What Does Cryptocurrency Mean In 2022? Useful Tips

What Does Cryptocurrency Mean In 2022
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What does cryptocurrency mean in 2022 – how to use it, types, differences, and useful tips by application. Detailed instructions for beginners in simple words.

a cryptocurrency is a series of coded signatures connected to each other

Many people have heard about cryptocurrencies, about the ups and downs of the price of Bitcoin, success stories when a few thousand dollars made people millionaires.

But in reality, things are much more complicated. Before investing in cryptocurrency, you need to understand what it is, what are the main advantages and disadvantages of this tool, the difference between crypto and traditional money, as well as the main ways to use it.

Before explaining what a cryptocurrency is and how to use it, let’s decipher the name itself.

For the first time, the term cryptocurrency (сrypto currency) was used in the title of an article by Andy Greenberg, editor of the American financial and analytical magazine Forbes, in 2011.

What does cryptocurrency mean?

The very concept of currency hardly needs explanation, and the prefix crypto is an abbreviation for the word “cryptographic“, which means secret or encoded.

In essence, a cryptocurrency is a series of coded signatures connected to each other, obtained as a result of solving cryptographic equations.

The cipher guarantees the uniqueness of each coin. To some extent, cryptographic signatures can be likened to serial numbers on banknotes.

Before the advent of the Bitcoin cryptocurrency, programmers were already trying to create virtual money. A special mention should be made to Nick Szabo’s Bit Gold project.

Zepera - Cryptocurrency Mining

At the end of the last millennium, he put forward the idea of ​​strengthening the security of electronic payments using cryptography.

What is cryptocurrency in simple words?

Cryptocurrency is virtual digital money or, more simply, a payment instrument.

Unlike national currencies issued by state banks, crypto money exists only on the Internet and is never minted in the form of coins or printed in the form of banknotes.

Cryptocurrency is essentially an analog of digital money, but with an increased degree of protection. Blockchain technology is used to create and execute transfers between network users.

All data about the cryptosystem is stored on many separate computers that are network nodes. All changes to the current state of the system are logged and acknowledged by each node.

Virtual coins are generated by performing cryptographic calculations, which, with the current level of computer technology, completely eliminates the possibility of counterfeiting.

Crypto money in some countries (Germany, Venezuela) is equated to national financial instruments, each of the virtual coins has its own exchange rate against the US dollar and other traditional currencies.

The exchange of digital coins of different networks among themselves for fiat money is carried out on specialized Internet services.

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The technical component of cryptocurrencies

Traditional cryptocurrencies are completely decentralized, that is, they do not have a single governing body and are not regulated from the outside by financial institutions. I will talk about exceptions to this rule a little later.

All information about the cryptocurrency is stored in a distributed ledger (same as accounting). For this, blockchain technology is used. Anyone who wants to examine the data of the wallet can take away the balance of money on the balance sheet and complete transactions.

Each new block contains information about commissions, completed transactions, and other service information. The process of forming new blocks in the network is called mining.

Anyone can participate in the mining of coins, subject to the availability of powerful computing equipment and a stable communication channel with the global network.

The user must have special skills in order to be able to set up a mining farm to work with a specific crypto network through a remote server.

Security measures when using cryptocurrencies

Information security is guaranteed by a cryptographic code. Many blockchain ecosystems use Proof-of-Work (proof of work) to protect against abuse of services.

Miners, by processing transactions and creating new blocks, ensure the functioning of the network and are rewarded with cryptocurrencies for this.

But, recently, projects using various modifications of the POS network protection algorithm (Proof-of-Stack) are becoming more and more popular.

The generation of new blocks of the chain occurs at a strictly defined time interval. Its duration is embedded in the program code of each system.

Each new block is interconnected with the previous one in a single chain, and the correctness of its hash signature must be confirmed by all network nodes.

Incorrect blocks are eliminated and cannot affect the functionality of the system. The hash sequence and digital signature guarantee the uniqueness and security of each transaction.

Types of cryptocurrencies
Photo by Roger Brown

Types of cryptocurrencies.

According to the resource Coinmarketcap in mid-2022, there were more than 19,000 different cryptocurrencies.

The total market capitalization of virtual assets at that time was about 1 trillion dollars, approximately 2/3 of this amount falls on the TOP 20 largest blockchain projects.

A fairly large part of the coins are used to pay for services in a certain network, are not sold on exchanges, and are of no value to investors.

There are the following types of cryptocurrencies:

  • Currencies Coin or payment system coins. They are intended to pay for goods and services and can serve as an investment object.

They are completely decentralized, anonymous, and easy to use. The most popular of these cryptocurrencies is Bitcoin.

  • Platforms Coins or internal crypto platform tokens. These tools are designed for the development and execution of smart contracts and network users cannot do without them.

A smart contract is a program that automatically controls the transfer of assets between two or more parties to the contract on predetermined conditions.

The most famous platform crypto coin is Ethereum. In addition to the main purpose, ether is used as electronic money along with bitcoin.

People invest in the infrastructure of the Ethereum network, being sure that they are not investing in a marketing trap, but are increasing their capital by contributing to the development of innovative projects.

  • Cryptocurrency Exchanges or internal marketplace tokens. Reputable crypto exchanges issue their own digital currency. Thus, the administration accelerates the turnover of funds and increases the liquidity of little-known assets on its trading floor.

Users at any time can sell this or that coin for an exchange token, with a minimum maintenance fee, which significantly reduces the risks of investing in young projects.

Digital coins of crypto exchanges are completely centralized networks, this is their main difference from traditional cryptocurrencies. They have good liquidity, but only as long as the platform that released them successfully develops.

The most popular exchange tokens are BNB coin and Exmocoin.

  • Utility Tokens or utility tokens, also called App Coins. They are issued in a limited volume for ICO. After the fundraising campaign is over, blockchain project teams sometimes try to promote it as an investment option.

But this practice is now strictly controlled by the US Securities and Exchange Commission, so for a successful investment you need to be an expert in the field of economics.

  • Security Tokens or hardware tokens are a direct analog of securities. They are distributed among investors to enhance the financial security of investments. The Security Token is something like a digital token that every contributor receives.

Dividend payments are distributed on the basis of cryptographic tokens, they themselves can be invested in other projects.

The right of the STO owner is recorded in a smart contract, and the tokens themselves are sold on trading floors. STO turnover is controlled by financial regulators, such as the US Securities and Exchange Commission (SEC) or the Swiss Financial Market Supervisory Authority (FINMA).

  • Crypto Commodities or crypto-commodity, the general name of an asset being sold or exchanged in the real or virtual world, which can be obtained through the blockchain network using exclusive digital tokens.

Crypto commodities tokens pay for hosting on a remote server, media content and other goods and services within a specific platform.

For example, with the coins of the Aeron blockchain network, you can pay for access to a database related to the safety of air travel. Self-regulation and execution of financial transactions in Crypto Commodities is embedded in the program code in the form of a smart contract.

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Unlike Platforms Coins, Crypto Commodities tokens are never used as regular money outside of the project.

  • Stable Coins (stablecoins) are the least volatile cryptocurrency because their value is always tied to a physical asset.

A company issuing stablecoins must have an amount in fiat funds, for example, in US dollars, on the balance of the reserve fund in order to guarantee the value of the token.

The most famous coin of this type is Tether, but there are other stablecoins backed by the dollar and euro.

For example, El Petro is the first state stablecoin issued by the government of Venezuela. Its provision is the oil and mineral resources of the country.

Government agencies of other countries are working on similar projects.

All stablecoins have one obvious drawback, the centralized rate maintenance mechanism is in direct conflict with the decentralized nature of cryptocurrencies.

Preparations for the transition to digital currency are actively underway in China.

The development of the crypto-yuan began back in 2014, and in May last year, the People’s Bank of China introduced a national cryptocurrency (DCEP) in four regions of the country.

What does cryptocurrency mean? Now you have a general idea about it. But perhaps you have a question: “Why do we need cryptocurrency at all?” Let’s try to figure it out and answer it.

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For example, El Petro is the first state stablecoin issued by the government of Venezuela. Its provision is the oil and mineral resources of the country.

Government agencies of other countries are working on similar projects.

All stablecoins have one obvious drawback, the centralized rate maintenance mechanism is in direct conflict with the decentralized nature of cryptocurrencies.

Preparations for the transition to digital currency are actively underway in China.

The development of the crypto-yuan began back in 2014, and in May last year, the People’s Bank of China introduced a national cryptocurrency (DCEP) in four regions of the country.

What does cryptocurrency mean? Now you have a general idea about it. But perhaps you have a question: “Why do we need cryptocurrency at all?” Let’s try to figure it out and answer it.

What is a cryptocurrency for?

Decentralized peer-to-peer systems are transparent, trustless, and not subject to external control.

If you explain what a cryptocurrency is in simple words, you can say this: “This is a convenient alternative to bank transfers.”

The distributed ledger system does not require intermediaries, which greatly simplifies trade and financial transactions. And records in the blockchain cannot be accidentally, deliberately destroyed, or forged.

Cryptocurrencies can also be used as a means of capital accumulation. For example, Bitcoin is suitable for this (experts call it “digital gold”).

The entire financial system, in fact, works on trust, failures and even outright fraud often occur.

Top managers receive huge amounts of bonuses for manipulating client assets in their own interests.

In 2008, the failure of four banks could bring down the world economy. A decentralized network, having lost one, or even ten nodes, will not disappear anywhere and will fully work.

De-Fi pools and staking

The development and improvement of crypto technologies have opened up the possibility of creating decentralized financial services using one of the popular blockchain ecosystems as a database.

Most often, DEFI applications are based on Ethereum, but there are projects on other chains, such as Terra or Solana.

Decentralized finance services can have different areas of activity. Defi-sector employs:

  • Credit companies;
  • Algorithmic stablecoin services;
  • Decentralized trading platforms (DEX);
  • Mutual insurance services;
  • Exchanges of digitized physical assets and synthetic tokens.

Farming is the main way to make money in the defi sector. Decentralized lending projects create special liquidity pools.

Holders supply digital assets to the pool and receive dividends for this.

The implementation of such a decentralized lending scheme became possible thanks to the development of smart contracts that automate the process of interaction between the service and the client.

Many decentralized services mint their own digital coins, allowing you to fix the client’s share in the pool.

Farming, also known as income farming. You sort of sow your crypto assets into a pool and eventually get them back in larger quantities.

Several profitable farming strategies have been developed, with different levels of complexity. The user can earn about 10% per annum, but there are pools that promise higher returns.

The threshold for entering the liquidity pool is usually low, and thanks to the receipt of internal tokens, the client can have additional income due to the appreciation.

Such statistics attract many investors to defi platforms. However, income farming is far from the only way to make passive income in the blockchain industry.

The second, no less attractive option is staking.

Many POS networks allow validators to raise additional funds from ordinary users to increase their status.

The validators, in turn, share with the holders a part of their payments, which they receive for processing transactions.

Thus, everyone can participate in ensuring the viability of the peer-to-peer network, and receive a certain percentage of commissions without even creating a trusted node.

Unlike profitable farming, staking is always directly related to a certain blockchain, and income directly depends on the success of promoting this project on the market.

In addition to farming and staking, you can earn passive income by participating in the landing program.

You lend to other users, and at the end of the term you get your coins back with a vengeance.

Typically, such programs operate on large exchanges that take a commission from participants, which somewhat reduces the level of profit.

There are no additional deductions in farming or staking, but landing is a less risky venture.

In liquidity pools, the level of profit is not stable and depends on many factors.

Funds blocked in smart contracts cannot always be withdrawn immediately and in full.

Smart contracts can have internal vulnerabilities that allow hackers to steal investors’ money. And the liquidity pools themselves have different levels of reliability.

An excellent benchmark for assessing the popularity of a DEFI pool is the value of the tokens it issues. You should also pay attention to the total capitalization of this project.

You can view the data here:

Nevertheless, farming is one of the best ways to increase crypto capital for both beginners and experienced investors.

Unless, of course, you scrupulously study the project before investing money, and do not forget about risk diversification.

How is cryptocurrency different from fiat money

How is cryptocurrency different from fiat money?

I will list the main differences between virtual money and ordinary money.

  • Decentralized and easy and access to the system. The blockchain network consists of a set of programs for mining and storing cryptocurrency.

Each local wallet is a complete network node and contains the entire database of the system. To view information, you do not need to open a wallet or register on the network.

  • Openness. The history of the transaction is tracked until the moment the coins are issued and cannot be corrected or deleted.

If you know the public key, you have access to the entire history of transactions and the number of coins on the balance of this wallet.

  • Freedom of choice. To connect, it is not necessary to install the full client, which can exceed 300 GB.

You can get access using a mobile application or a web interface. A hardware safe will provide maximum storage security.

  • Absence of intermediaries and external regulators. No one will turn off the blockchain wallet, and will not freeze it.

If the program code of this cryptocurrency has a restriction on the issuance of coins, then, with all the desire, they cannot be generated more.

Transfer fees are not high and do not depend on the distance or jurisdiction of the recipient. All completed transactions are irreversible.

  • Anonymity. When creating a wallet, you do not specify passport data anywhere. The wallet address is available, but you can’t find out the owner’s last name.

The exception is crypto-exchange deposits that work with both cryptocurrency and fiat, but this is a different story.

The address looks something like this: bc1ehZfq97zafn50cs4y8ji774et6mwgqd. For the convenience of calculations, it can be translated into a QR code.

  • Reward for system support. Each user who has enough funds to buy computing equipment and enough skills to set it up can take part in the production of crypto coins.

Participants in the process are called miners. They verify and record transactions in the next block and calculate its cryptographic signature.

After the next block is signed, a new one is formed based on its decision.

The entire set of blocks is a single chain in which each subsequent segment is a continuation of the previous one, which is guaranteed by cryptographic calculations.

All incorrect transactions and the blocks formed from them are canceled by the system, ensuring the integrity of the blockchain structure.

  • High degree of protection. The computing power of popular blockchain ecosystems is measured in petahesh and exahesh, which exceeds the capabilities of all modern supercomputers.

An attempt to establish at least partial control over them will cost the attackers billions of dollars, while there is no guarantee of success.

Fiat currencies, including the dollar and the euro, differ on all counts. Of course, it is impossible to hack the server of the Central Bank, but they have long learned how to masterfully counterfeit paper banknotes.

Counterfeits account for a substantial percentage of the money supply. They are periodically collected and destroyed, but new ones immediately appear.

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Pros and cons of cryptocurrencies

  • People no longer trust the authorities and fiat money, so the popularity of cryptocurrencies is constantly growing.

Most people became disillusioned with monetary policy, so they increasingly began to use decentralized payments. The main advantages of cryptocurrencies:

  • Reliability. Encryption algorithms, blockchain, and computing power make it difficult to hack or falsify money data.
  • Open-source. This allows anyone who wants to research the software, look for bugs, and suggest improvements to network performance.
  • Limited. The number of emitted coins is limited and known in advance. You can change the setting only with the consent of the majority of users on the network.
  • Cross-border payments. Now banks or intermediaries are no longer needed to transfer money from one country to another.
  • Control over funds. In the event of a bank failure, no one guarantees the safety of funds or the possibility of their return. Only the owner of the cryptocurrency is responsible for their digital money.
  • The possibility of earning. The popularity and development of the new technology make it possible to obtain a greater return on investment compared to traditional tools.

Despite the advantages of cryptocurrencies, they also have some disadvantages:

  • The risk of losing all the money. To access the money stored in the wallet, you must enter a private key.

It cannot be restored or changed. In case of loss of login data, the funds will be frozen in the account.

  • Attack 51%. The security of any cryptocurrency lies in the decentralization of computing power.

In the event that one person or group of people gains access to over 51% of the network resources, this will allow any changes to be made to the operation of the blockchain.

But this plan is difficult to implement with those cryptocurrencies that require a large amount of computing power.

  • Exchange rate volatility. The price of crypto coins can be influenced by the level of trust and user demand.

The market also reacts unpredictably to changes in the policies of leading countries regarding cryptocurrencies.

  • No guarantees. Investors should take into account that all risks fall on their shoulders, because in case of theft of an asset, loss or simply lack of access to the wallet, nothing can be done.

Despite the uncertain legal status, virtual money is in demand in many countries. First of all, due to its versatility and convenience of calculations.

Earning cryptocurrency in mining is an expensive and complicated process, but everyone can create a wallet and buy digital coins in an exchanger.

Clients appreciated the useful properties of blockchain networks: anonymity, immutability and complete lack of control.

Electronic wallets encrypted with a secret key are very secure. Therefore, many people invest in cryptocurrencies in the hope that prices will rise relative to their fiat money.

Cryptocurrency market – prospects for its development

Cryptocurrencies are very difficult to completely ban, but politicians are in no hurry to recognize them as money. At best, they are recognized as securities for the convenience of taxation.

More recently, the release of the state cryptocurrency would have seemed like a joke. But when, following Venezuela, China announced the upcoming transition to cryptocurrency and began to think in the European Union, the situation became somewhat clearer.

Influential people of the world want to use all the useful properties of blockchain assets, eliminating all the inconvenient ones. To do this, a hybrid of cryptocurrency and fiat is being created.

Such money cannot be counterfeited and its turnover can be easily controlled, but we are not talking about decentralization and anonymity.

Let’s see what happens. In the meantime, miners earn on block generation, traders on volatility, ordinary users participate in DEFI projects, staking and landing, or simply wait for the next price jump.

We are still at the very beginning of the journey, we are studying in practice what cryptocurrency is and how to use it. But blockchain technologies are being introduced everywhere in various spheres of life, and this means that a complete transition to virtual money is only a matter of time.

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In the following articles about cryptocurrency, we will analyze other interesting topics: ways to earn money, investments, the creation and sale of NFT, and much more. Therefore, do not forget to subscribe to my blog updates to be the first to know about new articles.

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