This article aims to provide insight into cryptocurrency and how it fundamentally works. It references crypto technology, decentralized finance (DeFi), and tokens. If you are familiar with some basics of crypto, do read our articles on blockchain and DeFi after reading this article.
Why Is Crypto Such a Big Deal?
Over the last few years, crypto has gained adoption at an unprecedented rate, peaking at roughly $3 trillion in November 2021. The volatility of the crypto market can be attributed to it still being in its early stages. However, in recent years, institutions and retail investors alike are increasingly interested in crypto due to its immense potential. Moreover, talented and passionate engineers are flocking to the open design space of crypto in record numbers. This means that mass adoption of crypto might come sooner than we think.
How Does Crypto Work?
A form of digital currency, crypto runs on blockchains.
Crypto gets its name from cryptography, which blockchains use for security. To be succinct, blockchains are digital ledgers that anyone with an internet connection can access. Blockchains are transparent and immutable, which creates a trustless way for people to perform transactions.
The value of any crypto token is dependent on its uses, qualities, and public opinion, much like any other asset. For example, Bitcoin has gained widespread adoption and has a limited supply of 21 million, making it a store-of-value asset to many people. You might have heard of Bitcoin referred to as “digital gold” for this very reason.
Other coins, such as Ether (ETH), the native token of the Ethereum network, are seen as valuable because of its many uses. ETH can be used to buy and sell digital assets such as NFTs, interact with dApps (decentralized apps), and offers a wide range of uses for those who dabble in decentralized finance (DeFi).
Tokens such as LINK, the currency for Chainlink, are highly valued by some because they believe the infrastructural developments that Chainlink is making in the crypto space will be valuable in the long run. Chainlink aims to create a decentralized oracle network, whereby smart contracts on a blockchain are provided with real-world data.
Uses of Crypto
Currently, the largest use for crypto is to participate in DeFi. We have another article on what DeFi is all about, but to summarize, it refers to a whole range of financial services on the blockchain. DeFi revolutionizes the finance industry by making it accessible, transparent, and more equitable.
In the physical world, people use crypto such as Bitcoin as a hedge against inflation, although Bitcoin’s volatility makes that a risky decision. In some countries where inflation threatens their currency, citizens might store their money in stablecoins to protect its value.
Many companies are expanding their portfolios to include some form of crypto, and payment companies such as Paypal and Visa are looking to support cryptocurrency. Some stores are starting to accept crypto as payment, and El Salvador has even adopted Bitcoin as an official currency. While there are many skeptics of crypto, it is clear that the world is warming up to the idea of digital money.
Types of Cryptocurrency: Tokens vs. Coins
You may have encountered people referring to crypto in terms of “tokens” and “coins”. While similar, the two cannot actually be used interchangeably. All forms of crypto can be referred to as tokens, but a coin refers to a specific token that is native to its blockchain. For instance, ETH is the token native to the Ethereum blockchain, hence it can be referred to as a coin.
Risks of Cryptocurrency
Many people are concerned about crypto hacks and scams. However, it is virtually impossible to hack into a blockchain. Unless you store your crypto on a centralized exchange (CEX), the real risks of investing in crypto are scams, exploits, and price volatility.
Here are some tips on staying safe when investing in crypto:
Use a Hardware Wallet
If you intend to purchase a large amount of crypto, consider purchasing a hardware wallet to keep your assets safe. CEXs are prone to getting hacked, and DEXs (decentralized exchanges) run smart contract risk and could get exploited. You can never be too safe with valuable assets.
Be Aware of Scams
These days, many crypto scams are designed to lure new investors on the promise of high returns. If something seems too good to be true, like a high-returns, risk-free project, it probably is. BitConnect, a scam project that promised extremely high returns on crypto trading, managed to amass over $2 billion before absconding with the money.
Thoroughly Research Projects Before Investing
Though many crypto projects are not scams, they may fail or not do well. Depending on your risk tolerance, you might want to avoid projects that are too new or projects started by teams who are brand new to the crypto space. Regardless of what you decide to invest in, never put in money you cannot afford to lose.
If you use Treehouse’s portfolio tracker, it has a risk assessment tool that can inform you of any protocols you are invested in that seem risky or suspicious.
How to Get Started With Crypto
By reading this article, you have already taken your first step to getting started with crypto. The next step is to research coins you are interested in investing in before jumping straight in.
New to DeFi? If you found this useful, check out our other Learn DeFi articles to dive deeper into the wonderful world of DeFi! Alternatively, browse our Insights section to read more in-depth analyses on the DeFi space. You can also try out our flagship product, Harvest, to get a comprehensive analysis of your DeFi assets. Lastly, subscribe to newsletter updates in the box below!