptocurrency, and encrypted money are all other names of cryptocurrency that speak of a single concept. A concept that may be dumb and mysterious to many people.
In this article, we want to introduce digital currency and everything related to it in a simple words. From its uses, reasons, differences, advantages and disadvantages compared to ordinary money to new concepts such as blockchain, mining, wallet and exchange.
Key points of digital currency:
- Digital currency is a form of money that, unlike common currencies, is not produced physically and is virtual.
- The best equivalent for digital currency is Cryptocurrency.
- Bitcoin is the first cryptocurrency in history that was released in 2008.
- Digital currencies provide the security of transactions using encryption technology.
- Cryptocurrencies are decentralized. It means that no intermediary or government institution has control and management of it.
- We need a digital currency wallet to store cryptocurrencies.
- The price of digital currencies is determined according to various factors, the most important of which is supply and demand.
- Legislators have not yet reached a consensus on the legality of cryptocurrencies, and laws related to cryptocurrencies are different in different parts of the world.
Let’s discover cryptocurrency together including:
- What is digital currency?
- How do digital currencies work?
- What is the difference between ordinary money and digital currency?
- What are the different types of digital currency categories?
- What are the famous digital currencies?
- Examining the risks of investing in digital currency
- How is the price of digital currencies determined?
- Is digital currency legal?
- Why are digital currencies popular?
- Frequently asked questions on digital currencies
What is digital currency?
Digital currency or cryptocurrency is a form of money that is created digitally or virtually and can be used for exchange. Cryptocurrency is made up of two words Crypto meaning encryption and Currency.
Cryptocurrencies have all the characteristics of common currencies except for their physical nature and use cryptographic technology to secure and confirm transactions.
They can be transferred, exchanged with other currencies, shopped online and so on, just like bank transactions with much less restrictions.
The first digital currency was Bitcoin, which was introduced to the world in 2008 by an unknown person. In the following sections, we will talk more about this cryptocurrency and the most important digital currencies.
How do digital currencies work?
To understand how digital currencies work, it is better to first have a brief overview of traditional finance.
We have to go to the bank to transfer money and benefit from financial services. A bank that has restrictions such as being at least 18 years old.
The bank checks our identity, registers our signature and opens an account with a specific number for us. Any money deposited to this account number belongs to us and withdrawal from it is done only with our permission and signature.
All bank account transactions are recorded in a ledger that only the bank has access to. The balance of each account is determined by adding and subtracting the transaction history of that account.
Whenever we request to transfer or withdraw money from our account, the bank checks two invoices to prevent fraud:
- Identity: To ensure that the requestor of the transfer is the same as the account holder.
- Account Balance: To ensure that there is an amount in the account equal to the requested amount.
But in digital currencies, there is no more news of a bank or central institution to establish rules and open an account. Everything will be done automatically and by decentralized programming codes.
Familiarity with the following concepts helps to understand the structure of digital currencies:
| Title | Definition |
|---|---|
| Public Key | An address is similar to a bank account number that you provide to others to receive digital currencies. |
| Private Key | It consists of a string of letters and numbers, which is used to perform any operation in the wallet. A private key is similar to a password and should not be shared with anyone. |
| Digital Signature | It is a type of encryption that is done using private and public keys. |
| Node | Qualified people in the network who are responsible for controlling digital currencies and user balance. |
| Consensus Algorithm | It is a mechanism by which network nodes agree on the current state of the blockchain. |
| Blockchain | It is a chain of blocks, each of which contains information about transactions and is connected to each other. |
| Mining | It is called the act of producing new coins in some blockchain networks. During this operation, using your computer’s processing power, you can solve complex mathematical equations and extract new coins. Whoever gets the answer first will receive some of the generated cryptocurrency as a reward. |
| Mining Pool | It is a place where users pool their computing power to have a better chance of finding the answer to blockchain equations. In these pools, the mining reward is also divided among the members. |
| Cryptocurrency Wallet | It is something like a bank account book that is used to store, send, receive and manage digital currencies. These wallets are software or hardware and your balance is displayed in it. |
| Staking | It means locking a number of tokens in the network, in exchange for which the user receives a profit. |
| Exchange | A digital currency exchange can be considered a market where it is possible to buy and sell and exchange cryptocurrencies. It is enough to deposit an amount to these exchanges and buy or exchange your desired cryptocurrency. |
| Block Explorer | Blockchain browser is a search tool similar to internet browsers. With the help of this tool, the information in a block chain can be searched. |
What is the difference between ordinary money and digital currency?
Digital currencies have the main characteristics of being converted into money, and for this reason there are many similarities between digital currency and fiat currency.
For example, both are used for transactions and both have the ability to be divided. Along with the main features, cryptocurrencies have special features that make them fundamentally different from regular money.
These features can be introduced as follows:
- Decentralization: The concept of decentralization became popular with the birth of Bitcoin. Decentralization means that the control of the digital currency market is not in the hands of a government organization or entity.
- Transparency: In the world of digital currencies, everything is recorded with transparency. Thanks to the existence of blockchain browsers, it is possible to monitor and track various transactions.
- Irreversibility: If you have mistakenly or for any reason sent your assets to another address, they cannot be returned.
- Speed and accessibility: Digital currency has removed geographical restrictions. Also, on the blockchain platform, transactions are published almost instantly on the network and are confirmed within a few minutes.
- Security: The use of public and private key cryptography helps to secure digital currencies. Only the owner of the private key can access the assets and perform the sending operation.
- No need for permission: To use digital currencies, you only need internet, wallet and assets, and you don’t need to get permission from anywhere.
What are the different types of digital currency categories?
Digital currencies can be classified from several perspectives. Below you can see an example of this division.
- In a general category, cryptocurrencies can be divided into two groups: Bitcoin and Altcoin. Due to its pioneering nature and special features, Bitcoin is a very speacial digital currency. That’s why all the cryptocurrencies created after that are called altcoins. Altcoin is composed of the combination of two words Alternative and Coin and means alternative coin.
- On the other side, we have a category called Coins and Tokens. Coins have their own blockchains. Like Bitcoin and Ethereum. But tokens are cryptocurrencies that are launched on other blockchains like Ethereum. Tokens are simpler than coins in terms of design and implementation. Because they do not need to design a new blockchain.
- Another group that we can pay attention to in this category are privacy cryptocurrencies or so-called privacy coins. Assets such as Monero, ZCash and Dash are among these currencies that help protect user privacy. In this way, they prevent the dissemination of information and eliminate the possibility of monitoring and tracking transactions.
- Bitcoins and meme coins are another category of digital currencies. Bitcoins are cryptocurrencies that have virtually no intrinsic value and are not trustworthy. The popularity of Bitcoins lies in the fact that sometimes they can bring their owners to great wealth. However, they mostly cause losses to users. Memecoins are also assets that usually originate from trending social media images (memes).
What are the famous digital currencies?
Now that you are familiar with the concepts of digital currencies, we will introduce some of the most famous digital currencies in the world.
- Bitcoin with the symbol BTC: is the first digital currency and was introduced in 2008 by an unknown person named Satoshi Nakamoto. Bitcoin has always been on the first place in the cryptocurrency table and has continued to work with strength during all these years. This has made Bitcoin price changes always important and affect the market.
- Ethereum with the symbol ETH: The second most valuable digital currency in the market, which has features such as smart contracts and decentralized applications, is called Ethereum. Ethereum can be considered the most serious competitor of Bitcoin in terms of market value, which has been close to Bitcoin several times.
- Tether with the symbol USDT: Tether is the first stablecoin of the crypto market that has stood the test of time well. Tether, which is also known as the digital dollar, is among the top 5 cryptocurrencies in the market and is currently ranked third with a market value of nearly 80.2 billion dollars.
- Binance Coin with the symbol BNB: BNB digital currency, which ranks fourth in the cryptocurrency market by a good distance from its competitors, is the main coin of BNB Chain. Many people who intend to invest usually buy this cryptocurrency along with Bitcoin and Ether.
- Other famous cryptocurrencies: Among other important cryptocurrencies that have always been associated with a lot of buzz and news, we can mention Ripple with the symbol XRP, Monero with the symbol XMR, Dogecoin with the symbol Doge and Shiba with the symbol SHIB. Although these last two cases are meme coins and from a technical point of view, they have nothing new to say. However, the name of these cryptocurrencies is usually heard in the news headlines.
Examining the risks of investing in digital currency
The digital currency market is volatile, and therefore investing in these assets is associated with high risk. Lack of mastery of basic concepts and lack of experience in some fields may cause users to make mistakes. Scammers and profiteers also trap unsuspecting users with the promise of huge earnings.
Some of these risks are as follows:
- User Risk: Since there is no way to cancel or reverse a cryptocurrency transaction, often times a mistake on the part of users can mean losing their assets.
- Regulatory Risk: The legal status of digital currencies in most countries is still unclear. Some consider them as currency and others as securities. The strictness of the Securities and Exchange Commission in recent years has always caused events that have marked the fluctuation of digital currencies.
- Third-party risk: Many users and investors work with exchanges, decentralized applications, etc., and entrust the custody of their capital to them. Any fraud or malfeasance by one of these third parties will result in the destruction of people’s capital.
- Risk of project failure: The world of digital currencies is quite similar to the startup space, and the probability of project failure is also high. Many teams work towards specific goals and people who believe in them invest in their projects. The failure or departure of some important members of a team leads to a decrease in the price of cryptocurrency and, as a result, losses to investors.
- Risk of poor programming: Many platforms, like lending programs, use automated smart contracts to control user deposits. Due to bugs in the programming codes of these smart contracts, many hacks have occurred and millions of dollars have been stolen. An example of this problem can be clearly seen in the hacking of blockchain bridges.
- Market Manipulation Risk: Market manipulation is a major problem in the cryptocurrency space. Exchanges or whales have been accused many times of price manipulation. Also, pumping and dumping digital currencies has caused a lot of damage to a large number of users.
How is the price of digital currencies determined?
There are various sites and platforms such as Coin Market Cap that determine the price according to certain factors. The prices of digital currencies on reference sites are determined by methods and based on various factors, the average of which is available to users.
Among the most important factors in determining the price of digital currencies, we can mention factors such as supply and demand, use in the real world, the influence of media, social networks and famous people, issues related to legislation, transferability, risks and hacks, etc.
Also, about each cryptocurrency, there is sometimes news that can affect its price. As an example, it can be mentioned that the possibility of recession and dollarization affects the price of Bitcoin.
Also, the impact of the Shanghai hard fork on the price of Ethereum is another example that shows the effect of news on the price of digital currencies.
Apart from these, different assets also have different ways of pricing. For example, the NFT pricing mechanism is different from the Bitcoin pricing method.
By studying these few cases, you can understand what a complicated process it is to determine the price of cryptocurrencies.
Is digital currency legal?
Maybe this question will never have a clear answer. Because the views of different countries in this regard are different. Therefore, the legal status of Bitcoin and digital currencies is still in an aura of uncertainty.
As the popularity and use of digital currencies is increasing day by day, law enforcement agencies, tax authorities and legal regulatory bodies around the world are trying to understand the concept of digital currencies and consider the right legal frameworks for it. They have not been successful.
There are many concerns about the decentralized nature of cryptocurrencies and their use for illegal activities. Therefore, at present, each country has its own laws for digital currencies, and there is almost no common law for it.
Why are digital currencies popular?
In response to this question, several reasons can be given. But perhaps the motivation to make money is the most important factor in the popularity of cryptocurrencies.
Of course, the important point here is that many people who have entered this field, have stepped on this path with the intention of getting rich overnight, and there is no happy ending waiting for them.
On the other hand, the novelty of this platform and the services and technology introduced by digital currencies are attractive to many people.
The introduction of concepts such as the third generation of the web, DeFi and Metaverse are all such things that draw curious people to digital currencies.
Frequently asked questions on digital currencies
What is digital currency?
Digital currency or cryptocurrency is a type of encrypted money that you can use to transfer money, buy, earn, and perform numerous financial transactions.
What factors does the price of digital currency depend on?
Supply and demand can be considered the most important factor in determining the price of a cryptocurrency. Also, the characteristics of a cryptocurrency, its applications in the real world, media and famous people, issues related to legislation, etc. are other influential factors in this field.
How is digital currency bought and sold?
To buy and sell digital currencies, you can use an exchange or deal directly with people.
How to store and keep digital currencies safely?
For this we need to keep our assets in digital currency wallets that provide us with different levels of security.
Digital currency is a relatively new concept that includes other concepts in its heart. To get familiar with these digital assets, it is necessary to study issues such as wallets, exchanges, public and private keys, encryption standards, blockchain, consensus algorithm, etc.
In this article, in addition to explaining what digital currency is and what its uses are, we mentioned each of these concepts. Investing in digital currencies is like a double-edged sword that can both make people rich and make them lose their wealth.
Studying and gaining knowledge along with experience are factors that can guarantee and accelerate the success of people in this market.
What do you think about digital currency? Do cryptocurrencies have the power to replace physical money? What has been your personal experience of working with digital currencies?