What is the difference between cryptocurrencies and tokens?
At first glance, cryptocurrencies and tokens appear identical. Both are traded on exchanges and can be sent between blockchain addresses.
Cryptocurrencies are exclusively meant to serve as money, whether as a medium of exchange, store of value, or both. Each unit is functionally fungible, meaning that one coin is worth as much as another.
Bitcoin and other early cryptocurrencies were designed as currency, but later blockchains sought to do more. Ethereum, for instance, does not just provide currency functionality. It allows developers to run code (smart contracts) on a distributed network, and to create tokens for a variety of decentralized applications.
Tokens can be used like cryptocurrencies, but they’re more flexible. You can mint millions of identical ones, or a select few with unique properties. They can serve as anything from digital receipts representing a stake in a company to loyalty points.
On a smart-contract-capable protocol, the base currency (used to pay for transactions or applications) is separate from its tokens. In Ethereum, for instance, the native currency is ether (ETH), and it must be used to create and transfer tokens within the Ethereum network. These tokens are implemented according to standards like ERC-20 or ERC-721.
What is a crypto wallet?
Essentially, a cryptocurrency wallet is something that holds your private keys. It can be a purpose-built device (a hardware wallet), an application on your PC or smartphone, or even a piece of paper. Wallets are the interface that most users will rely on to interact with a cryptocurrency network. Different types will offer different kinds of functionality — evidently, a paper wallet cannot sign transactions or display current prices in fiat currency.
For convenience, software wallets (e.g. Trust Wallet) are considered superior for day-to-day payments. For security, hardware wallets are virtually unmatched in their ability to keep private keys away from prying eyes. Cryptocurrency users tend to keep funds in both types of wallets.
How does crypto mining work?
The process referred to above is known as mining. If the miner finds a solution, the block they constructed would extend the chain. As a result, they would receive a reward denominated in the blockchain’s native currency.
The cryptographic puzzle miners must solve involves repeatedly hashing data to produce a number that falls below a particular value. Hashing with a one-way function means that given the output, it is virtually impossible to guess the input. But given the input, it is trivial to verify the output. In this way, any participant can verify that the miner has produced a ‘correct’ block, and rejects those that are invalid. In this case, the miner receives no reward and has wasted resources by trying to forge an invalid block.
This results in some interesting game theory that makes it costly for an actor to attempt to cheat, but profitable for them to act honestly.
Is cryptocurrency valuable?
In financial systems, value is a shared belief. Just like with anything valuable, the value isn’t inherent to cryptocurrency itself — it’s assigned by people. In other words, something has value if people believe it does. This is true regardless if the object of value is a precious metal, a piece of paper, or some bits in a database.
With all that said, some consider cryptocurrencies and Bitcoin, something akin to a scarce digital commodity. Due to its predictable issuance rate and monetary policy, some argue that Bitcoin may act as a store of value in the future, similar to gold. Since Bitcoin has existed only for a little more than a decade, it’s yet to be seen whether it will stand the test of time in this regard.
What is the market capitalization of a cryptocurrency?
When you’re looking at the price of a cryptocurrency, you only see part of the picture. An equally important metric is how many individual units of that cryptocurrency exist out there, i.e., the supply.
More specifically, to assess the valuation of a cryptocurrency network, you need to know how many individual units exist right now. This is called the circulating supply. Different cryptocurrencies may adopt different issuance schedules, so it’s important to understand how the issuance works with each network.
The market capitalization (or market cap) is the price of an individual unit multiplied by the circulating supply.
Market Capitalization = Circulating Supply Price
As you might imagine, the market capitalization of a cryptocurrency network is a more accurate representation of the value in the network than the price of an individual unit. A network with a lower-priced coin but a higher circulating supply might have a higher total valuation (market cap) than one with a higher-priced coin but lower circulating supply. And the opposite could also be true in certain cases.
I lost my key. Can I get my funds back?
If you’re sure you lost your keys, chances are you will never get them back. The great benefit of cryptocurrencies is the removal of custodians and middlemen from managing financial transactions. The downside of that, however, is that the responsibility is now entirely in your hands. So you need to be extremely careful not to lose your private keys, as they’re what give you ownership of your funds.
