Introduction to cryptocurrencies: concept, operation, and main categories

The essentials you need to know

Various types of cryptocurrencies exist in the market, but they all share common characteristics: they are digital assets secured by cryptography, operate on decentralized blockchain networks, and enable direct transactions between users without intermediaries. Among the most prominent options are Bitcoin, Ethereum, BNB, Tether, and Solana, each with distinct purposes and mechanisms. Access to these assets is achieved through specialized wallets or exchange platforms, although technically the funds are recorded on the blockchain, not stored physically.

What defines a cryptocurrency?

A cryptocurrency is a secure digital asset using cryptography that functions as a medium of exchange without relying on traditional financial institutions. Its architecture allows for global operations 24 hours a day, 7 days a week, eliminating delays from intermediaries such as banks or payment processors.

Decentralization is its distinguishing feature: instead of a central entity validating transactions, a distributed network of computers (nodes) collectively verifies each movement. This structure also enables the different types of cryptocurrencies we know today: from store-of-value coins to programmable utility tokens.

The origin: Bitcoin

The first and most recognized is Bitcoin, created in 2009 by someone identified as Satoshi Nakamoto. Since then, thousands of cryptocurrencies have emerged, each innovating with specific features: smart contracts (like Ethereum), decentralized governance, artificial intelligence applications, blockchain gaming, digital healthcare, and more.

The technical engine: how cryptocurrencies operate

The blockchain network: distributed validation

Most cryptocurrencies operate through a distributed network where multiple computers (nodes) maintain identical copies of a public ledger called the blockchain. When you send cryptocurrencies, the nodes collectively validate your transaction before permanently recording it.

This decentralized structure increases security: there is no single point of failure that attackers can exploit. If a node attempts to validate fraudulent operations, it is quickly expelled from the network.

Cryptography: the guarantee of security

Cryptocurrencies use cryptography to secure transactions and control the creation of new units. When making a transaction, you use a private key to generate a digital signature. The network verifies this signature and, if valid, adds it to a block (a page of the blockchain ledger).

Unique Features of Cryptocurrencies

1. Absolute user control

Cryptocurrencies allow you to fully own your assets without relying on any central authority. This autonomy reduces vulnerabilities and risks of manipulation.

2. Transparent and Immutable Record

The blockchain documents all transactions in a public ledger that cannot be altered. Once an operation is recorded, it is virtually impossible to modify it.

3. Programming capability

Many cryptocurrencies, especially Ethereum, are open source and allow the creation of decentralized applications (dApps) through smart contracts. Anyone can develop innovative solutions on these blockchains without permission.

4. Global reach without borders

They can be transferred instantly to any corner of the planet, ideal for international remittances.

5. Limited and predictable offer

Bitcoin has a maximum of 21 million coins with predictable issuance, which prevents inflation and acts as a store of value. This programmed scarcity contributes to the increase in demand.

Understanding Market Capitalization

Market capitalization is calculated by multiplying the current price by the circulating supply: Market Cap = circulating supply × current price

This metric ranks cryptocurrencies by relative size. A higher market capitalization generally indicates greater stability and acceptance; a lower one usually signals higher volatility. However, it is just one of several factors: it also considers the underlying technology, the development team, the tokenomics, and real use cases.

Major cryptocurrencies by market capitalization (as of November 2024)

Bitcoin (BTC) - The pioneer

Created by Satoshi Nakamoto, it is the original and most valued cryptocurrency. It functions as a store of value and medium of exchange through a mechanism called Proof-of-Work (PoW), where miners compete to validate transactions in exchange for rewards. Its limitation to 21 million units positions it as “digital gold.”

Ether (ETH) - The programmable platform

Ether is the native currency of Ethereum, created by Vitalik Buterin. Ethereum allows developers to build dApps using smart contracts. It originally used PoW but migrated to Proof of Stake (PoS), allowing transaction validation through staking instead of computational power, significantly reducing energy consumption.

BNB - The growing ecosystem

Launched in 2017 as an ERC-20 token, it migrated to its own blockchain in 2019. BNB Chain offers an environment for smart contracts with reduced fees and fast processing. Its utility includes staking, payment of transaction fees, participation in token launches, and access to an automatic burn mechanism that limits supply.

Tether (USDT) - Guaranteed stability

USDT is a stablecoin pegged to the US dollar, launched in 2014. Each token is backed by equivalent assets in reserves. Stablecoins eliminate costs and delays when converting between cryptocurrencies and traditional fiat currency.

Solana (SOL) - High performance

SOL is the native cryptocurrency of Solana, a third-generation blockchain launched in 2020. It implements unique innovations offering high performance, fast transactions, and low fees.

Safe strategy for investing in cryptocurrencies

As with any financial investment, there are risks. Here are six essential guidelines:

1. Conduct thorough research (DYOR)

DYOR ( “Do Your Own Research” ) means to research before investing. Understand the fundamentals of blockchain, the various types of cryptocurrencies available, and market dynamics. Books, blogs, podcasts, and forums are excellent resources. Research specific projects, teams, and underlying technologies to make informed decisions.

2. Protect yourself against scams

The crypto space, although innovative, is rife with scams. Do not trust strangers online. Avoid pyramid schemes and Ponzi schemes, identity theft, suspicious multi-signatures, fraudulent airdrops, and fake raffles. Verify social media accounts before interacting. Use reliable password managers and keep private keys and recovery phrases stored offline. Consider splitting your recovery phrase for additional security.

3. Start with modest investments

The volatility of the crypto market, especially in less popular coins, is considerable. Start with small amounts that won't affect your finances if lost. This approach allows you to experiment and understand trends without excessive risk.

4. Stay updated

The landscape is evolving rapidly. Keep up with news, technological advancements, and regulatory changes. Understand the projects well before risking capital.

5. Choose reliable exchange platforms

Select recognized and secure exchanges as your top priority. If certain exchanges are not available in your region, compare options based on trading volume, fees, customer service, security measures, interface, and asset availability.

6. Implement risk management

Before investing, set limits: only invest what you can afford to lose and implement stop-loss orders to limit potential losses. These techniques make a significant difference.

The whitepaper: key evaluation document

A cryptocurrency whitepaper details technical specifications, project objectives, functionality, underlying technology, involved team, tokenomics, and roadmap. It serves as a comprehensive guide to the project.

Investors and the community review whitepapers to assess legitimacy and potential before investing. However, there are no regulations regarding whitepapers: they can be misleading or inaccurate. Projects write what they wish, so the responsibility to verify truthfulness falls on users.

Final Reflection

Cryptocurrencies have transformed the conception of money and financial transactions. While some believe they will eventually replace traditional financial systems, others see them as a complement. Regardless, their impact on finance and technology is already evident, and their influence will likely continue to expand as technology matures and adoption increases.