What are digital currencies : a comprehensive guide
What are digital currencies? Digital currencies or cryptocurrencies are digital and decentralized money of exchange, based on blockchain technology (block chain).
There is no central authority that manages and maintains the value of digital currency, instead these tasks are widely distributed among cryptocurrency users online.
You can use cryptocurrency to buy some regular goods and services. Most people also invest in cryptocurrencies as they do in other assets – such as stocks or precious metals. While cryptocurrency is an exciting new asset class, purchasing it can be risky, as you must conduct a lot of research to understand what cryptocurrencies are, how each currency works, and the system it relies on.
The origins of digital currencies :
Bitcoin was the first cryptocurrency, and was first introduced by Satoshi Nakamoto in a 2008 research paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” Nakamoto described the project as “an electronic payment system that relies on cryptographic proof rather than trust.” This cryptographic proof comes in the form of transactions that are verified and recorded on the blockchain.
What is blockchain ?
Blockchain is an open, distributed ledger that records transactions in code. In practice, this technology is similar to a checkbook that is distributed across countless computers around the world. (It is better to explain this sentence more)
Transactions are recorded in blocks that are linked together on a chain of previous cryptocurrency transactions.
Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax, explained this idea by saying: “Imagine a book in which you record every day all the money you spend. Consider each page as a block, and the pages of the book together are a chain of blocks.”
With blockchain technology, everyone who uses cryptocurrency has their own copy of this book to create a unified transaction record.
Each new transaction is recorded as it occurs, and each copy of the block chain is simultaneously updated with new information. All records are kept identical and accurate to prevent fraud.
How can you mine digital currencies ?
Mining is how new units of digital currencies are released into the world, while the average person can theoretically mine cryptocurrencies.
But as the Bitcoin network – one of the digital currencies – grows, the mining process becomes more complex and requires more processing power. The average consumer used to be able to do this but mining is now so expensive that many people who mine have to improve their equipment and techniques to outperform the competition.
Some digital currencies also require huge amounts of energy to mine. For example, Bitcoin mining currently consumes electricity at an annual rate of 127 terawatt hours (TWh).
How can digital currencies be used ?
There are a number of goods and services that can be purchased with digital currencies, especially using Bitcoin or Ethereum. Digital currencies can also be used as an alternative investment option away from stocks and bonds, taking into account the risks they entail, and taking into account the Sharia ruling for investing in them.
“Bitcoin, the most popular cryptocurrency, is secure and decentralized, and has become a store of value like gold,” says David Zeller, a cryptocurrency expert at financial news site Money Morning. “Some people even call it digital gold,” he added.
How to invest in digital currencies ?
Understanding how to buy and store cryptocurrencies is crucial as some brokerage platforms like Robinhood, Webull, and eToro allow you to invest in cryptocurrencies.
With many exchanges available similar to traditional investment platforms, creating an account is quick and easy. However, it is advisable to thoroughly research each cryptocurrency before investing in it.
For beginners wondering how to get started, follow these five steps:
Choose the cryptocurrency you want to invest in
Choose a reputable cryptocurrency exchange
Explore storage and digital wallet options
Determine the amount you want to invest
Stay informed and manage your investments wisely with risk management strategies that are right for you.
It is noteworthy that the legal rulings regarding trading and investing in digital currencies must be reviewed. For more information, please see the ruling on dealing in digital currencies .
The most widely traded and common digital currencies :
– Bitcoin (BTC)
Bitcoin is still the currency that people generally refer to when they talk about cryptocurrencies as the foundation of digital currencies. Its mysterious inventor – the alleged “Satoshi Nakamoto” – launched the currency for the first time in 2009, and it has been on a journey full of fluctuations since its release. But in 2017, popular awareness of cryptocurrency increased and it became the focus of attention of traders. Later in 2024, the SEC approved the launch of ETFs that invest directly in Bitcoin, giving investors a simple way to bet on Bitcoin.
– Ethereum (ETH)
The closest digital currency to Bitcoin is Ethereum, which has the symbol “Ether”. The Ethereum network aims to replace traditional financial services companies such as banks and brokerage firms by using decentralized applications called “DeFi” for financial applications.
– Tether (USDT)
The price of Tether is fixed at $1 per coin, so it is called a stablecoin. Stablecoins are tied to the value of a particular asset and Tether is tied to the US dollar.
Tether often acts as an intermediary when traders move from one cryptocurrency to another, instead of going back to the dollar they use Tether.
– USD Coin (USDC)
This coin is the second largest stablecoin, and similar to USDT, USDC is centralized and backed by cash and US Treasury bonds.
– Binance Coin (BNB)
It is the cryptocurrency of the Binance platform, which is among the largest cryptocurrency exchanges in the world.
It was originally created as a token to pay for down trades.
– Solana (SOL)
Launched in 2020, Solana is an independent Blockchain network. It also has a native cryptocurrency of the same name. Solana is often used for smart contracts and non-fungible tokens (NFTs).
– XRP (Ripple)
Created in 2012, Ripple (XRP) provides a way to pay in many different real currencies. Ripple can be useful in cross-border transactions and uses a trustless mechanism to facilitate payments.
– Dogecoin (DOGE)
Dogecoin was originally created as a joke after the price of Bitcoin rose, and took its name from an internet meme featuring a Shiba Inu dog. Unlike many cryptocurrencies that limit the number of coins in existence, Dogecoin has an unlimited version. It can be used to pay or send money.
– Cardano (ADA)
Cardano is an open-source, decentralized public blockchain. Although it has been around since 2017, it began developing in 2015 with the help of one of the founders of Ethereum.
What are the advantages of digital currencies ?
Digital currencies have gained great popularity among investors around the world, especially after technological intervention and industrialization, while Bitcoin has achieved a satisfactory position compared to other currencies.
Cryptocurrencies facilitate the transfer of money without any interference from banks and other financial institutions, and among their most important advantages are:
Ease of access:
An investor only needs a computer or smartphone connected to the Internet to use digital currencies to buy or trade. The identity verification process is also very easy and fast, and there is no need for a credit check to open a cryptocurrency wallet.
So it is much faster and easier compared to old financial institutions. Cryptocurrencies also allow individuals to make online transactions or send money to someone effortlessly.
Cryptocurrencies are also considered safe and secure as no one can access your funds unless they have access to the private key of your cryptocurrency wallet. But on the other hand, if you forget or lose your key, you will not be able to get your money back.
In addition, transactions are secured by the blockchain system along with a large network of computers that verify them. So it is safer if investors keep crypto assets in their own wallets.
Inflation protection:
The value of many currencies has decreased due to inflation. Many people see cryptocurrencies as providing protection against inflation. Bitcoin has a cap on the number of coins that will ever be minted as only 21 million Bitcoins have been issued and all Bitcoins will be mined by 2140.
Transaction speed:
If you want to transfer money, for example, in the United States of America, there are several ways to transfer assets or money from one account to another very quickly. However, cryptocurrency transactions are completed within minutes, which is attractive to many.
It is worth noting that within US financial institutions, most transactions are settled within three to five days, while bank transfers take at least 24 hours.
Cost effective transactions:
Cryptocurrencies help you transfer money globally, and the cost of transactions with cryptocurrencies can be minimal or non-existent as they eliminate the need for third parties such as VISA to confirm transactions.
Decentralization:
Cryptocurrencies represent a new decentralized model of money. It also helps in combating currency monopoly and freeing cash from control. Since no government organization can determine the flow of currency or its value, which is what crypto enthusiasts believe is what makes cryptocurrencies safe and reliable.
Ease of currency exchange:
Investors can buy cryptocurrencies using currencies such as the US dollar or European Euro and many others, as various cryptocurrency exchanges help investors trade digital currencies and convert currencies with the lowest and lowest transaction fees across multiple wallets.
What are the disadvantages of digital currencies :
Investing in cryptocurrencies may seem attractive and profitable, but investors must also consider the risks and threats surrounding it:
1- Price fluctuation:
High cryptocurrency prices may turn sharply lower the next day. Although the rise and fall in the prices of these currencies is similar to what prices witness in the stock market, these fluctuations in cryptocurrencies tend to be more severe among digital assets.
2- Unfair evaluations:
When you invest in the stock market, stock prices can be based on the underlying company’s sales, profits, growth rates, cash flows, dividend yields, and many other factors, but this is not the case in the cryptocurrency market.
In many cases, cryptocurrency investors do not have a proper financial framework to correctly determine market value.
3- Lack of regulations:
Governments and regulatory bodies around the world are still trying to figure out how to manage cryptocurrencies.
Some countries, such as El Salvador and the Central African Republic, are moving with all their might to adopt Bitcoin as an official currency. But on the other hand, officials in India and China have declared cryptocurrencies illegal.
While the US government is currently grappling with the issue of regulating digital currencies and questioning whether these digital currencies should be treated as a dollar-like currency or a financial asset, this classification will define the rules for making, trading, creating, and taxing digital currencies.
There are no easy options here as a one-size-fits-all solution may be a mistake as different cryptocurrencies have different goals and features, and may need a variety of treatments and regulations on a case-by-case basis.
4- Decentralization:
Many investors and cryptocurrency enthusiasts see decentralization as an important feature of digital assets. By eliminating intermediaries such as banks and financial service providers from the equation, it reduces transaction fees and speeds up processing time.
Validating data across a global network increases the security of blockchain systems.
But decentralization can be a double-edged sword, as decentralized blockchain networks are managed by consensus and voting among a global community, which causes a number of potential problems. Proposed changes to blockchain technology may be unpopular, delaying or even preventing useful or necessary modifications altogether.
5- Losing your crypto wallet keys : Your cryptocurrency holdings are kept in a digital wallet. You can set up a digital wallet on your smartphone, and you might even buy a special gadget just to store your crypto keys.
But what happens if you forget the password for your digital wallet? Worse still, what if you lose your smartphone or physical wallet containing your Bitcoin and Ethereum assets? In this case, recovering your digital funds will be difficult or even impossible .
Read more : What are meme coins
Central banks and digital currencies :
Many governments worked to ban the use of digital currencies in their countries at the beginning of their emergence due to the ambiguity surrounding digital currencies and dealing with them. They even went so far as to enact laws criminalizing those who deal in these currencies or mine them.
But in light of this technical revolution, rapid technological development, and the digital decentralization revolution, most governments have begun to enact laws and regulations in order to regulate dealing in digital currencies.
We have recently seen that central banks have worked to issue their own digital currencies. According to a poll conducted by the Bank for International Settlements, it was found that 94% of the 86 banks surveyed are considering issuing their own digital currency. The Bank for International Settlements (BIS) has expressed concerns that these centralized digital currencies will disrupt the conduct of monetary policy in the coming years.
Many governments worked to ban the use of digital currencies in their countries at the beginning of their emergence due to the ambiguity surrounding digital currencies and dealing with them. They even went so far as to enact laws criminalizing those who deal in these currencies or mine them.
But in light of this technical revolution, rapid technological development, and the digital decentralization revolution, most governments have begun to enact laws and regulations in order to regulate dealing in digital currencies.
We have recently seen that central banks have worked to issue their own digital currencies. According to a poll conducted by the Bank for International Settlements, it was found that 94% of the 86 banks surveyed are considering issuing their own digital currency. The Bank for International Settlements (BIS) has expressed concerns that these centralized digital currencies will disrupt the conduct of monetary policy in the coming years.
FAQ :
1- What is the difference between digital currencies and cryptocurrencies ?
Cryptocurrencies are digital currencies that rely on blockchain technology to secure data and operations, making them more secure. It is worth noting that all cryptocurrencies are digital currencies and not all digital currencies are encrypted.
2- How are digital currencies used ?
Digital currencies are used in the buying and selling of some goods and services. They can also be invested in, such as stocks and bonds, and are used to pay and send money.
3- What are the risks of digital currencies ?
The prices of digital currencies fluctuate greatly over short periods, in addition to the decentralization of these currencies and the lack of international regulatory rules and regulations for dealing with them. This makes it a risky investment compared to investing in stocks and bonds.
The Reviewer :
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2- https://www.forbes.com/advisor/investing/cryptocurrency/best-altcoins/?utm_source=ra&utm_medium=referral
3- https://www.bankrate.com/investing/types-of-cryptocurrency/
4- https://www.forbes.com/advisor/in/investing/cryptocurrency/advantages-of-cryptocurrency/
5- https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/risks-of-cryptocurrency/
6- https://www.stash.com/learn/how-to-invest-in-cryptocurrency
7- https://www.cointribune.com/en/crypto-94-of-central-banks-are-on-the-verge-of-issuing-cbdcs/
