What is Cryptocurrency?

A cryptocurrency is the native asset of a blockchain network that can be traded, utilized as a medium of exchange, and as a store of value:

– A medium of exchange is an asset used to acquire goods or services. Some examples of other mediums of exchange are the US dollar, Euro, and UK pound…

– A store of value is an asset that can be held or exchanged for a fiat currency later without incurring significant losses in purchasing power (depreciation). Some other examples of stores of value are gold, real state,…

And as a native asset, a cryptocurrency can only be issued directly by the blockchain protocol on which it runs, which is why it is often referred to as the blockchain’s native currency. For example:

– The Bitcoin blockchain has issued Bitcoin as a native cryptocurrency.

– The Ethereum blockchain has issued Ether as a native currency.

– The Cardano blockchain has issued Ada as a native currency.

Currencies and cryptocurrencies develop over time.

If you want to understand what cryptocurrency is, you need to understand the characteristics that make a cryptocurrency and how to differentiate cryptocurrencies from other crypto digital assets, like tokens.

And there is no better way to ensure you understand cryptocurrency than by challenging yourself.

At this page’s end is a Cryptocurrency quiz to test your knowledge.

If you feel confident about your Blockchain knowledge, you can directly scroll down to the quiz. But we do recommend you browse through the content of this page.

Table of Contents

Important notice: Do your research.

Our content is intended to be used and must be used for informational purposes only. It is not intended to provide investment, financial, accounting, legal, tax, or other professional advice.

It is essential to research and verify any information you find on this website or any other website.

Cryptocurrency Characteristics

Ideal characteristics of a cryptocurrency.

Cryptocurrencies, as a store of value or medium of exchange, must meet the following ideal characteristics:

Secure: A cryptocurrency must be designed to meet the highest financial security levels. 

Fast: Transactions must be processed within a very short period.

Decentralized: A cryptocurrency must be immune to manipulation by individuals, small groups, or central authorities.

Immutable: It should not be possible to alter or delete any transaction committed to a block.

Scalable: A cryptocurrency must handle increasing transaction volumes, especially during sudden high demand peaks.

Transparent: Every transaction can be traced in the blockchain

Pseudonymous:  While every transaction can be traced in the blockchain, the identity of the users should remain private.

Limited supply: As a store of value, a cryptocurrency should have a limited and pre-determined supply to prevent inflation. For example, the Bitcoin supply is limited by code to only 21 million coins.

Portable: A cryptocurrency should be easily transferable and accessible from anywhere, without the need for intermediaries or permission from central authorities.

Accessible: A cryptocurrency should be easy to acquire and use without the need for specialized knowledge or equipment.

Interoperable: A cryptocurrency should be able to be used across different platforms and networks, allowing for seamless transactions and exchanges.

Robust: A cryptocurrency should withstand external factors such as network congestion, hacking attempts, and other forms of attack.

Flexible: A cryptocurrency should be used for various purposes, such as online payments, remittances, and smart contracts.

Divisible: A cryptocurrency should be divisible into small units, allowing for transactions of various sizes and facilitating micro-transactions.

Verifiable: A cryptocurrency should have a verifiable and auditable transaction history, allowing for transparency and accountability.

Incentivized: A cryptocurrency should have a mechanism for incentivizing users to participate in maintaining and securing the network, like a proof of stake or a proof of work.

But note that maybe none of the existing cryptocurrencies fully meet all the ideal characteristics. 

For example, it is very complicate to make a scalable cryptocurrency with is also very secure.

Cryptocurrencies Vs Tokens

If you navigate the CoinMarketCap or CoinGecko websites, you will see a list of thousands and thousands of what seem to be cryptocurrencies. 

But you must be aware that not all of them are cryptocurrencies, as many are tokens.

Blockchain Vs. Cryptocurrencies Vs. Tokens.

Crypto coins are digital currencies native to a blockchain and are used as a store of value and medium of exchange.

Examples of cryptocurrencies and coins are:

– Bitcoin (BTC), issued as native currency to the Bitcoin blockchain.

– Ethereum (ETH), issued as native currency to the Ethereum blockchain.

– Binance coin (BNB), issued as native currency to the Binance blockchain.

– VeChain (VET), issued as native currency to the VeChain blockchain.

Tokens are digital assets built over an existing blockchain and represent tradeable assets or have a utility.

Examples of tokens are:

– Uniswap (UNI), issued as a token to the Ethereum Blockchain

– DogeCoin (DOGE), issued as a token to the Ethereum Blockchain

– ChainLink (LINK), issued as a token to the Ethereum Blockchain

The three token examples above have been issued using Ethereum as a blockchain, but many other tokens have been issued over blockchains.

It just happens to be that Ethereum is one of best-established Blockchains, and this is why many projects choose it as a blockchain for their tokens,

Tokens and digital assets have a close connection to cryptocurrencies, so you need to make sure to have a clear understanding of what they are and how they differ from cryptocurrencies.

Cryptocurrencies and Tokens as Digital Assets

Both cryptocurrencies and tokens are digital assets, but not all digital assets are cryptocurrencies or tokens.

A digital asset is something that is created and stored digitally, has value, and is identifiable and discoverable:

– Both cryptocurrencies and tokens are created digitally, in a blockchain, and stored digitally in a blockchain

– Both cryptocurrencies and tokens have value; they can be used for purchasing products or exchange for fiat currencies,…

– Both cryptocurrencies and tokens are identifiable; every minted cryptocurrency or token has a unique identification number.

– Both cryptocurrencies and tokens are discoverable on their blockchains. For example, Etherscan can be used to track every single Ethereum transaction and minted coin.

Other examples of digital assets are:

– Social media accounts

– Email accounts

– Graphics like logos, avatars, …

Why are Tokens Important in the World of Cryptocurrency and Blockchain?

Tokens are needed for various reasons in the world of cryptocurrency and blockchain:

Access: Tokens can provide access to a particular platform or service. For example, some tokens are used to access decentralized applications (dApps) or to purchase goods and services within a specific ecosystem.

Rewards: Tokens can be used as a reward system for participants in a network or ecosystem. For example, a social media platform might reward users with tokens for creating content or engaging with others.

Investment: Tokens can be used to invest in a particular project or startup. These types of tokens are often sold through an initial coin offering (ICO) or security token offering (STO).

Interoperability: Tokens can be used to facilitate transactions between different blockchains or platforms. For example, a token might be used to facilitate the exchange of value between different dApps or blockchain networks.

Overall, tokens play an important role in the cryptocurrency and blockchain space, providing a way to access services, reward users, raise funds, and facilitate transactions between different platforms.

Cryptocurrency Advantages and Disadvantages

It is crucial to learn and understand the advantages and disadvantages of cryptocurrency for several reasons:

Informed decision-making: Understanding the pros and cons of cryptocurrency can help you make informed decisions about whether to invest in or use it as a form of payment.

Risk management: Knowing cryptocurrency’s potential risks and benefits can help you manage risk more effectively and make smarter investment decisions.

Security: Understanding cryptocurrency’s risks can help you take appropriate measures to protect your investments and personal information.

Regulation: As governments worldwide consider regulating cryptocurrency, it is important to understand the potential impacts of such regulation on the market and individual investors.

– Future implications: Cryptocurrency is still a relatively new technology, and its long-term consequences must be fully understood.

Cryptocurrency Advantages

The most prominent advantages of cryptocurrencies are:

Cryptocurrency transfers are faster and cheaper than traditional currency transfers because cryptocurrencies do not require third-party intermediaries. 

Cryptocurrencies streamline the transfers between borders, between different countries or currencies. For example, someone in Germany can easily trade euros for Bitcoin and send the Bitcoin to someone in Canada. This person in Canada can quickly sell Bitcoin for Canadian dollars.

Some cryptocurrencies can be used as a store of value or even as an investment. The value of some cryptocurrencies, like Bitcoin or Ethereum, beat inflation and gained purchasing power over the years.

There are some other advantages related to security and decentralization, which you want to research on your own.

Cryptocurrency Disadvantages

The most prominent disadvantages of cryptocurrencies are:

Cryptocurrencies are very susceptible to price changes. While some cryptocurrencies have gained considerable value over time, within the short and medium terms, the value is very volatile. This makes cryptocurrency investment a non-suitable option for many retailers or institutions (e.g., pension funds).

Cryptocurrencies and cryptocurrency users are susceptible to security risks that are not so widespread within traditional currency systems. There are a considerable number of hacks and scams that target cryptocurrencies and cryptocurrency users.

The cryptocurrencies adoption and usage as payment systems are not far-reaching. While it is already possible to use crypto visa cards, e.g., Binance visa cards, for day-to-day payments, it still seems long before cryptocurrencies are mass adopted.

There are some other advantages related to security and decentralization, which you want to research on your own.

Cryptocurrency vs Blockchain: What’s the Difference?

Cryptocurrency and blockchain are two terms that are often used interchangeably, but they refer to different things. 

Here is a brief explanation of the difference between cryptocurrency and blockchain:

– Cryptocurrency is a digital asset used as a medium of exchange, similar to traditional currencies like the US dollar or the Euro. 

– Cryptocurrencies use cryptography to secure and verify transactions, and they are typically decentralized, meaning any government or financial institution does not control them.

– Blockchain, on the other hand, is a distributed ledger technology used to record transactions. 

– A blockchain is essentially a database maintained by a network of computers, designed to be transparent, secure, and tamper-proof. 

– Blockchains are often used to create decentralized systems, such as cryptocurrencies, where no central authority is needed to validate transactions.

If you want to learn more about What is a Blockchain, have a look at this post where we explain the most important Blockchain Technology concepts.

What is Blockchain

What is a blockchain and how does it work?
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Where are the Cryptocurrencies Stored?

Cryptocurrencies are stored on the blockchain, which is a decentralized, digital ledger that records transactions in a secure and tamper-proof way. 

Each block in the chain contains a cryptographic hash of the previous block, creating a chain of blocks that cannot be altered without changing the entire chain. 

Cryptocurrencies are recorded on the blockchain as digital transactions, with each transaction linked to the previous one, forming a continuous and unalterable chain of ownership.

While cryptocurrencies are stored on the blockchain, cryptocurrency wallets are necessary for managing the transfer and access of cryptocurrencies. 

A cryptocurrency wallet is a digital wallet used to store, manage, and transfer cryptocurrencies. It allows users to hold, receive, and send cryptocurrencies securely and easily.

When a user wants to send or receive cryptocurrency, the transaction is recorded on the blockchain and stored in a block. 

The user’s cryptocurrency wallet then communicates with the blockchain to verify the transaction and update the user’s balance.

In addition to managing cryptocurrency transactions, cryptocurrency wallets also provide a means for securing and protecting cryptocurrencies. 

Cryptocurrency wallets store the user’s private keys, which are used to sign and verify transactions. 

Without a private key, a user cannot access or transfer their cryptocurrency. 

By using a cryptocurrency wallet, users can keep their private keys safe and secure, protecting their cryptocurrencies from theft or hacking.

Crytocurrency Wallet

What Is A Cryptocurrency Wallet? All You Need To Know
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Cryptocurrency Quiz

Cryptocurrency quiz.

This quiz will score your general Cryptocurrency knowledge.

After completing the quiz, your score will be displayed as well as our feedback on each one of the questions.

What are the uses of cryptocurrencies?

Which is NOT an ideal characteristic of a cryptocurrency? (mark all that apply)

Are cryptocurrencies and tokens the same?

Which of the following is a cryptocurrency?

What are the characteristics of digital assets? (mark all that apply)

Cryptocurrencies and blockchains are the same things.

Cryptocurrencies transactions cannot be traced.

Cryptocurrencies and crypto assets are the same things.

Crypto scams are some of the most common and frequent financial scams.

Where are cryptocurrencies stored?

What is a CBDC?

What does create high inflation?

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