The Crypto World: A Simple Explanation of Cryptocurrencies and NFTs

March 16, 2022 |
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From virtual currencies secured by cryptography to encoded digital assets representing real-world objects – the crypto world is moving fast and growing big. Some say it’s a bubble destined to get popped. Whereas some say it will change the world.

What does the world of crypto hold? What is a cryptocurrency? What are NFTs? To keep up with the fast-paced world, we need answers. So let us jump in.

A Brief History of Cryptocurrencies

Bitcoin, Ethereum and many other cryptocurrencies are usually the more known part of the crypto world to us. These are digital currencies built on the blockchain technology that are not reliant on any central authority.

Cryptographic systems are used to stop double spending and to record each and every transaction. The decentralization of the system comes from a digital ledger distributed among all users of the cryptocurrency. And the transactions are logged in individual blocks inside a blockchain system and encoded with strong cryptography that makes it next to impossible to hack into.

The journey of cryptos has been interesting to say the least. The first decentralized cryptocurrency, Bitcoin, was released as an open-source software back in 2009. Within a couple years, more cryptocurrencies started to form, all attempting to improve the proof-of-work scheme used in Bitcoin. For example, Litecoin used a different hash function called scrypt in its cryptography and Peercoin used a proof-of-work and proof-of-stake hybrid.

In 2021, the history of cryptocurrencies started to get more exciting starting as early as in January when Stablecoin was launched, previously commissioned by the UK government. Later in June, Bitcoin received its first acceptance as a legal tender by the country of El Salvador followed by Cuba starting the regulation of cryptocurrencies.

But it wasn’t all sunshine and roses for cryptos. In fact, they have and are still receiving a large share of criticism. Many experts and critics think it is just a hype and the crypto bubble will burst soon. And many governments are skeptical of such a decentralized system. In fact, crypto currencies are not only illegal in Bangladesh but also in countries like China which was the largest market for cryptos.

Crypto Market in 2022

In late February of 2022, the crypto market dipped below $2 trillion. Being the first and most popular cryptocurrency, Bitcoin had a lot of expectations to surge above. But instead it started dropping in price since the end of last year and is now below $40,000. This is considered the bear market for cryptos and according to some experts, the next bull market will not appear until 2024.
Even during its downward spiral, Bitcoin is still at the top of the crypto market with a value of $39,758 on the day of writing this article followed by the second most popular cryptocurrency, Etherium at $2665. Yes, big difference there. Some other popular and top of the market cryptocurrencies include Cardano, Solana and Binance Coin.
On the other hand, the cheapest yet potentially profitable cryptocurrency right now is the Lucky Block according to the Times of India. Avalanche is also another promising cryptocurrency of 2022 while some new names such as Maker and Basic Attention Token (BAT) are making themselves well-known as well.

How to Invest in Cryptocurrencies

To invest in cryptocurrencies, you first need to understand if it’s legal in your country. We say that because many countries have not legalized cryptocurrency and you don’t want to get in trouble.
In Bangladesh, cryptocurrencies are illegal and financial organizations are not allowed to facilitate Bitcoin transactions. Among other countries in South Asia, cryptocurrencies are absolutely banned in Nepal whereas legalized in India and Pakistan. Among the intergovernmental organizations, cryptocurrencies are legalized both by the European Union and the G7. A more detailed list of cryptocurrencies’ legal status can be found on this page.

Now assuming your country has legalized cryptocurrencies, here’s how to invest in them.

Step 1: Find a Broker or a Crypto Exchange

A broker will take the complexity out of purchasing crypto for you. Their interfaces are usually easy-to-use and their fees are generally higher than a crypto exchange. The catch is that you have the possibility of losing a lot of control over your portfolio and in some cases, you might have trouble moving your holdings off the platform. Some popular crypto brokers are Robinhood and SoFi.

A crypto exchange, on the other hand, is harder to use with a more complex interface. But they have lower fees and you will get complete control over which cryptos to invest in and when to do so. This amount of control is definitely not for everyone because it is not very convenient and you will need to constantly keep up with market knowledge.

Step 2: Create an Account

After choosing a broker or exchange, it’s time to create your account on their platform. The account creation will usually be followed by a verification process where you will need to provide photo identification and other documents.

Step 3: Deposit Funds to your Account

You need money in your account to start investing. In order to deposit that money, you can connect your bank account or make a payment using your debit or credit card.

Step 4: Purchase your Preferred Cryptocurrency

Once you are ready and have decided on which currency to purchase, you can enter its ticker symbol (BTC for Bitcoin etc.) and the amount you want to buy in the broker or exchange platform to invest in it. Most platforms will let you buy in fractions of a unit as many cryptocurrencies cost thousands to buy in whole.

Step 5: Store your Cryptocurrencies

You can’t put your cryptocurrency in your physical wallet, you know? It needs a storage method to be stored. There are a few options available out there.

Firstly, you can keep it at the exchange you used to purchase it with. Exchanges usually have a ‘crypto wallet’ attached to it where you can store your currencies. But this might not be the safest option for you. If you want, you can transfer the currencies to a separate hot or cold wallet. Depending on the amount you are going to transfer, you may need to pay a small fee. The most popular options for crypto wallets include MetaMask along with eToro and Coinbase.

Hot wallets are stored online and work based on internet connectivity which means a higher risk with a higher convenience. Cold crypto wallets don’t use internet connectivity and are stored on a hardware device such as a hard drive. They are the safest as they are not connected to the internet. Don’t lose the keycode associated with them though, otherwise you won’t be able to access them!

The Adventures of Non-Fungible Tokens

The literal meaning of fungible is replaceable by another identical item. Which essentially means that fungible assets can be exchanged for the same asset, such as money or a Bitcoin. And non-fungible assets can not be exchanged for an identical item, such as a painting or a piece of property. Quite self-explanatory, right?

Non-Fungible Tokens or NFTs are non-fungible units of data stored on a blockchain. Do you know that the times when you create a digital asset, such as a graphic or a video, it is difficult to enforce your ownership? Only because it is a file on the internet and anyone can download it, does not mean anyone should be able to own it. That’s where NFTs come in.

The first known NFT was a video clip created by Kevin McCoy and Anil Dash in 2014. It was registered on the Namecoin blockchain and later sold for $4. Non-Fungible Tokens started gaining popularity in 2017 with the development of CryptoKitties, an online blockchain-based game. Selling tradable cat NFTs of CryptoKitties brought people’s attention to the system. Video gamers are still one of the largest markets of NFTs selling their in-game creations and tradables.

An NFT is a token stored in a blockchain to represent the ownership of a non-fungible item, commonly digital ones. And the ownership can be determined and handed over without any centralized authority. Let’s say you have created a digital art that is stored as a .jpg file on your computer. To encode its ownership, you can mint an NFT out of this file which won’t require you to actually store the file on the blockchain but some information about it. The minting can be done free using websites like Enjin, Rarible and Binance NFT Marketplace.
The non-fungible tokens usually consist of three pieces of information – a unique fingerprint or hash, a token name and a token symbol. Once the token is created with the encoded information, it is stored on a blockchain and you become the owner. But the fun does not end here.

Now, you can sell the token using an NFT marketplace. The leading marketplace for NFTs is OpenSea. Axie Marketplace, CryptoPunks and Rarible are also popular marketplaces for NFTs. But in this step, we need to keep the legal regulations in mind. As NFTs are reliant on cryptocurrencies and the transactions are based on them, you can’t buy or sell an NFT under governments that have not legalized crypto.

Selling an NFT will create a transaction on the blockchain and log the history on its distributed ledger. The transaction information will keep track of who the current owner is and how much the token has been sold for in the past. And of course, being on a blockchain, the transaction information is extremely hard to tamper with. Once the transaction is complete, you will lose the ownership and the buyer will own it from now on. They will have the bragging rights along with the selling rights. But you, the creator, will still retain the copyright and the reproduction right. Which means, if your NFT gets secondary sales, you will get a cut of the profit as long as royalty is specified in the smart contract.

Here is the more interesting part about an NFT. When someone buys a Non-Fungible Token, that is all they get – a token. They don’t get any physical or digital files. In fact, most of the time, the digital file is already available to be downloaded by anyone for free. All the token does is represent the ownership. Moreover, the original creator can still sell prints of the file they bought due to their reproduction rights.

All this does not mean that NFTs are useless. Imagine crypto was created 500 years ago and you bought the non-fungible token for the original Mona Lisa! That token would sell for a higher profit today than we can think of. Which circles us back to the very first point of this discussion – all NFTs are not created equal. Some may lose you money and never get sold. On the other hand, some can bring you an incredible amount of profit if you hold it till the right time.

Today, the world of crypto is bringing us the new opportunity for a completely different internet experience where the kind of decentralization we never thought possible, is happening. The dynamicity of blockchain technology is bringing us new and exciting knowledge every now and then. Knowledge that we indulge our readers into on a weekly basis. Wish to remain updated about the tech-news of tomorrow? Then stick around!

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