Cryptocurrency, or crypto, is a new asset class that started with Bitcoin in 2008. Today, crypto represents a whole genre of different investible technologies through various coins.
Beginning the crypto journey
Let's start with a high-level overview.
Crypto is very different than our current global cash system of fiat currency because a single entity doesn't control crypto. It isn't created or distributed by an organization, like a bank or a government. Instead, crypto can freely flow between any individual without a financial go-between. This is what makes crypto a decentralized alternative to a traditionally centralized financial system.
This is a big deal because now third parties or governments can't freeze our accounts, can't dictate what we can buy, and cannot enact monetary policy to tell us how much our money is worth.
For digital currencies to work effectively and securely, we needed new technology to break away from the dependency of banks and financial institutions.
New technology has enabled us to transact and track ownership in a decentralized manner, without a central authority like a bank or government. We can break down the tech into two components.
- The blockchain
- The asset of the blockchain
Blockchain is the technology backbone that allows cryptocurrencies to be decentralized.
New information is stored in blocks with finite storage capacity. Once filled, the block is chained to the previous filled block, making a blockchain. Everyone has a copy of this chain or ledger on their computer. A consensus algorithm makes sure everyone has the same transaction information to prevent fraud, like someone forging fake transactions/blocks.
Keep in mind; not all cryptos are the same. For example, some blockchains are faster, more private, more secure, and more programmable. Bitcoin blockchain was the original technology but has since been improved by other organizations, such as Ethereum, to create more efficient blockchains.
The asset of the blockchain
Depending on the purpose of the blockchain, the tradeable assets can either be coins or tokens. These assets are what we refer to as cryptocurrency.
An example of a coin is BTC (bitcoin), and an example of a token is ETH (ether). While both of these are considered cryptocurrencies, the difference is significant enough to understand why ETH price is going up when BTC price is going down.
Coins are native assets of a blockchain that are meant to act as both mediums of exchange and long-term stores of value. Coins like BTC are typically only used for money we transact. All coins are cryptocurrency but not all cryptocurrencies are coins.
Tokens are units of value developed by blockchain-based organizations or projects on top of existing blockchain networks. Similar to coins, tokens have a monetary value; however, tokens are mostly created for additional purposes, like rewards in an application. Tokens effectively allow blockchains to become the foundation for other organizations to build services. All tokens are cryptocurrency but not all cryptocurrencies are tokens.
Before investing in crypto, we need to understand the utility behind the technology and the potential economic value.
It's important for us to be clear of the distinction between coins and tokens since many use these two terms interchangeably. By better knowing what we are investing in, we have a leg up compared to other investors.