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Crypto

What is cryptocurrency?

Cryptocurrency is a digital currency that is stored on blockchain technology. It can be used to make payments and transactions online.

How is crypto different from other payments?

Crypto is not controlled by any government/financial institutions, unlike other forms of payment. This means it is decentralized (peer-to peer exchange between crypto assets without the need for an intermediary, such as a bank), meaning there is no third party interference. 

What are ledgers and blockchains?

  • Ledgers are collections/running spreadsheets holding records of crypto transactions. There are many copies of one ledger in cryptocurrency. Because there are so many copies of the same thing, every transaction you make is recorded independently on each copy. This way, if someone decided to hack a transaction, even if 99% of the ledgers say one thing, and one says another, the system knows that someone violated the rules of the system, and prohibits this from happening.

  • Blockchains are chains of blocks formed in a direct line (literally!) and are forms of digital ledgers, which many people use. Blockchains were largely adopted when bitcoin came around, which is why they are often associated with bitcoin. Blockchains essentially track data changes over time, and retain history for these changes. This means that if changes are made, the blockchain will add a new block exhibiting this change, and won't make any adjustments to pre-existing blocks. Unlike block chains, ordinary ledgers are subject to being hacked, tampered with, and are pretty vulnerable. 

Blockchain Block!

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Because a blockchain has this specific pattern, it is almost impossible for anyone to hack it! This blockchain ledger system is what makes bitcoin (which usually uses blockchain technology) so secure! This is why bitcoin appeals to so many investors

Pros and cons to crypto and stock investments

Stocks Pros and Cons

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  • Investing in and selling stocks can be a good preventative measure against future inflation

  • Investing in stocks is very efficient; it doesn't require much money to be in one's account and is very easy to buy

  • Because you can sell your stock at any time, stocks are extremely liquid

  • Investing in stocks can increase revenue if they are strategically invested

  • Like other investments, risk is involved with stocks, meaning that one can lose money if one's invested stock loses its value
  • If you sell stocks from a brokerage account, you need to pay capital gain taxes
  • Stocks are volatile, in the sense that their value can often unpredictably fluctuate  
  • If a company is performing bad, and there are no buyers, you may not be able to sell your stock
  • There is a chance that the third party (broker) fails to live up to its obligations

     

Crypto Pros and Cons

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  • Blockchain technology that is usually incorporated with crypto, is extremely secure

  • No third-party interference/third-party obligation

  • There is an extremely high reward potential 

  • Investing in crypto is a good preventative measure against future inflation

  • Just like there is high reward, there is an equally high risk 

  • Crypto is even more volatile than stocks (ex: in 2021, the value of crypto lost more than half of its value, and later gained 100 percent value in a few months)

How does crypto investing work?

Crypto can be bought and sold on cryptocurrency exchanges, and even mined. All it is, is converting money into digital currency, such as bitcoin, in hope to gain a profit. This conversion takes place through a broker, which was talked about in the previous lesson about stocks, or through a crypto currency exchange, such as Coinbase Exchange. 

Coins vs. tokens

Think of the difference between renting and owning a car. If you rent a car, you need to worry about issues about the car requiring care. On the other hand, renting a car will require monthly payment, but you don't have to worry about the same issues you would if you own a car. In this analogy, coins are similar to owning a car, while tokens are similar to renting a car. Coins operate as their own blockchain, while tokens inhabit a pre-existing blockchains belonging to coins, like renting a car. So what does this mean? Coins can be used as a means of exchange, like currency, while Tokens still hold intrinsic value, but has a variety of purposes. 

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Note: Both coins and tokens are digital assets, which cryptocurrencies can be categorized as.

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Coins Pros and Cons

Tokens Pros and Cons

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  • Coins can be used to buy goods and services and are used to purchase digital assets, like Bitcoin

  • Coins are designed to work the same as regular money

  • Coins should be purchased to buy products 

  • Coins are often more secure than tokens

  • You need to build your own blockchain if you want to make coins 

  • Coins can be liquified into "real" money, unlike tokens

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  • Can be used on any existing blockchain

  • Serve a broader (going beyond simply money), purpose than crypto coins, since they can be used for assets, utilities, and payment tokens (coins)

  • Tokens can be used to facilitate transactions on a blockchain

  • Tokens should be purchased for services 

  • If you aren't going to create an application that would require its own blockchain, tokens are the way to go

  • Tokens are assets, meaning they hold value, but cannot be directly used to pay for goods and services

  • Tokens cannot be liquified into "real" money

  • The market value of a token is not as significant as that of a coin

What types of cryptocurrencies are there and which ones are coins/tokens?

As of 2023, there are close to 9000 active cryptocurrencies! If you, like myself, had only heard of Bitcoin, then you are probably mind-blown! Here are the most common cryptocurrencies:

  • Bitcoin: Crypto Coin

  • Ether: Crypto Coin

  • Binance Coin: Crypto Coin

  • Tether: Crypto Token (Uses Ethereum blockchain)

  • Ethereum: Crypto Coin

  • Cardano: Crypto Coin

  • Polygon: Crypto Token (Uses Ethereum blockchain)

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Key Takeaways

  • In summary, cryptocurrency is a digital currency that can either be invested as coins or tokens. 

  • Cryptocurrency does have a huge risk/huge reward

  • Cryptocurrency is extremely secure, and does not involve any third-party interference

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