This entry aims to delve into cryptocurrencies, their definition, uses and what makes them so special. Space is also reserved to talk about CBDCs and investing in ‘cryptos’.
Definition and functioning of cryptocurrencies
In essence, cryptocurrencies, also called digital currencies or crypto-currencies, among others, are nothing more than fully digital money. For example, you can physically touch a euro, but the same is not true of cryptocurrencies.
This already presents a difference with FIAT money (the money we are used to handling, for example, the Euro), but the most important characteristic is that it is money not controlled by governments, institutions or any other body.
For example, going back to the case of the euro, it is controlled by the Central Bank in charge of regulating the currency, as well as all transactions. This is not the case with cryptocurrencies, which use a decentralised database called Blockchain.
In this same blog you can find very interesting articles that explain the meaning of Blockchain technology, but to apply it to cryptocurrencies quickly, each user has their digital wallet linked to an identifier, and this identifier is the one used in the blockchain as transaction history. In this way we have a database distributed all over the world, constantly supervised and using strong cryptographic security controls.
Acquisition and storage
Since cryptocurrencies are based on fully digital money and are not linked to a central bank, we cannot normally buy them or hold them in our traditional bank account. Therefore, for their acquisition we have other options, of which we highlight three:
- Centralised exchange. This is possibly the simplest way to obtain cryptocurrencies by exchanging them for FIAT money, although there are also certain commissions involved. Some modern online banking allows this type of transaction, but there are numerous portals dedicated to this purpose.
- Decentralised exchanges. These systems aim to link buyers and sellers without intermediaries. This means lower commissions and anonymity for the transaction, although they tend to be more complex to use.
- Investment products. More and more traditional investment products are betting on cryptocurrencies. Assets such as ETFs or investment funds have joined the bet on digital currency and it is possible to acquire it through them. If it is true that in these cases it is not a question of trading with cryptocurrencies, but rather it is oriented towards investment.
Once we have our acquired assets, it is necessary to store them somewhere. Cryptocurrencies are stored in virtual wallets, which are a piece of software or hardware with an associated identifier that will be used within the Blockchain.
The importance of wallets lies in the storage of keys, which are what give ownership of the assets held. In other words, the security of virtual wallets lies in the ownership of personal keys.
There are many virtual wallets, both software and hardware, the latter being the most secure. On the other hand, Exchanges are sometimes used as wallets for our cryptocurrencies. This is totally inadvisable as we do not own the keys and we expose ourselves to losses.
Value of a cryptocurrency
As mentioned above, cryptocurrencies are not linked to central banks that control the value of the currency. Therefore, the fluctuation in the value of the currency is determined by supply and demand.
This makes it difficult to establish a pattern for when a currency will have a higher or lower value on the market. What can influence these fluctuations are certain relevant events that occur around the cryptocurrency. For example, changes in regulation and greater adoption of cryptocurrencies, variation in capitalisation, standardisation as a payment method, expansion of associated projects and expansion, etc.
Types of cryptos
Normally, when people talk about cryptocurrencies, they think of Bitcoin. This is normal, as it is the first cryptocurrency that appeared and, moreover, it has unique features. Despite this, there are thousands of cryptocurrencies associated with particular projects focused on specific tasks.
There are cryptocurrencies for the payment of products or services, as a store of value, as a viral Internet trend (memecoin), others linked to replicating FIAT currency (stablecoin), for the development of applications, communication, etc.
In addition to Bitcoin, some of the best known cryptocurrencies today are Ether (Ethereum), XRP (Ripple), ADA (Cardano), USDT (Tether), SOL (Solana) and DOGE (Dogecoin), among many others.
Main uses
The types of cryptocurrencies briefly mentioned some of the uses they can have within the ecosystem. There are as many uses as there are individual projects for which they have been designed and the most common are listed here:
- Shopping in shops: As mentioned above, more and more shops are accepting payment in cryptocurrencies. Although it is true that most of them can be found on web portals, there are also shops in the luxury, automotive and insurance sectors, to name but a few, that already accept payment in cryptocurrencies.
- Decentralised applications (DApps) and Smart Contracts: Decentralised applications are autonomous applications whose operation is not subject to intermediaries, and these are executed through intelligent contracts in the Blockchain network. By creating or investing in DApps, it is possible to make profits in cryptocurrencies, for example.
- Financial or investment product: Although it will be discussed later, one of the main reasons for acquiring cryptocurrencies is for investment and portfolio diversification. In addition to buying and selling, it is possible to apply other reward mechanisms such as staking.
- Services: There are many networks and cryptocurrencies that try to cover different services through a decentralised approach. Thus, we can find services such as data storage, aimed at improving energy efficiency, data organisation, etc.
- Digital life: Increasingly, our digital life is taking up more and more of our traditional life. An example of this is the emergence of the Metaverse, where cryptocurrencies play an important role. Likewise, the acquisition of ownership of NFTs is based on cryptocurrencies.
Cryptocurrencies as an investment product
In recent years, beyond their use as a payment method or in projects associated with cryptocurrencies, they have been used as an alternative investment product due to their good performance compared to other investment markets. Some people even compare Bitcoin to gold as a safe haven.
In 2024, Bitcoin grew by 121% compared to the previous year. By direct comparison, the Nasdaq 100 index (which includes the 100 best technology companies in the United States) grew by 25.6% in the same year. This would be a 5-fold improvement for Bitcoin.
This is not only the case over the last year, but if we look at the comparison from 2011 to 2024, Bitcoin far outperforms all assets in 11 of these 14 years analysed. In this sense, what is often said is that whoever invested in this medium in 2010 would have a lot of money today.
That being the case, it seems easy to say that Bitcoin or other cryptocurrencies are a quick and easy investment product, but nothing could be further from the truth. Cryptocurrencies are very volatile assets and do not always perform as expected. As with any investment product, you have to be very sure of what you are doing.
CBDC
The acronym CBDC may not mean anything if it is not familiar. It stands for ‘Central Bank Digital Currency’ and could be understood as the digital currencies of central banks. It is important to be able to differentiate them from cryptocurrencies as we understand them, as CBDCs break with one of the essential characteristics of cryptocurrencies, namely decentralisation.
In this sense, faced with the high demand for cryptocurrencies and the conversion of FIAT money to these assets, central banks are looking to issue their own digital currency in order to assimilate themselves into this new concept and attract money. Currencies such as the digital Euro are already on the roadmap of central banks for implementation.
CBDCs are considered a good example of the paradigm shift from traditional to digital money. In this sense, the replacement of ‘paper money’ opens up other debates about legislation or privacy, and how a single entity can control all our movements.
Why use cryptocurrencies?
Having reached this point, we know a little more about what cryptocurrencies are, some of the types that exist and what can be done with them. Even so, we are still not aware of why we can use this medium. In certain cases, cryptocurrencies are even seen as something alien or even obscure within the system. Perhaps, to give an example, the euro can be seen as the angel and Bitcoin as the devil.
Nothing could be further from the truth, cryptocurrencies are a fantastic means of carrying out thousands of operations. They even have advantages that cannot be seen in traditional currencies, such as:
- Privacy: Payment with cryptocurrencies is anonymous. It is not necessary to provide personal data that identifies you.
- Security: We are talking about Blockchain technology. A technology based on strong cryptographic controls, distributed by numerous computers within the network and open source.
- Transparency: Absolutely all transactions are included in the network’s ledger. All movements are known at all times and these are irreversible.
- Speed: Normally a bank transaction takes one or two days to complete. Cryptocurrencies can take, at most, an hour.
These are some of the reasons why cryptocurrencies are set to replace traditional money.
