Josh Miller
Learn the fundamentals of cryptocurrency, what it is, how it works, and why everyone is talking about it.
ethereum dash and bitcoin coins on a motherboard

Aside from being one of the hottest topics, cryptocurrency is still fairly cloudy for most people. So, lets learn exactly what cryptocurrency is!

What is cryptocurrency?

You’ve probably heard the name come up. But what exactly is cryptocurrency ??

The easiest way to describe it is to split it into two parts.

  • Crypto,
  • Currency.

What is ‘crypto’

Crypto is short for cryptographic. Meaning it uses complex math to encrypt data. Which, makes it hard to hack.

how cryptocurrency works simple
A simple diagram of how the cryptographic model works.

What is ‘currency’

Currency is money. A unit of account. Sure, it’s not the same as ‘normal’ money — better known as ‘fiat’ money. But, it’s closer than you might think.

Why use cryptocurrency?

There are multiple reasons why people use cryptocurrency. Some of the reasons are for:

  • Investment purposes — some cryptocurrencies pay interest, many are growing in price too.
  • Efficiency — they tend to be faster and cheaper than standard methods.
  • Privacy — many cryptocurrencies or more private than standard currencies.
  • Anonymity — some cryptocurrencies allow people to remain anonymous.
  • Freedom — users of cryptocurrencies are free to send and recieve them as they wish
  • True ownership — if you own cryptocurrency, it tends to really be yours, instead of a loan from the government.

However, it’s important to note that not all cryptocurrencies share these properties.

Types of cryptocurrency

There are many types of cryptocurrency. But the most common two types are coins and tokens.


What are coins?

‘Coins’ are like cash in the real world. They’re the actual currency the blockchain network that issues them. For example, Bitcoin is a Coin. It’s the currency of the Bitcoin Network.

See also  Blockchain

Coins aren’t physical. They are just units of a currency, in the digital world. The same idea applies to many altcoins too.

What are altcoins?

Altcoins are any coin that isn’t Bitcoin. Some examples of altcoins are: Ethereum (ETH), Litecoin (LTC) and Binance Coin (BNB).

Remember: altcoins are the ‘native’ currency of the network that they belong to. Coins, including Bitcoin and other altcoins, differ from Tokens.


What is a token?

Tokens are created on smart-contract-enabled blockchains. But they are not the native currency of the blockchain that they are created on. Instead, tokens are representations of assets on the blockchain.

Why are tokens used?

There are many reasons why tokens are used, a few common purposes for crypto tokens are:

  • Governance — People voting on changes to a blockchain.
    This process requires using ‘tokens’ to submit or cast a vote. After all, most blockchain projects aren’t own by any one person. There are democratic votes that place before changes happen.
  • Securitization — Creating representations of assets on the blockchain.
    For example, ‘stocks and shares’ are types of ‘security’. You don’t own literal bricks and mortar when you buy stocks, you own a ‘security’, a contract of ownership. Many projects issue ‘security tokens’ while they work on the real project, then, when the project gets released, investors can exchange them for the real thing.
  • Utility — Tokens have specific utility in the ‘crypto-world’
    For example, decentralized applications that run on blockchain may require utility tokens to interact with. The utility token is a guarantee that you use can use the product or service that issued it. Like a coupon for a shop, or a token for an arcade machine.
See also  Best Places to Buy Cryptocurrency in 2021

You could make a token that represented your house, if you wanted. All you need to do is find a ‘smart-contract’-enabled blockchain — like Ethereum — and by paying a little of the native currency (ETH), you can issue your own token!

Or, like many cryptocurrency projects do, they issue tokens of their cryptocurrency before it is created.

Cryptocurrency 101 Summary

Cryptocurrencies are are types of cryptographic money. They are kept secure by complex maths.

There are two distinct types of cryptocurrency: coins and tokens. Coins are the native currency of their network. Tokens are not the native currency of the network that they are built on. Altcoins, are coins that are not Bitcoin.

Read next: Blockchain 101

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