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A plethora of cryptocurrencies have been launched in recent years, starting with Bitcoin during the Great Financial Crisis in 2008. Today, the total market capitalization of these cryptocurrencies is approaching $2 trillion. Taken together, they are emerging as an important component in the future of finance. Therefore, it is imperative for individuals to become familiar with them within the scope of their financial literacy. In this article I will describe what cryptocurrencies are and the different ways to acquire them.
What are cryptocurrencies?
Cryptocurrencies are native tokens that exist on blockchains whose transactions are recorded on the native ledger. Depending on the design of the blockchain, the functional use cases of cryptocurrencies can differ. Bitcoin, the world’s first cryptocurrency, is used as a store of value due to its absolutely limited supply – although it’s also increasingly being used as a means of payment thanks to the development of the Layer 2 Lightning network.
Ethereum, as the second largest cryptocurrency, is used as a utility token to pay for smart contract-based transactions (so-called “gas fees”) that use the computing power of the Ethereum blockchain. Other smart contract platforms and Ethereum competitors like Cardano, Solana, and Polkadot all have their own native tokens. In addition to paying transaction fees, these tokens can also serve as governance tokens, allowing holders to exercise their governance rights, e.g. B. voting on protocol and parameter changes.
There are also many other emerging cryptocurrencies and use cases. A hot topic right now is decentralized finance (DeFi). Many DeFi blockchains have sprung up over the past year to replicate traditional financial services but in a decentralized way, greatly increasing efficiency, reducing costs and removing censorship. These financial services range from borrowing and lending to wealth management, insurance, derivatives and trading. The tokens associated with these DeFi protocols offer their holders a range of utilities, including rights to use the protocol, a share of the protocol’s transaction fees, the right to create and verify blocks, and management of the network.
The tokens described above often offer attractive benefits as blockchain use cases expand and the ecosystem grows. Hence the next thing to learn about how to acquire them:
Related: 6 good and bad things to consider before investing in cryptocurrencies
How to Buy Cryptocurrencies (3 Methods)
The first way to acquire cryptocurrencies is to buy directly from the company or development team at an initial stage via public or private sales. For example, Polkadot raised $145 million in 2017 and sold 50% of the network’s then 10 million dots. The advantage of this method is that the token price is usually lower since the protocol is still in the early stages of development. However, it also increases the risk that the project is a scam as it is still unproven or has no track record. The company or the development team can often just walk away with the funds invested by the users. We saw many instances of fraud and scams in the Initial Coin Offerings (ICOs) mania in the last bull cycle in 2017.
The second method is to acquire tokens through core exchanges such as Binance, Huobi, and Coinbase. By the time these tokens are listed on the major exchanges, the projects would have become more established. Therefore, the risk of fraud is reduced. Additionally, centralized exchanges often provide an easy and convenient way for users to buy and store cryptocurrencies without having to store their private keys. However, these are centralized entities that can be at risk of hacks and data breaches. It is almost inevitable that an exchange will eventually be hacked. For example, major South Korean exchange Upbit suffered a massive breach in 2019, stealing 342,000 ETH.
The third way to acquire cryptocurrencies is via a decentralized exchange, which is part of the DeFi movement. As the name suggests, this type of exchange has no centralized authority. Instead, trades are executed directly between buyers and sellers via automated liquidity pools and smart contracts. The main benefit of using a decentralized exchange is that security is greatly improved as cryptocurrencies remain in the custody of the user and not in a centralized exchange. The downside is that these exchanges are still not easy to use and require a certain level of technical sophistication from users. Additionally, the supply of cryptocurrencies available on decentralized exchanges may not be as wide as on centralized ones. That being said, we expect these downsides to dissipate over time as the DeFi space continues to advance and mature.
See also: How blockchain and cryptocurrency can revolutionize businesses
In summary, cryptocurrencies are exciting innovations that represent the future of finance. It is imperative that the sovereign individual learn to read and write with them and also own them in order to be part of the future. This article has explained the different ways individuals can buy cryptocurrencies, including through private and public sales, and through centralized and decentralized exchanges. Each method has its own advantages and disadvantages. Which method is used ultimately depends on the judgement, experience and knowledge of the individual.