The basic foundations of Cryptocurrency
Since the introduction of Bitcoin in 2009, Litecoin in 2011 and Ethereum in 2015, the world of Decentralised Finance has evolved significantly. Cryptocurrency provides an alternative to Fiat currencies, such as the US dollar or the Great British Pound, due to cryptocurrencies decentralised nature. Fiat currencies are defined as currencies that are controlled by a central authority. Conversely, cryptocurrency transactions are verified by a blockchain.
The origins of cryptocurrency
It's no coincidence that the first cryptocurrency, Bitcoin, was introduced in 2009, following the global financial crisis of 2007-2008. The distrust in centralised banks after this event was at an all time peak, which resulted in the uptrend of decentralised financial options, such as Cryptocurrency. Bitcoin has been the most popular and valuable cryptocurrency in the market since it began trading. It reached a high of $68,000 in 2021 and a low of $4000, in 2018. The second cryptocurrency and Bitcoins first, direct competition, Litecoin, launched in 2011. The Ethereum blockchain wasn't introduced until 4 years later, in 2015.
What is decentralised finance?
Decentralised Finance, or DeFI for short, is an umbrella term for financial services on public blockchains, such as Ethereum. With DeFi, you can do most of the things that banks support like: earn interest, borrow, lend and trade. However, it doesn’t require the paperwork a centralised finance provider, such as a bank would.
DeFi uses blockchains to eliminate the need for third parties or centralised institutions in financial transactions. DeFi is a peer-to-peer network of transactions verified on a public Blockchain. A blockchain is essentially an authoritative network that all users trust to verify transactions within the market. Bitcoin and Ethereum are the largest blockchains in the market and have multiple uses. For example, NFT's (non-fungible tokens) are sold on the Ethereum blockchain, using Ethereum as the standardised currency.
Types of crypto tokens
There are multiple different variations of crypto, however the main characteristics that define crypto tokens are:
Utility
Payments
Security
Stable coins
Utility tokens serve a specific function inside of a crypto projects eco-system. These tokens could also be seen as a form of software and they aren't meant to be a real world medium of exchange. An example of a purpose of a utility coin would be to maximise or protect the value of personalised data.
Payments tokens can be used for payments in real-time business environments, or e-commercially. these tokens are used in merchant-to-consumer transactions to protect sensitive card data. Essentially, a persons sensitive card data would be replaced by a substitute, the token.
Security tokens are financial instruments that represent ownership interest in an asset. In other words, security tokens are the digitised format of a securitised investment, such as stocks or shares.
Stable coins and tokens are an attempt at creating a cryptocurrency with a price that is consistently stable. In the world of Crypto, prices for assets can be extremely volatile so stable coins offer an alternative investment with less risk. However, this does not mean there is no risk, as seen with Terra's Luna stable coin which collapsed, losing hundreds of thousands in investors money.
The dangers of Cryptocurrencies
Crypto is intrinsically volatile, which makes it a dangerous investment by nature. Stablecoins are an attempt to contradict this perception however they make up a very small portion of the market.
The biggest drawback of investing in cryptocurrencies is that there are little to no protective measures in place. This leaves buyers susceptible to Crypto scams. One commonly used scam is called the Pump-and-Dump. This scam involves people who have a large stake in a particular Crypto, encouraging other, less informed people, to invest in the same Crypto to drive up it's value. Once this happens, the scammers sell their holdings which often drives the price down so that those who invested are left with a fraction of their initial sum.
What does the future hold for Cryptocurrencies?
Cryptocurrency is seen in multiple different ways from an international perspective, which leaves it in a position where it is unable to replace money. Views of Crypto range from acceptance of bitcoin as an official currency, to deeming it illegal to use. Regulators from every institution would have to generate a global framework for Crypto regulation for cryptocurrency to be in a situation in which it could provide an official alternative to money. This situation is extremely unlikely given the disagreeing opinions currently held across the globe.
Despite this,