Cryptocurrencies like Bitcoin, Ethereum, Tether, Litecoin, and other altcoins are quite different from fiat currencies in many aspects. But if there was one difference that is the most discernible, it is their tangibility. Fiat currencies such as the US Dollar can be in both digital as well as physical form. You can see your USD holdings as a bunch of numbers in your electronic bank account, or you can even hold its currency notes in your hand. Cryptocurrencies, on the other hand, exist only in their digital form. While you can use a cryptocurrency to buy tangible things, including converting it to fiat currencies, you cannot hold it in your hand or store it in your pocket.
From the creation of its tokens, or coins, to recording and verifying its transactions, a cryptocurrency is governed by its software code. In fact, at the end of the day, all your cryptocurrency holdings are basically lines of code recorded in blockchains.
Creating Crypto Tokens
Considering cryptocurrency tokens are nothing but code, their creation is also dictated by the same code. The software that dictates a cryptocurrency is completely decentralized, distributed throughout the network rather than on a single server. The digital tokens of a cryptocurrency are created using cryptographic algorithms. Each token is a series of encrypted bits, stored and transmitted over the network.
To create or ‘mint’ a new coin or token into circulation, cryptocurrencies rely on a decentralized computational process that is called ‘mining’.
The main purpose of mining is to validate and confirm crypto transactions. For each block of transactions that is validated, a new cryptocurrency token is created. The token is awarded to the miner who validates the transaction and successfully solves a cryptographic problem before anyone else. Solving the cryptographic problem is called ‘Proof of work’. Incentivizing miners who validate the transactions helps in garnering support for the cryptocurrency’s network.
However, mining is not the only way to mint new tokens. There are different types of cryptocurrencies, classified as per how tokens are created.
Types of Cryptocurrencies
The most common type of cryptocurrencies are Mineable cryptocurrencies. As the name suggests, these cryptocurrencies are essentially generated through the process of mining. The newly generated tokens are rewarded to miners who manage to solve complex cryptographic algorithms that help in validating transactions and adding them to the blockchain. Most of the prominent cryptocurrencies like Bitcoin, Ethereum and Litecoin belong to this category.
Then, there are other cryptocurrencies which can be called Non-Mineable cryptocurrencies. These cryptocurrencies can only be bought through digital wallets. Their tokens are already in circulation and no mining is required to generate them. For validating their transactions, they use trusted validators rather than making the verification open to all miners. Typically, these cryptocurrencies also reward their holders by generating interest on their holdings. The more coins one holds in their wallet, the higher the interest rate that they can earn.
Additionally, instead of using ‘Proof of Work’ as a means to verify transactions, they use another method called the ‘Proof of Stake’. Here, ownership or stake in a cryptocurrency is used as a criteria for selecting the validators for transactions. The likelihood of being chosen as one of the validators depends on the number of tokens of the cryptocurrency that a person owns, as well as the time period for which they have held these.
Cryptocurrencies like Ripple, Stellar, Cardano, and NEO, to name a few, can be classified as non-mineable cryptocurrencies.
Another in-between category would be Pre-Mined cryptocurrencies. These are those currencies that are mined before being made available for trading on a crypto exchange. Certain amounts of tokens of any cryptocurrency can theoretically be pre-mined irrespective of whether the currency accepts Proof-of-work or Proof-of-stake as its validation process.
This usually happens in case of ICOs or Initial Coin Offerings, where coins are bought pre-sale and are mined later. Although both Bitcoin and Ripple can be considered pre-mined cryptocurrencies as well, AuroraCoin is a more direct example of what a pre-mined currency is like.
Investing in Cryptocurrency
There are a multitude of reasons why the cryptocurrency market is ripe for investment and can prove to be highly lucrative for those looking to trade in it. <Link to Cycle 2_Blog 5>
Even though it is a fairly nascent market, there are already more than 5,000 cryptocurrencies being traded at crypto exchanges, with a total market capitalization of over USD 200 billion! With the trend towards cryptocurrency becoming a valuable medium of exchange, and growing worldwide adoption of major cryptocurrencies, investing in crypto is an excellent long-term bet. In fact, even for day traders who aren’t daunted by the volatility of the crypto market, cryptocurrency trading can be quite rewarding and profitable considering the high returns it can garner.
Of course, before you can dip your toe in the crypto trading pool, you need to choose the right platform to do so. For any trader, whether a professional or a beginner, aspects such as security, flexibility and convenience are top-most priorities when it comes to choosing a cryptocurrency exchange.
Which is why there couldn’t be a more natural choice than CoinDCX, considered by many as the best btc exchange in the world. The multi-faceted crypto trading platform gives its users tremendous flexibility in trading, with over 200 altcoins and more than 500 markets to choose from. With CoinDCX, traders get unparalleled liquidity for their crypto trades, as it is linked directly with some of the world’s largest exchanges like Binance, Huobi, and HitBTC.
Its powerful and secure wallet offers a host of trade options – be it spot trading, margin trading, or trading in the futures market. CoinDCX is the world’s safest crypto exchange, offering unbeatable security through its 2-factor authentication and cold wallet storage features.
CoinDCX, the most versatile cryptocurrency trading platform, is suitable for both inexperienced and professional traders. To begin your journey of crypto trading, sign up and register as a new user today!