What are cryptocurrencies? Understanding Bitcoin, Dogecoin, Ether and the rest

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To understand cryptocurrency, you need to understand how money works and what makes these new assets useful, and potentially usable as money in the future. First of all, there was “physical” money – notes and coins. Then came e-Money – the numbers that appear in your e-banking applications. These two documents are issued by the government.

And then came cryptocurrency, a type of electronic money that is not issued by any government. It is also called Math Money because it is created and managed using blockchains which are computer networks powered by advanced mathematics. Today, cryptocurrency’s use case is primarily its value as an asset, while the underlying blockchain technology is already powering a number of applications. But the future of money could be very different.

1. What is blockchain?

Let’s say Svetlana borrows 10,000 rupees from me. She’s supposed to return it in a week but doesn’t. I remind her of it, but she conveniently “forgot” it. What can I do? Nothing, except never to lend him anything again! True story.

Now suppose that at the time of the loan of the money, some friends are present. They all clicked on a photo or shot a video of me loaning Svetlana the money and promising to return it in a week. And each of those friends post the photo / video to Instagram, Facebook, etc. This is solid proof. And Svetlana can’t really delete all of those videos / photos from the internet.

Now it’s something like a blockchain.

A blockchain is generally a collection of computers (nodes) connected to each other. All of these computers contain the same information (eg a transaction log). To “hack” this information, you will have to “hack” most of these computers at the same time. And that’s a pretty difficult thing to do!

There are many blockchains in the world. The Bitcoin Blockchain is the first and oldest. It records all bitcoin cryptocurrency transactions. Anyone can run a node on this blockchain. All you need is a computer with enough storage space and a strong internet connection.

2. How are cryptocurrencies created?

There are 2 common ways to create cryptocurrencies. One is the style used by Bitcoin and the other is the style used by Ethereum.

In the Bitcoin style, there are a bunch of computers called miners that are constantly trying to solve math puzzles. Every 10 minutes or so, one of these miners wins this race to solve the riddle. This miner earns a reward which is currently 6.25 bitcoins. It’s about Rs. 2 crores. Yes, you read that right. Every 10 minutes someone receives 2 crore of bitcoin.

But don’t be too jealous of these minors. They have to spend tons of money on computers and electricity. And they can never know how much they will end up earning.

Many years ago, anyone could mine or create bitcoin using a laptop! Well, not anymore. Today you need a ton of computing power for it. In case you want to understand this concept of mining in all its complicated technological glory, you can download the free Future Money Playbook I wrote.

In the Ethereum style, you can create your own crypto in a matter of minutes. My daughters were tired of hearing about Dogecoin. So they decided to create their own cryptocurrency based on cats. All they had to do was customize a “smart contract” and publish it to the Ethereum blockchain. That’s it! Within minutes, they had created a new cryptocurrency with a supply of 7 billion tokens – one for every human on Earth. True story.

3. What are the types of cryptocurrencies?

There are 3 common types of crypto – medium of exchange, utility coin, and stablecoins.

A medium of crypto exchange can be used to buy and sell things. Examples are Bitcoin, Dogecoin, Litecoin, and Monero. These are the types that governments hate. This is because they can be used by criminals. But hey, criminals can also use cash! So it’s a little unfair to blame these poor little cryptos.

Then there are the utility parts. Just as oil “fuels” the global economy, utility coins, like Ether, “fuels” blockchain-based businesses.

And finally, there are the stablecoins. These are backed by normal fiat currencies like the US dollar or Japanese yen.

4. Numbers don’t lie

The world’s first and most popular cryptocurrency is Bitcoin (BTC). It is a medium of crypto exchange with a total value of over $ 880 billion. And the world’s largest bank, JP Morgan Chase, is worth $ 470 billion.

The world’s most popular utility coin is Ether (ETH) with a total value of $ 377 billion. India’s largest bank, HDFC Bank, pales in comparison with a total value of $ 140.37 billion.

Tether (USDT) is the most popular stablecoin with a total value of $ 64 billion. Doesn’t that sound like a lot? Well, that’s the size of ICICI Bank too!

(Note: figures are as of August 20, 2021)

Rohas Nagpal is the author of the Future Money Playbook and the chief blockchain architect at the Wrapped Asset Project. He is also a retired amateur boxer and hacker. You can follow him on LinkedIn.

Interested in cryptocurrency? We discuss all things crypto with WazirX CEO Nischal Shetty and WeekendInvesting Founder Alok Jain on Orbital, the Gadgets 360 podcast. Orbital is available on Apple Podcasts, Google Podcasts, Spotify, Amazon Music and wherever you get your podcasts.

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