What is cryptocurrency: Everything you need to know

June 13, 2022
June 13, 2022
What is cryptocurrency: Everything you need to know

The word “cryptocurrency” is somewhat of a misnomer. “Cryptocurrency” gives the impression that crypto is exclusively used for transactional purposes and as a medium of exchange. However, this is but one of the use cases. A more appropriate name would be “digital assets”, or “crypto-assets”, or simply just “crypto”. 

According to the Four Quadrant model developed by Michael Saylor, CEO of Microstrategy, crypto assets can broadly be classified under 4 different categories. They are, namely:

  1. Digital Property
  2. Digital Currencies
  3. Decentralized Platforms
  4. Decentralized Applications

Different crypto projects serve different use cases. Some examples include:

  • Store of value 
  • Payment for goods or services
  • Money transfer across borders
  • Software and apps
  • Digital art (e.g., non-fungible tokens or “NFTs”)
  • Decentralized finance (Defi) (e.g., smart contracts)
  • Passive income (e.g, staking or yield farming)

Differentiating between the different categories is important. Just like how there are different flavors or types of candy, and a Snickers Bar is different from a pack of Sour Patch Kids, knowing what category each crypto belongs to can help you navigate through this interesting, albeit confusing space.

Digital property

Digital Property

Since the inception of Bitcoin—the first-ever crypto created in 2009—crypto’s popularity, prevalence, and price have skyrocketed. Bitcoin is the preeminent digital property. If we thought about what the term “property” means, it implies that there exists a thing of value and ability for someone to own that thing.

Examples of what would be considered property in the traditional world include things like real estate, gold, stocks, bonds, etc. Of course, you can have digital representations of a bar of gold, a stock, a bond, or a piece of real estate, but none of those things are inherently digital. Being a digital property means that it exists in a “natively digital” form, meaning that it was created digitally and can only exist digitally.

Before Bitcoin, having a digital property was all but impossible. Say you created a digital file on your computer and said that the file shows you have a certain amount of money, who would believe you? Further, how would you prevent someone from tampering with the file such that they can give themselves an unlimited amount of money and leave you with nothing? Bitcoin solves this problem by creating a system of financial records, also called a “ledger”, that everyone has a copy of.

Like a game of Monopoly, transactions must be broadcasted out in the open and verified by the network’s participants before they can be added to the ledger. The technology that enables this “decentralized” way of tracking transactions is called “blockchain technology”. It is decentralized because all the network’s participants are responsible for helping keep the ledger updated, so there isn’t one central authority, like a government or company, that controls this ledger.

The maximum number of bitcoin that can exist is limited to 21 million. This makes bitcoin very similar to real estate and gold since the supply of real estate and gold is also limited. 

Bitcoin allows anyone to fully “own” something in a natively digital way, and this is why it essentially defines the category of Digital Property.

Digital currencies

Digital currencies are typically the category of digital assets that comes to mind when someone utters the term “cryptocurrency”. As the name suggests, the purpose of digital currencies is to make transactions in the digital world quicker, more reliable and more secure. Digital currencies are optimized for high throughput (often measured in “transactions per second”, often shortened to “TPS”) and characterized by low to no transaction costs.

Digital currencies can further be broken down into 2 subcategories:

  1. Stablecoins
  2. True cryptocurrencies

Stablecoins

Stablecoins are digital tokens that are pegged 1-to-1 to a regular fiat currency like the US Dollar, Canadian Dollar, Japanese Yen, etc. Stablecoins are useful for making transactions in the crypto world since the value of those tokens is denominated in currencies that we are familiar with. 

Note that not all stablecoins work in the same way. In particular, different stablecoins have different ways of maintaining their 1-to-1 peg with the desired fiat currency. Broadly speaking, stablecoins fall into 3 categories: algorithmic, fiat-backed, and multicollateralized. 

Algorithmic stablecoins maintain their peg through an automated system that manages the supply and demand of the stablecoin relative to a “sister crypto token” that trades openly on the market.

Fiat-backed stablecoins maintain their peg by having real fiat reserves sitting in a bank account and/or held as liquid financial securities like bonds which are used to back the stablecoin tokens. 

Multicollateralized stablecoins use a combination of an algorithmic supply and demand balancing system and a basket of assets in reserve to back the tokens. That basket of reserves can include other cryptocurrencies or any variety of liquid assets. 

Currently, the most popular stablecoins include USD Coin (USDC) and Tether (USDT) which both fall under the category of fiat-backed stablecoins.

True cryptocurrencies

These tokens have fluctuating prices that are not pegged to any particular fiat currency or any other benchmark. Examples include XRP and Stellar Lumens (XLM). It is incredibly fast to transfer XRP or XLM between wallets or exchanges with essentially no fees. 

Decentralized platforms

Decentralized platforms

Decentralized platforms represent the next iteration of blockchain technology. Decentralized platform projects are sometimes also called “Layer 1s” as they seek to become the base layer for where powerful decentralized applications can be built. The most dominant decentralized platform in the crypto space today is Ethereum. 

Platforms such as Ethereum are optimized for utility and programmability where they can serve as a hub for decentralized finance services (Defi) as well as NFT (Non-Fungible Token) projects. Other examples of Layer 1s include Cardano, Solana, and Polkadot. 

Decentralized applications 

Decentralized applications

Decentralized applications are projects that are built upon decentralized platforms. The purpose of these applications is to provide value and utility to anyone in an open, permissionless, and decentralized way. One can think of decentralized platforms as office buildings and decentralized applications as the companies that live inside the buildings. 

The possibilities regarding the use cases of decentralized applications are endless. Examples include Uniswap, a decentralized exchange (DEX) that can allow anyone to swap one coin for another without the need to provide personally identifiable information by the user, or Aave, which is a decentralized finance (Defi) application that facilitates lending and borrowing of stablecoins and other crypto assets in a decentralized manner. 

Key properties of crypto

How exactly are crypto assets different from traditional assets? The difference may not seem obvious at first glance. In an age of online banking and cashless payments, it may seem like our money is already digital. So what exactly is the difference between sending an electronic funds transfer (EFT) versus a crypto transaction? What’s the difference between owning crypto in a personal wallet versus having cash sitting in a bank account that’s accessible through an app on your smartphone? Those things may seem very similar to each other at first glance but are very different from a fundamental perspective.

To answer these questions, it is important to take a look at some key properties of crypto which demonstrate some differences between crypto and traditional assets:

What is cryptocurrency

Crypto is a decentralized asset 

This means that when it comes to crypto, it isn’t controlled or issued by a centralized authority such as the government. Instead, it’s managed by a peer-to-peer network that uses open-source software. Access to this asset is completely free and open to the public on any internet-enabled device. 

One can try to understand what it really means to be a decentralized asset when relating it to another real life example such as physical gold. If one had a gold bar, that gold bar does not require a government to declare that it has value and one can feasibly use it as money when traveling to any country. This is because the value of gold is recognized by people all over the world. 

While cryptocurrency is widely known as a decentralized asset, accessing and using it is made easier through the help of centralized entities like crypto exchanges. Exchanges help people turn government-issued money into crypto assets and facilitate the storage and trading of those assets. 

Crypto transactions are irreversible 

The reason why transactions need to be irreversible is because this property ensures that no one can tamper with the ledger of transactions. Not having to change the ledger also means that it can settle payments with finality in a very short amount of time. 

Crypto is permissionless

Being permissionless simply means that no authority needs to approve one who wants to join and participate in the network. Also, it is not required for one to identify themselves by providing “Know Your Customer” (KYC) information before using the network. 

With this being said, many centralized crypto platforms still require KYC before one can use the exchange. However, if one is already holding their crypto, they can effectively tap into the network with only a device that can run a basic desktop or mobile operating system and an internet connection. 

The advantage of being permissionless is a huge benefit for people in developing countries who desire access to financial services but lack the banking infrastructures that exist in more developed countries. Being permissionless also allows for more privacy as it’s not required for one to disclose their identity when using permissionless networks.

How does crypto work?

There are two prevailing methods for blockchains to run in a decentralized way. To add a block to the blockchain in a decentralized manner, the participants on the network (called “nodes”) must agree with each other to add a particular block. This process is called “achieving consensus”, and the two primary methods of achieving consensus are Proof of Work and Proof of Stake.

For Proof of Work blockchains, to achieve consensus, mining is required.

Mining is a process that uses computing power to solve a tedious mathematical problem that requires repeatedly guessing at an answer. Coins are given as a reward for a computer that is the first to successfully guess the answer. Because mining is a resource-intensive process, most people tend to leave it up to companies who professionally mine crypto. For their own use, people tend to buy cryptocurrencies from an online broker, exchange, or another user. Once purchased, you can store your private cryptocurrency keys in digital storage known as a “wallet”.

For Proof of Stake blockchains, participants put up coins as a stake in hopes of being randomly chosen as the “validator” to add the next block. If a validator misbehaves, goes offline, or tries to attack the network, the stake is confiscated which would lead to financial loss for the staker. This economic incentive makes it profitable to support the network and expensive to attack it. The main benefit of Proof of Stake blockchains is that it uses far less energy. A Proof of Stake node can be run off of a smartphone battery, so the energy consumption of running a validator is almost negligible. 

What can you buy with crypto? 

To buy things with crypto, it’s easiest to use a crypto debit card. These cards are loaded with your crypto, and as you spend it, it gets converted to regular currency and paid to the merchant. Alternatively, one can find a merchant who would agree to accept crypto directly.

Whether you use a crypto debit card or prefer to spend your currency directly, below are a few examples of what you can buy with bitcoin and other crypto. 

  • Cars: Individual dealerships have begun accepting crypto as payment for vehicles. Specifically, a few dealers for BMW, Nissan, and Toyota in North America now allow crypto. 
  • Charitable donations: You can make charitable donations to organizations or even countries in need using cryptocurrency. Aid for Ukraine is one example that accepts donations in the form of cryptocurrencies like Bitcoin, Ethereum, and Solana. 
  • Food and groceries: Although you can’t directly spend your coins to make a purchase, companies like Whole Foods and Starbucks now accept crypto indirectly through the help of third-party apps. These apps help you convert your coins to spend at the grocery store or into a gift card to buy a cup of coffee.
  • Luxury watches: Major luxury watchmakers like Hublot and Franck Muller design watches that exclusively take crypto as payment.
  • Technology: Companies like Microsoft and AT&T now accept Bitcoin for online purchases.
  • Travel: Some travel agents like Travala take cryptocurrencies to pay for vacations. 

Although major retailers and e-commerce sites have begun to accept cryptocurrency as payment for goods and services, it’s not yet mainstream to pay for everyday things with bitcoin. Keep reading to learn more about crypto’s practical applications in the real world. 

Pros and cons of crypto

In the world of crypto, it’s important you do your research. Learn about the following pros and cons of cryptocurrency before getting started. 

Pros of crypto

As an alternative to the traditional systems of banking and payments, crypto has the power to disrupt how people exchange value across the globe. Read about a few of the major advantages that crypto offers users. 

Transparency

Because blockchain records all transactions, any cryptocurrency that uses this technology (e.g., bitcoin, Ethereum, etc.) keeps a record that’s viewable by the public. This makes manipulation of the currency difficult and keeps the system fair. 

Accessibility and efficiency

Thanks to their decentralized nature, cryptocurrencies aren't stored by a financial institution, like a bank. They also transcend borders because they’re not controlled by governments, so you can access them wherever and whenever you want. Also, with no middleman to process transactions, crypto makes payments quicker and cheaper.

Security

The majority of cryptocurrencies use blockchain to secure transactions. This technology is decentralized or spread among different computers in a vast network. For a transaction to get confirmed, the network must verify it. This makes counterfeiting or cheating the records almost impossible, provided that the crypto project’s blockchain is programmed properly and the network is sufficiently decentralized.

Privacy

Unlike a credit card, cryptocurrencies don’t require you to share personal information to make a transaction. When you make a purchase, details like your name, address, and account numbers aren’t shared with third parties, such as payment processors. This helps keep your information private and prevents your identity from being stolen. 

Innovation and autonomy

Crypto and blockchain are innovative technologies that act as a gateway to many different industries. Users can not only participate in technological progress but also benefit from being able to use their currency in different ways. 

Low technological barrier to entry

Contrary to what many think at first, it is in fact much easier for one to get involved in a crypto project than it is to open a bank account. With crypto, all that’s needed is a device that’s connected to the internet that’s capable of running a basic operating system. Unlike a bank account, no additional process or paperwork is required, a crypto enthusiast can just download an app and get started. This is especially beneficial for people in developing countries who have no access or trust in their local banking infrastructure. 

Cons of cryptocurrency 

Despite its potential for revolutionizing commerce and the benefits that come with it, there are also some practical disadvantages to using crypto. 

Major volatility and high risk of financial loss

One major characteristic of crypto is that, in general, the price volatility tends to be much greater than other asset classes. The prices for some cryptos, especially smaller market cap projects with a higher mix of retail investors, tend to move according to speculation. In the same way that coin prices can spike to astronomical highs, they can also plummet to deep lows. If you’re the type to get stressed by big movements in your portfolio value, it’s highly recommended you do more research and gain confidence in a crypto’s long-term potential before jumping into it.

High learning curve

At first, getting your crypto set up can be somewhat complex if you’re not the most technologically savvy. There is indeed a lot of jargon and technical vocabulary that you may need to learn before you can truly understand a given crypto project.

Increased responsibility for those who self-custody

A downside to decentralization is that many of us are used to relying on an institution to safeguard our wealth, and self-custodying one’s own crypto puts that responsibility onto oneself. This means that if one loses access to their own wallet, such as losing the seedphrase to their wallet, the crypto cannot be recovered. 

Irreversible transactions

Another disadvantage of crypto is that transactions are irreversible. While this can benefit commerce by making payments easier and cheaper, it may pose an inconvenience for consumers. Once you send crypto off as a payment, it’s gone for good. There’s no room for mistakes and no way to reverse a transaction. 

Despite these disadvantages, you can minimize any risks by diligently doing your own research when it comes to buying, trading, or investing in crypto. Always look into the reputability and reliability of any crypto platforms you interact with and learn about how a specific crypto works and any rules before buying it. Once you have crypto, make sure you prioritize its security so that you can prevent cyber attacks or lost coins. 

How to buy crypto

If you’re interested in buying cryptocurrency, the process is quite straightforward. Typically, people purchase crypto with fiat or government-issued money like the U.S. or Canadian dollar. Once you have your funds ready, you’ll want to pick a platform to buy from, choose your desired cryptocurrency, and then make an order. 

Check out a quick run-through for how to buy crypto on Newton.

Buying crypto on Newton:

  1. Sign up and create an account to get access to low-fee crypto trading.
  2. Fund your account with fiat money like CAD or any crypto you already own.
  3. Pick your cryptocurrency of choice — Newton offers over 70 coins including Bitcoin, Ethereum, and Dogecoin.
  4. Purchase your coins straight from your phone or computer.

It’s important to do your research on whether you’ll buy from a broker, exchange, or other investment vehicles. Learn about the different platforms below.

Traditional brokers 

Online investment brokers provide ways to invest in a variety of financial assets like stocks, bonds, and ETFs. Many now offer services for buying and selling cryptocurrency, though they’re often limited in their offerings. 

Cryptocurrency trading platforms & exchanges

A crypto trading platform allows individuals to buy or sell crypto assets from a reserve, while a cryptocurrency exchange is a platform where users buy and sell crypto from one another. Both act as intermediaries for consumers that wish to exchange fiat money for digital assets or vice versa. 

Crypto exchanges and platforms like Newton are popular because they’re easy to use, have more crypto offerings, and generally offer low-cost trading.

Payment services 

Certain payment services like PayPal now allow you to buy, sell, and store crypto on their platforms. These may be convenient if you also wish to make transactions with currencies other than crypto, but they tend to have fewer crypto offerings. 

Other Investment Vehicles

You can also invest in crypto using investment vehicles like stocks, mutual funds, trusts, or ETFs. Blockchain companies sometimes offer stocks for purchase, or you can buy a Bitcoin ETF, which is a basket of many assets that are correlated to the price of Bitcoin. Using an investment vehicle allows you to test the waters with crypto without actually owning the crypto asset itself. Companies that hold a large majority of their balance sheet in Bitcoin, are sometimes also used as a “proxy” to invest in Bitcoin. 

How to store cryptocurrency

After you purchase cryptocurrency, it’s necessary to store it securely so you can prevent theft or other potential risks for loss of funds. You can store your digital assets in a crypto wallet or through wallet services offered by an exchange or crypto trading platform. Not every exchange or crypto trading platform provides wallet storage though, so make sure to look into this before you buy the cryptocurrency. 

Check out the different types of wallets you can use to keep your private keys safe.

Hot wallet 

A hot wallet is a type of crypto storage that secures private crypto keys using online software. Hot wallets don’t typically charge fees and are free to set up and use. Often, they come in a form such as a browser extension that integrates right into popular browsers like Google Chrome. Hot wallets are cost-efficient and convenient to use, however, users should beware that they are generally less secure than other types of wallets since the private keys must be locally stored on your computer itself (which can be infected with malware). 

Cold wallet

Also known as a hardware or offline wallet, a cold wallet is a physical device that secures your private cryptocurrency keys without connecting to the internet. Keeping your keys offline means they’re safe from hackers, but hardware wallets typically cost between $50-$250 each since they are devices that need specialized hardware and firmware to store crypto. 

Tips for keeping crypto safe

With crypto crimes on the rise, currency holders must use best practices when it comes to buying and securing crypto assets. Find a few tips for prioritizing safety below.

  • Only buy, sell, or trade on a reputable crypto platform or exchange
  • Choose popular coins to avoid potential scams
  • Research your wallet and choose the best type of storage for you
  • Use strong passwords and two-factor authentication on any crypto accounts

Examples of current popular crypto projects

From the original Bitcoin to newer cryptocurrencies like Lucky Block, it may seem like you hear about a new type of crypto in the media every day. To help you dip your toes into the crypto waters, we’ve outlined some popular cryptocurrencies that you should know below.

Bitcoin

Created by the pseudonymous Satoshi Nakatomo, Bitcoin (BTC) was the first cryptocurrency and is also the most popular. Since its creation in 2008, Bitcoin has gone from being worthless to being valued at tens of thousands of dollars per coin. At the time this post was written, the price per coin was nearly $30,000 USD or $37,500 CAD

Ethereum

Widely regarded as the second most popular cryptocurrency, Ethereum (ETH) is a crypto platform with the goal of creating decentralized, universal access to financial services. It’s known for its enablement of smart contracts and decentralized applications (dApps). A single coin of this currency is referred to as an Ether and is worth about $2,000 USD or $2,500 CAD.

Cardano

Founded by Ethereum co-founder Charles Hoskinson, Cardano (ADA) is a newer blockchain platform created with peer-reviewed research and the proof-of-stake protocol ouroboros. Cardano’s native token is known as ADA and is worth about $0.66 USD or $0.83 CAD at the time this post was written.

Litecoin

Created by Charlie Lee in 2011, Litecoin (LTC) is a popular cryptocurrency that takes after Bitcoin. Despite its similarities, Litecoin touts a quicker block generation rate, making confirmation of transactions much faster than Bitcoin. At the time this post was written, Litecoin is valued at $62 USD or $78 CAD.

Is crypto legal?

Unlike fiat money, which is government-backed currency, cryptocurrency isn’t associated with a government or central authority. So when it comes to the legality of crypto, it really depends on the country you live in. For example, in Canada and the U.S., cryptocurrencies are legally allowed. Countries like China, Morocco, and Iraq, on the other hand, have banned them entirely.

It’s important to note that while crypto may be legal in certain countries, it’s often not accepted as legal tender. Legal tender refers to any payment that's legally acceptable to meet a financial obligation or settle a debt. At the time of this writing, there are only 2 countries in the world that recognize Bitcoin as legal tender. El Salvador and the Central African Republic. 

Why people invest in cryptocurrency

Crypto offers a new avenue for people to invest their money to diversify from traditional financial assets. Find out more about why people invest in cryptocurrency to see if it’s right for you.

Investment in the future of decentralized finance

As our society progresses toward a digital economy, many people are drawn to the idea of participating in Decentralized Finance (Defi). Defi is a way of conducting financial activities without intermediaries like banks or governments. Its growing popularity is a driver of cryptocurrency adoption, with the North American market growing by over 1000% from 2020 to 2021. 

Crypto adoption and Defi have also been popularized in the press thanks to public figures. For example, prominent investors like Kevin O’Leary and Mark Cuban back Defi and cryptocurrency in the media. It’s also hard to miss how a single tweet from Elon Musk can influence Dogecoin’s price or how Argentinian football star Lionel Messi accepted part of his salary in crypto fan tokens. 

A way to diversify from traditional assets

Some view assets like Bitcoin as “digital gold”, since Bitcoin does not rely on any central source of authority such as a government to give it value. Bitcoin shares many of the same properties as gold such as having a scarce and limited supply. For reasons like these and many more, some people use bitcoin as well as other crypto assets in place of or alongside traditional assets in their portfolios such as stocks, bonds, cash, etc. 

Potential for passive income

When you stake or lend your crypto, you can generate passive income. In other words, you can earn periodic interest on your holdings. For those interested in using crypto for passive income, it’s important to do your own research before you try activities like staking or yield farming. Please note that Newton does not currently allow for staking or yield farming on the platform.


The world of crypto is vast and complex, and it may seem daunting to get started. If you feel this way, remember that the spirit of cryptocurrency is that anyone can be empowered to access and exchange value around the world.
Use this guide to learn everything you need to know about what cryptocurrency is and how it works. If you’re ready to start your crypto journey, try Newton for a low-cost way to start trading.

Sources: Business Insider | CNBC | CoinTelegraph

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