What is cryptocurrency?
Home > What is cryptocurrency?
Killian Bell
Aug 15, 2022 10 mins read

What is cryptocurrency?

You’ve likely seen cryptocurrency on the news and all over the internet, even if you’ve never invested in it or traded it in the past. So, you might be wondering, what exactly are cryptocurrencies and why have they become so popular? In this AAG Academy guide, you’ll learn everything you need to know as a cryptocurrency newcomer.

To begin with, let’s look at what makes a cryptocurrency, such as Bitcoin or Ethereum. As you may already know, a cryptocurrency — unlike a conventional currency — is not a physical object. It is an entirely digital asset that exists either on a blockchain or on a digital device.

Function of cryptocurrency

The key function of cryptocurrency is to provide a method of payment for the digital world. These days, millions of people around the world use cryptocurrencies of some kind to facilitate online transactions because they consider them to be a simpler, more secure, and more accessible payment solution than traditional debit and credit cards.

Cryptocurrencies are a faster, more direct, and more transparent method of payment that does away with “middlemen” like banks and credit card companies. They have also become a popular investment tool. A large portion of the cryptocurrency community acquires tokens in the hope that they will one day be worth more than they originally paid for them.

The more people trust a cryptocurrency, the more its value grows, and the bigger the return on investment for token holders.

Is cryptocurrency legal?

Cryptocurrency has, for many years now, been acknowledged as a legal method of payment in most countries worldwide, although some of them have boundaries on how crypto can be used. For example, in the United States, cryptocurrency trading must comply with tax laws and rules set out by the Financial Crimes Enforcement Network (FinCEN).

That means that for some cryptocurrency traders, it is important to understand local laws and regulations that govern the use of cryptocurrency before you begin trading and investing. Each country has a different approach to cryptocurrency activities. 

Types of cryptocurrency

Bitcoin kickstarted the entire cryptocurrency industry when it launched in 2009. It laid the foundations for what a cryptocurrency should be, and how it should function. Every cryptocurrency that has surfaced since then has followed Bitcoin’s example, however, not all of them are used in the same way.

We have another AAG Academy guide dedicated to Bitcoin for those who want to learn more, but for now, let’s look at the nine different types of cryptocurrency that exist today.

1. Utility tokens
A utility token is a crypto asset that is used for blockchain operational services, such as paying for goods and services inside certain networks. Utility tokens can also grant access to features and other perks that are exclusive to token holders.

For example, if you want to carry out a transaction on the Ethereum network, you would need to pay a certain amount of Ether (ETH) tokens as a transaction fee. The same can be said for most networks in existence today.

The most popular utility tokens currently include Ethereum, Augur, Vechain, TRON, EOS, Binance Coin, Stellar, Cardano, and Tezos.

2. Security tokens
Security tokens represent tangible assets on the blockchain, such as stocks, funds, or even property. They can be acquired and traded just like any other cryptocurrency token, but because they are backed by something physical, many consider them to be a safer investment.

The most popular security tokens include Bcap (Blockchain Capital), Science Blockchain, and USDT.

3. Payment tokens
Payment tokens, as the name suggests, are used as a method of payment for goods and services on a digital platform. They have the same function as conventional fiat currencies, like the U.S. dollar, except you don’t need a bank or credit card to use them.

The most popular payment tokens in use today include Monero, Ethereum, and Bitcoin.

4. Exchange tokens
Exchange tokens are issued by a centralized exchange (CEX), and they are most used to cover transaction fees when trading. However, they can also be used outside of the exchange, and they can be traded just like any other cryptocurrency. 

Some popular exchange tokens are Binance Coin (BNB), FTX Coin, OKB, HT, CRO, and KuCoin.

5. Non-fungible tokens (NFTs)
Non-fungible tokens (NFT) are assets that represent something digital, such as an image, a video, a piece of music, games, and even social media posts. The token, which can be bought and sold like any cryptocurrency, is used to prove ownership of the digital asset.

Every NFT is recorded in the blockchain, and while the digital asset itself can be duplicated, the original NFT cannot be. It is unique and irreplaceable, and since each NFT has its value, it cannot be easily interchanged or exchanged for other goods or assets. That’s what makes an NFT “non-fungible.”

This gives NFTs a slightly different purpose than other cryptocurrencies like Bitcoin, though some do have a utility inside games and other web3 applications. For instance, the Genesis NFT collection from AAG can be used for staking, allowing owners to boost their earnings potential.

6. Decentralized finance (DeFi) tokens
Decentralized finance (DeFi) is the term used to describe a financial system based on secure distributed ledgers, much like those used by other cryptocurrencies. DeFi is a little like a bank, providing a way to invest your money and earn returns. However, it is also free (for now, at least) from the laws and regulations that govern traditional banking institutions.

The use of the term DeFi dates back to 2018 when a group of software developers came up with an alternative to traditional financial services that would be automated and built on the blockchain, taking away the central control that traditional banks possess.

Every DeFi application is supported by a “stablecoin” (more on these below) that is backed by a real entity or pegged to a conventional currency. DeFi can be used for lending and borrowing, buying insurance, and lots of other financial applications. 

Solana, Chainlink, Uniswap, Polkadot, and Aave, are some of the biggest DeFi tokens.

You might be interested in: What is DeFi?

7. Stablecoins
Stablecoins are cryptocurrencies whose value is pegged to fiat currencies like the U.S. dollar, another commodity like gold, or a financial institution. They were designed to give traders a way to transfer assets quickly and affordably, but with a stable value. They are an alternative to regular cryptocurrencies, which can be volatile.

Stablecoins aims to combine the advantages of both cryptocurrency and fiat currency, such as a fast transaction process, cryptographic security, and a stable value. 

There are three common types of stablecoin based on this system:

  • Fiat stablecoin warranty
    Fiat stablecoins use a fiat reserve like the U.S. dollar or the euro as a warranty for the stability of the stablecoin’s value.

These reserves are maintained by independent custody and are audited regularly. Tether (USDT) and TrueUSD (TUSD) are the most popular stablecoins that are supported by U.S. dollar reserves and have values equivalent to the dollar.

  • Precious metal stablecoin warranty
    Some coins have a value backed by precious metals such as gold. These include:
  1. PAX Gold (PAXG) is a digital asset issued by Paxos. Each PAXG token is worth one troy ounce of gold bar that is accredited by the London Bullion Market Association (LBMA). PAXG holders can exchange tokens for gold in physical form, which is held by the Paxos Trust Company in New York.
  2. Tether Gold (XAUT) is one of the biggest stablecoins that uses gold as its warranty. Each XAUT is backed by one troy of the gold bar from London Good Delivery. Tether gold is kept in a deposit box at Swiss Bank and investors can take their gold in physical form or redeem it with cash.
  • Crypto asset stablecoin warranty
    Dai is one example of a stablecoin that uses other cryptocurrency assets as its warranty. It is a token on the Ethereum blockchain that is programmed to have the same value as the U.S. dollar.

Dai is published by the decentralized finance application MakerDAO, and to acquire Dai, a user must guarantee a certain amount of crypto assets to be kept inside of the Maker vault.

The warranty value in the vault should be worth 150% more than the amount of Dai to be borrowed. If the guaranteed crypto asset value decreases, then Maker can liquify the warranty assets to cover the loss.

8. Asset-backed tokens
Asset-backed tokens are cryptocurrencies that are backed by real-world assets like cash, stocks, bonds, real estate, and other valuable goods. These tokens are used as a representative and are traded digitally in place of the actual asset on the blockchain. 

Types of asset-backed tokens include:

  1. Tokens backed by gold, such as PAXG and DGX.
  2. Tokens backed by a company’s stock, such as Quadrant Token, Neufund, The Elephant Private Equity Coin, Slice, Document, BFToken, The Dao, and RRT Token
  3. Tokens backed by commodities such as crude oil, natural gas, renewable energy, wheat, and sugar, such as OilCoin, Petroleum Coin, and Ziyen Inc Oil.

9. Privacy tokens
Cryptocurrency tokens used for private applications are called privacy tokens. They are designed to conceal the information usually present in a digital transaction and are therefore untraceable, giving all parties greater anonymity.

There is some anonymity with all cryptocurrency transactions. Users do not have to disclose things like their address, date of birth, or even their name to trade on decentralized exchanges. However, most cryptocurrency transactions still include identifying information, like wallet addresses. Privacy tokens are designed to conceal that information using cryptography.

There are lots of reasons why people might need greater privacy for crypto transactions, particularly when it comes to sensitive trades. Unfortunately, the anonymity offered by privacy tokens also makes them a popular method of payment for crime and fraud activities.

Popular examples of privacy tokens are Monero, Zcash, Dash, Horizen, Beam, and Verge.

Most popular cryptocurrencies

There are thousands of cryptocurrencies in use today, and many of them have little to no value. However, there are a growing number of cryptocurrencies that are incredibly valuable indeed. Here are 10 of the most valuable tokens as of August 5, 2022:

1. Bitcoin (BTC)
Bitcoin, established in 2009 by a person or group known as Satoshi Nakamoto, is the first peer-to-peer digital cryptocurrency. It’s also one of the easiest to understand since its primary purpose is to replace conventional currencies as a method of payment.

Price: $22,648.53
Market cap: $432 billion

You might be interested in: What is Bitcoin?

2. Ethereum (ETH)
Ethereum was first made by Russian programmer Vitalik Buterin in 2015. It is now the biggest blockchain in the world — as well as the second-most valuable cryptocurrency after Bitcoin. The biggest strength of Ethereum is its smart contracts, which power an ever-increasing number of decentralized applications (DApps) and decentralized autonomous organizations (DAOs).

Price: $1,608.95
Market cap: $196 billion

3. Tether (USDT)
Tether (USDT) was the first stable coin ever created — as well as the biggest in terms of market capitalization — and its value is pegged to the U.S. dollar.

Price: $1
Market cap: $66 billion

4. USD Coin (USDC)
USD Coin (USDC) is another stablecoin pegged to the U.S. dollar. Every circulated unit is worth $1 and is kept in a reserve in the form of cash and U.S. Treasury short bonds. Consortium Center, which backs these assets, says USDC is issued by an authorized financial institution. 

The Consortium Center has two founding fathers. Circle, the payment peer-to-peer payment company, and cryptocurrency exchange Coinbase. 

Price: $1
Market cap: $54 billion

5. Binance Coin (BNB)
Binance entered the market in July 2017 and quickly became the largest centralized exchange based on daily trading volume. It has also established a full ecosystem for its users. 

Binance networks cover Binance Chain, Binance Smart Chain, Binance Academy, Trust Wallet, and research projects that are empowered by blockchain technology. The BNB token is an integral part of the multi-function of Binance sub-projects. 

Price: $310.12
Market cap: $50 billion

6. XRP (XRP)
XRP is the cryptocurrency of Ripple Labs and it uses the XRP Ledger. XRP Ledger is an open-source decentralized blockchain network that can be used by anyone. This digital asset operates as a “bridge” between various currencies inside the Ripple network. 

The primary purpose of XRP is to be a digital payment method for DApp networks. It has a different concept than any other cryptocurrency. Each time a transaction occurs in the Ripple network, an amount of XRP will be “burned” as fees.

Price: $0.3709
Market cap: $17 billion

7. Binance USD (BUSD)
Binance USD (BUSD) is yet another regulated stablecoin pegged to the U.S. dollar. BUSD can be used for trading, lending, borrowing, and payment, and its value is directly impacted by the movement of the U.S. dollar.

Price: $1.00
Market cap: $17 billion

8. Cardano (ADA)
Cardano, created by one of Ethereum’s founders, is another of the world’s biggest blockchain networks. The default crypto asset of this network is ADA.

Cardano uses an environmentally friendly proof-of-stake (PoS) technology that consumes less energy than Ethereum. Its PoS technology also processes transactions faster and at a lower cost.

Price: $0.502
Market cap: $17 billion

9. Solana (SOL)
Solana (SOL) is a smart contract blockchain that supports the decentralized ecosystem in crypto applications, similar to Ethereum (ETH). SOL uses algorithm verification that integrates proof-of-history (PoH) and proof-of-stake (PoS) systems, different from other networks. This makes SOL the fastest network, processing up to 50,000 transactions per second. It is considered to be the main competitor to ETH with more advanced technology.

Price: $38.95
Market cap: $13 billion

10. Polkadot (DOT)
Polkadot (DOT) is a network that is set up to connect multiple blockchains in one integrated ecosystem. It is designed as a multichain decentralized system that allows smaller networks to interact more freely with one another. Its default crypto token is DOT.

Price: $8.24
Market cap: $9 billion

Advantages and disadvantages of cryptocurrency

Advantages:

1. Data security and privacy
Without central regulation, it’s much easier to hide your identity when conducting cryptocurrency transactions. And because cryptocurrency by its very nature runs on peer-to-peer networks, it is more secure than centralized systems.

2. Faster transaction times
With cryptocurrency, you can send money to anyone around the globe within minutes. There’s no need to wait for international processing, which can take days or even weeks when using traditional bank transfers.

3. Lower cost
Although cryptocurrency transactions do incur fees, they are significantly lower than those charged by banks and other financial institutions.

4. Universal
You can send and receive money from anywhere around the world. There are no boundaries and no barriers to entry. As long as you have an internet connection, you can trade cryptocurrency. 

5. Stronger resistance to inflation
Cryptocurrency has stronger resistance to inflation since its supply is the same from the beginning. That means that as time goes by, its value is more likely to rise as demand increases because each circulated unit becomes more valuable. 

Disadvantages:

1. Scaling problems
Scalability is one of the main concerns in cryptocurrency today. As digital currencies grow in popularity, and more and more transactions are processed every day, there is a greater strain on the infrastructure and technologies that support them.

2. Security
Although cryptocurrency trading can be more secure than traditional banking, as we mentioned above, it does have its security risks. Cryptocurrency is highly dependent on digital technology and therefore provides cyberattackers with new opportunities. Cryptocurrency traders should be mindful that they do not fall victim to hacks and scams.

3. Value and volatility
Cryptocurrency has changed the mindset of investors as it has grown in popularity, and is now seen as a valid and worthwhile investment system. However, the price of almost all cryptocurrency tokens — even Bitcoin — is still significantly more volatile than conventional currencies since it is not backed by a tangible asset.

4. No regulation
While a lack of regulation can be seen as a bonus for many cryptocurrency investors, it can be a downside for others. It means that there is little protection for cryptocurrency traders and no rules that decentralized exchanges and organizations must adhere to.

In most countries, however, centralized exchanges like Binance and Coinbase do have to adhere to local financial regulations.

References

Frequently Asked Questions

There are numerous ways to buy cryptocurrency today. If you want to use a credit or debit card, you’ll have to use centralized exchanges like Binance and Coinbase. However, if you want to trade cryptocurrency tokens for other tokens, you can use one of many decentralized exchanges. Bear in mind that you will need a cryptocurrency wallet as well.

Cryptocurrency is safe so long as you are mindful of the risks. See AAG’s guide to avoiding hacks and scams and you will be able to enjoy using cryptocurrency without fear of losing your investments. And remember: Never share your wallet’s seed phrase with anyone.

A cryptocurrency token is a unit of digital currency. It represents a tradable asset on a blockchain that can be used for payment, investment, and other purposes.

That depends on what your criteria is. Many consider Bitcoin to be the best, simply because it is worth the most. However, it’s just as volatile as many other cryptocurrencies. Stablecoins are less volatile because their value is pegged to other assets, like gold or fiat currencies.

Mining is the process of verifying transactions on a blockchain in exchange for cryptocurrency tokens. Bitcoin is one of the most famous cryptocurrencies that can be mined, however, the mining process is incredibly complex and relies on sophisticated computer hardware.

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About the author

Killian Bell
Senior content writer
United Kingdom
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.

Disclaimer

This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.

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