What are cryptocurrencies?
A cryptocurrency is a digital currency, also referred to as digital money, where transactions are both recorded and verified by a decentralized public distributed ledger, which acts as a public record and uses cryptography rather than a centralized authority. The main purpose of a cryptocurrency is to act as a digital payment system which allows peer-to-peer transactions without relying on traditional financial institutions or central banks.
How do cryptocurrencies work?
Blockchain technology is the underlying technology which is used for most cryptocurrencies. Blockchain networks use a consensus mechanism to validate transactions and maintain the integrity of the ledger. It’s a technology that creates a distributed, secure and transparent digital ledger that records and verifies transactions. Blockchain acts as the infrastructure for cryptocurrencies like Bitcoin, which enables it to function as a decentralized digital payment system.
Why do differences between cryptocurrencies matter to traders?
Supply
The supply of any asset is crucial for price determination in any marketplace. When a cryptocurrency has limited supply, it will likely command a higher price when compared to a cryptocurrency with a high supply. When a trader or investor is looking to buy a cryptocurrency, it's important for them to consider the supply of all the coins, including those not yet in circulation. If only 20-30% of the cryptocurrency are in circulation, future releases of new coins—generated or released through mining or other mechanisms—may cause the price to drop. If the cryptocurrency has 80-90% of its supply already in circulation, there will be less risk of new releases causing both dilution and a rapid price decline.
Demand
The price of any asset is determined by two factors, firstly the level of interest in the market to buy (demand) that specific asset and the amount of supply of that asset is available in the marketplace. When the demand is low and the supply is high the price will go down. When traders buy cryptocurrencies, they are hoping that the price will rise and demand by investors for a specific coin will continue. When traders short cryptocurrencies, they are hoping that the price of the crypto currency will fall and either the demand for the crypto currency will decline or as a result of a new release there will be an increase in the supply for the crypto currency, which will cause the price to fall.
Reputation
When it comes to cryptocurrencies reputation is everything, generally the world of cryptocurrencies has a very low trust amongst investors due to the significant investor losses from scams, hacks, bugs and volatility. Cryptocurrencies with high trustworthiness and investor confidence amongst its users tend to attract increased investment flows from reputable and sophisticated investors such as hedge funds and other asset managers.
As the biggest and widely recognized cryptocurrency, Bitcoin has a very good reputation in the crypto currency ecosystem because it has a fixed liquidity cap. Bitcoin was created by the pseudonymous Satoshi Nakamoto, whose mysterious identity adds to its mystique and historical significance. There are only 21 million total coins in circulation which in theory means that the lack of new supply will help to retain Bitcoins purchasing power.
Decentralized applications
Decentralized crypto currency applications are software applications that operate on a distributed network using blockchain technology. They offer improved security, transparency and user autonomy. They use smart contracts for the autonomous execution of transactions and the management of data which eliminates the need for centralized servers.
This decentralized approach fosters trustful environments where users can interact without intermediaries. A lot of decentralized applications are open-source and community-driven which improves investor confidence and enhances both the security and transparency.
Many decentralized applications are focused on DeFi applications, which provide decentralized financial services such as lending, borrowing, and trading without the need for traditional banks. Most decentralized applications are open source and community driven which improves investor confidence and enhances both transparency and security. The decentralized approach creates trustful environments where users can interact without intermediaries.
Decentralized applications can drive adoption, which can lead to increased demand for the underlying cryptocurrency. They also add value to cryptocurrencies through increasing their utility and demand within the crypto currency ecosystem.
When intermediaries are eliminated, decentralized applications can offer faster transactions at a lower cost making cryptocurrencies a more attractive alternative to traditional financial systems.
Transaction speed and scalability
When it comes the cryptocurrency world, both transaction speeds and scalability are crucial for enhancing user experience and enabling a wider adoption. Fast transaction speeds can lead to quicker confirmations and reduced waiting times, which is important for payment and gaming applications. On the other hand, scalability makes it possible for blockchains to handle increased transaction volumes without compromising performance. Scalable blockchains are able to process more transactions per second, which improves usability and encourages broader adoption.
Transaction speed and scalability directly impact the usability of cryptocurrencies, which influences their ability to compete with traditional financial systems. Faster transactions and greater scalability can lead to a better user experience. Slower speeds and limited scalability also lead to network congestion, higher fees, and widespread use.
Types of cryptocurrencies
Cryptocurrencies
Cryptocurrencies are digital or virtual currencies that are secured by cryptography with blockchain technology without a central authority. Apart from being used for internet-based payments they can also function as a store of value. What makes cryptocurrencies special is their decentralization, cryptographic security and limited supply.
Tokens
Tokens are digital assets that operate on an existing blockchain network. Security tokens are blockchain-based tokens that represent ownership in physical assets or companies, functioning similarly to traditional securities. They are native assets of a blockchain used for various purposes including to represent ownership, grant access to services and facilitate governance. Although they can be traded like cryptocurrencies they are generally not used as a medium of exchange.
Popular cryptocurrencies
As of 2022, the cryptocurrency market had over 10,000 different cryptocurrencies, or cryptos, which represent a wide range of projects and use cases, showcasing the diverse options available to investors beyond Bitcoin. That said, Bitcoin continues to be the largest coin by market capitalization. Other largest cryptocurrencies by market capitalization include Ethereum and Tether.
Ethereum (ETH)
Ethereum offers a range of features beyond basic cryptocurrency transactions. The Ethereum blockchain enables the creation of tokens, decentralized applications, and smart contracts. These include a programmable nature, security and the ability to support a wide variety of applications including decentralized finance. Ether tokens enable users to make transactions, store and use non-fungible tokens, trade cryptocurrencies and interact on social media.
Tether (USDT)
Tether (USDT) is one of the first and most popular stablecoins. It is a stablecoin pegged to the US dollar, providing price stability for users. Tether maintains its value by being pegged to a fiat currency, specifically the US dollar, at a 1:1 ratio. This offers investors a way to store value and transfer funds without the comparable volatility in other cryptocurrencies. USDT is also widely used for trading and making payments in DeFi. Tether is currently the third largest cryptocurrency by market capitalization.
Binance Coin (BNB)
Binance Coin (BNB) is a cryptocurrency developed by the Binance exchange, which is one of the largest crypto exchanges globally and the largest cryptocurrency exchange by trading volume. It serves as the native token for the Binance ecosystem, including the Binance Chain and Binance Smart Chain. Initially, BNB was designed to provide discounted trading fees on the Binance exchange, but it has since been expanded to various applications.
Solana (SOL)
Solana was launched in March 2020 by the blockchain startup Solana Labs, which was co-founded by Anatoly Yakovenko a former Qualcomm engineer. It is the fastest blockchain platform supporting smart contracts, decentralized applications and cryptocurrency transactions.
Solana touts its speed at completing transactions, being capable of processing thousands of transactions per second.
Unlike other popular blockchain networks Solana is built on a blockchain that scales without giving up either decentralization or security. As a platform it is optimized for the support of transactions per second, it is one of the most efficient and scalable blockchains. When it comes to speed and efficiency Solana is incomparable.
USD Coin (USDC)
USDC is a cryptocurrency stablecoin which is issued by Circle. It is pegged to the United States dollar and is distinct from a central bank digital currency.
XRP
XRP offers several benefits, including faster transaction times, lower fees, and high scalability, making it a potential solution for efficient global payments and financial transactions. It is widely used for cross border transactions due to its speed and low fees. It also benefits from growing acceptance by financial institutions, adding credibility and trust.
XRP serves as a bridge currency and a native token on the XRP ledger. It facilitates international money transfers by acting as a medium of exchange between different fiat currencies, enabling faster and cheaper transactions compared to traditional banking methods. Additionally, XRP is used for transaction fees and to maintain liquidity within the XRPL.
Dogecoin (DOGE)
Dogecoin is an open-source, peer-to-peer cryptocurrency designed for making digital payments. While it was initially conceived as a parody of Bitcoin, Dogecoin has evolved to be a recognized cryptocurrency with a strong community. It utilizes the Dogecoin blockchain, a secure, decentralized ledger, to process transactions. Dogecoin is used for tipping, buying and selling goods and services, and is a popular cryptocurrency among meme traders. Dogecoin is also commonly used for sending money quickly and with low fees.
Tron (TRX)
TRON is often referred to by its native cryptocurrency TRX. It is a decentralized blockchain-based platform aiming to create a decentralized internet. The Tron Foundation is responsible for launching and supporting the TRON blockchain ecosystem. It’s a public blockchain that supports smart contracts and decentralized applications. The goal of TRON is to empower content creators, which enables them to control their work and connect directly with their audience whilst reducing reliance on intermediaries.
Toncoin (TON)
Toncoin is a native cryptocurrency of The Open Network, which is a decentralized blockchain network. It offers a variety of features for its users, including fast transactions, low fees, and a plethora of applications from gaming to financial services. It is designed to be fast, scalable and secure.
Cardano (ADA)
Cardano (ADA) is a cryptocurrency designed to address the scalability issues of earlier cryptocurrencies. It aims to create a more secure, transparent, and sustainable foundation for individuals to transact and exchange. Cardano is also known for its scientific and research-driven approach, with updates made through peer-reviewed academic research. It uses a proof-of-stake consensus algorithm which is more energy efficient compared to proof-of-work systems like Bitcoin.
Cryptocurrency comparison table
Key crypto metrics include market capitalization, transaction speed, and supply. Market cap, a crucial indicator of a cryptocurrency's value, is calculated by multiplying the current price by the total supply. Transaction speed, often measured in transactions per second (TPS), reflects the efficiency of the blockchain. Supply refers to the total number of coins or tokens in existence, including circulating supply.
| Market capitalization Transaction Speed (TPS) Supply | |||
|---|---|---|---|
| Bitcoin | $2.07 trillion | 7 TPS | 21m |
| Ethereum | $304.37bn | 15 TPS | Unlimited |
| Tether | $153.07bn | 12 TPS | Unlimited |
Source: Coinbase, Statista, Coinmarketcap.com
Bitcoin vs other major cryptocurrencies
Bitcoin (BTC)
Bitcoin is a digital currency that generates each unit through computing a complex mathematical problem. Bitcoin was the first cryptocurrency created, marking the beginning of the digital currency era. Its digital or virtual nature makes it an effective currency for all online transactions and can also be exchanged into cash.
Bitcoin cash (BCH)
Bitcoin Cash is a cryptocurrency spun off from Bitcoin it offers faster transaction times and lower fees than Bitcoin. Both coins operate on the blockchain, which processes transactions. The spin-off that created Bitcoin Cash increased the block size for transactions from 1MB to 8MB initially.
Ripple (XRP)
The Ripple network can facilitate highly liquid transactions without the need for an institutional go-between, making it a much faster option to send money between countries. The network can handle up to 1,500 transactions per second, settling each in less than 5 seconds.
Stellar (XLM)
Stellar is a decentralized, public blockchain designed for faster, cheaper, and more energy-efficient financial transactions compared to traditional systems. It offers features like low transaction fees, rapid transaction confirmation times, and the ability to represent various currencies and assets on its platform. Stellar's benefits include enabling cross-border payments, facilitating the issuance and exchange of digital assets, and connecting different financial systems.
Ether (ETH)
Ether is a cryptocurrency used in Ethereum’s global virtual machine. It has several uses: It is used to pay network participants for their contributions to the blockchain. Ether also serves as a payment method for transaction fees and services on the Ethereum network. Investors use it as a store of value, and traders use it to take advantage of price movements. Consumers can use it to pay for goods and services at businesses that accept it.
Litecoin (LTC)
Litecoin offers several benefits such as faster transaction times, scalability, active development, and widespread acceptance. However, it also comes with specific drawbacks including security concerns, market volatility, competition, and a limited use case. Litecoin is often used as a lightweight version of Bitcoin and has features like faster transaction times.
EOS (EOS)
EOS cryptocurrency is a blockchain platform designed for fast and scalable decentralized applications (dApps). Its key features include Delegated Proof-of-Stake (DPoS) for transaction confirmation, fee-free transactions through resource staking, and high scalability.
NEO (NEO)
NEO offers several benefits, including its role in the smart economy, its support for digital assets, and its use of smart contracts. NEO also supports digital identities, decentralized applications and a variety of programming languages for development, making it a versatile and accessible platform.
