A cryptocurrency is a digital asset that uses cryptography for secure and transparent transactions. Like most digital assets, anyone can send or receive crypto in exchange for value, such as products, services, or fiat money. The primary difference between cryptocurrencies and most other types of digital assets is the use of cryptography and distributed ledger technology.
Many cryptocurrencies are decentralized, which means that they do not rely on a central authority and cannot be controlled by any one entity. The decentralization adds an extra layer of security because it minimizes the risk of fraud or manipulation since changes and major network events require collective effort.
The following are the most common ways to buy cryptocurrencies:
- Crypto Exchange: A crypto exchange is easily the most popular option for purchasing crypto. These platforms are easy to use, have a wide range of supported cryptocurrencies in many cases, and offer users cost-effective ways to acquire their favorite assets.
- Trading Apps: Several trading apps allow users to directly buy cryptocurrencies in addition to traditional stocks, options, and exchange-traded funds (ETFs). Some trading apps may charge a purchase fee or add a spread markup on each transaction. Trading apps also offer wallets where users can simply hold their assets until further notice.
- Pre-Sales: A pre-sale is an early-stage event by a crypto project where pre-approved users can buy a limited number of crypto tokens before a public launch. Developers may launch pre-sale events using unique forums and websites or decentralized exchanges (DEXs). Generally, pre-sales events help developers raise extra capital for their projects and provide investors an opportunity to earn. Users can buy assets at low prices and then sell them for high profits after the public launch (source: https://insidebitcoins.com/buy-cryptocurrency/best-crypto-presales).
- Crypto ATMs: A crypto ATM (automated teller machine) is a kiosk that allows people to buy and sell cryptocurrencies using a debit card, credit card, or cash. While this is not the most common option, crypto ATMs are an easy-to-use method of buying crypto.
Most cryptocurrencies function using blockchain technology. A blockchain is a distributed database that stores data in blocks and is controlled by a large network of nodes that maintain the database and build the asset’s ecosystem. Since the database is immutable, anyone can recall every transaction since the blockchain’s inception, ensuring that all network transactions are transparent and publicly accessible.
Blockchains use consensus algorithms, procedures through which network nodes reach a common agreement and coordinate themselves despite decentralization. The following are two common consensus mechanisms used on popular blockchains:
- Proof-of-Work (PoW): The PoW method is the consensus mechanism behind major blockchains like Bitcoin (BTC), Litecoin (LTC), and Dogecoin (DOGE). The process requires miners to create blocks by solving complex mathematical problems using specialized equipment. Unfortunately, this process is expensive because the hardware used is pricey and consumes a lot of power.
- Proof-of-Stake (PoS): The PoS consensus algorithm involves validators who create new blocks depending on the amount of cryptocurrency each one has staked. Validators earn transaction fees as rewards for maintaining blockchain records and voting on network outcomes, in addition to other duties performed. Nonetheless, a validator can lose some or all of their stake as a penalty for wrong or fraudulent validations. Unlike PoW, the PoS method does not require expensive equipment or large amounts of energy.
Bitcoin is the first major decentralized cryptocurrency, initially designed as a peer-to-peer electronic cash system. Anonymous creator Satoshi Nakamoto stated in the Bitcoin whitepaper that the system will directly facilitate online payments between parties without the need for middlemen. Cryptocurrencies have since evolved from Bitcoin’s initial design and now perform many different functions, including the following:
- Investment: Many people buy and hold cryptocurrencies to take advantage of their volatility. The highly unstable nature of most crypto tokens sometimes results in gains for people who buy and hold them until prices increase. For instance, BTC has returned 120% to investors in 2023 as of November, while ETH holders have gained over 60%. Several other crypto assets have also seen huge returns, including Avalanche (AVAX) at 82% and Solana (SOL) at a whopping 439%.
- Fund Transfers: Cryptocurrencies function as an efficient way to transfer money between users, especially across borders. Using blockchain technology, users can send funds between crypto wallets of the same assets without worrying about traditional limitations like geographical proximity. This fund transfer method is also significantly cheaper than traditional options because there are no middlemen involved.
- Payment: Crypto is a popular medium of exchange commonly used to pay for goods and services. As adoption has increased over the years, an increasing number of businesses and merchants now allow customers to pay for goods and services using various supported cryptocurrencies. Popular examples are Shopify, Tesla, and Burger King.
- Tokenization: Traditional assets are sometimes digitized so that they are tradeable on the blockchain. These tokens represent many real-world items and facilitate easy trades with added protection provided by blockchain technology. In addition, tokenizing a large or expensive asset on a blockchain helps to split ownership to benefit as many people as possible.
Digital assets provide users with several benefits depending on each person’s preferred use of crypto. As adoption grows, use cases are likely to increase while regulators around the world provide more clarity on the permitted application of these assets. However, the crypto community is advised to protect themselves from fraud, market manipulation, and volatility, by conducting thorough research on assets they intend to invest in or buy.