Cryptocurrency‘s rise has undoubtedly reshaped discussions about finance and technology. In recent years, from the emergence of Bitcoin to the flourishing of various innovative applications, this new asset class has captured the attention of global investors, technology experts, and the general public. However, for many newcomers, the world of cryptocurrency seems filled with complex terminology and elusive concepts. This guide aims to demystify cryptocurrency, providing a clear and comprehensive overview for readers eager to understand its essence. Together, we will explore the definition of cryptocurrency, how it works, its diverse types, and how it is gradually changing the existing financial landscape.
Before we delve deeper into the trading and applications of cryptocurrency, it is essential to have a clear understanding of its basic definition and core characteristics. This will lay a solid foundation for our subsequent learning, enabling us to navigate this digital financial world full of opportunities and challenges with greater confidence.
To understand the uniqueness of cryptocurrency, we must first clarify its definition. Cryptocurrency is a digital or virtual form of currency that uses cryptography to secure transactions, control the creation of new units, and verify the transfer of assets. Unlike traditional currencies, most cryptocurrencies operate independently of a central bank or a single financial institution. They are digital assets built on an innovative technology called blockchain, designed to function as a medium of exchange.
Cryptocurrency is compelling in part due to several key intrinsic characteristics, with Transparency and Immutability being particularly important.
Regarding transparency, although cryptocurrency is often associated with anonymity, its transactions are typically recorded on a public ledger, the blockchain. This means anyone can view the transaction history between wallet addresses, although the real-world identities behind these addresses are not inherently public. This public, decentralized ledger feature ensures that all transaction information is publicly recorded by miners and is queryable by anyone. This transparency contrasts sharply with traditional financial systems, where transaction details are often siloed and not open to the public. It promotes verifiability but also raises discussions about privacy. A common misconception is that cryptocurrency offers complete anonymity.
In reality, it provides pseudonymity; transactions are public but are linked to wallet addresses, which do not directly point to a real identity unless the address is associated with a verified identity through specific procedures (like a KYC identity verification on an exchange). This has profound implications for both privacy protection and regulatory efforts.
As for immutability, once a transaction is confirmed and added to the blockchain, it cannot be altered or deleted. This is achieved through the blockchain’s cryptographic hashing and decentralized consensus mechanisms. This feature provides a high degree of security and trust in the integrity of the transaction record. However, it also means that erroneous transactions, such as sending funds to the wrong address or falling victim to a scam, are generally irreversible. This places a greater responsibility on the user, as once a transaction is on the chain, it becomes a permanent and irreversible record. This “what’s done is done” characteristic, while ensuring data integrity and preventing censorship, also highlights the importance of extreme caution when users operate.
The uniqueness of cryptocurrency largely stems from its underlying technology. Next, we will explore the key technology that underpins the operation of these digital assets—blockchain.
Blockchain is the core technology on which cryptocurrency relies. Simply put, a blockchain is a decentralized, immutable public ledger that records transactions in the form of “blocks.” Each block is cryptographically linked to the previous one, forming a continuously growing “chain.” This technology enables secure and transparent record-keeping without the need for a central authority.
One of the key features of blockchain is its decentralized nature. In the context of blockchain, decentralization refers to transferring control and decision-making from a centralized entity (like an individual, organization, or group) to a distributed network. In a decentralized blockchain network, no single entity has complete control. Instead, data storage and transaction verification are distributed among numerous computers (nodes) in the network.
This decentralized architecture reduces the need for trust among participants through transparency and collective consensus. Since the integrity of the system is maintained by the collective agreement of the network and the transparency of the ledger, participants can interact securely without needing to trust each other. It also prevents any participant from unilaterally imposing authority or control in a way that could harm the network’s functionality. The benefits of decentralization are many, including improved efficiency in data reconciliation, reduction of single points of failure in the system (as there is no single point of failure), and optimization of resource allocation, thereby providing more stable and consistent services.
However, it is crucial to understand that decentralization is not a black-and-white state. It is more like a spectrum rather than an absolute binary. Many blockchain applications apply varying degrees of decentralization in different aspects, and not all solutions need to achieve 100% decentralization. A project may exhibit different levels of decentralization in its governance, data storage, or validation mechanisms, which directly affects its security, efficiency, and user experience.
Furthermore, the pursuit of decentralization often comes with certain inherent trade-offs. While decentralization brings significant advantages like stability and fairer services, it often means making compromises in certain areas, such as potentially leading to lower transaction throughput (i.e., the speed at which the system processes transactions). Compared to centralized systems, decentralized blockchain systems typically prioritize security over ultimate performance. This balance between security, decentralization, and scalability, often referred to as the “Blockchain Trilemma,” is a challenge that blockchain designers must face and a factor that users need to consider when evaluating a cryptocurrency project.
The world of cryptocurrency is not monolithic; it consists of thousands of different digital assets, each with its specific design philosophy, functionality, and target community.
Bitcoin is the world’s first and, to date, most well-known cryptocurrency. It was launched in 2009 by an individual or group using the pseudonym “Satoshi Nakamoto,” with the original intention of being a peer-to-peer electronic cash system aimed at enabling direct value transfer without financial intermediaries. Over time, Bitcoin’s narrative has evolved, and in addition to its payment function, more and more people view it as a form of “digital gold” or a store of value.
A notable feature of Bitcoin is its supply cap of 21 million coins. This inherent scarcity is considered a significant factor in its perceived value, similar to precious metals like gold. As the market pioneer, Bitcoin has a strong network effect and widespread market recognition, making it a bellwether for the entire cryptocurrency market.
Altcoins is a broad term that generally refers to all cryptocurrencies other than Bitcoin. The word is a portmanteau of “alternative coins.” Altcoins often emerge to improve upon certain design flaws of Bitcoin, offer different features, or target specific application scenarios and market needs.
Among the many altcoins, Ethereum is undoubtedly the most influential. Ethereum is not just a digital currency but a decentralized global computing platform capable of running applications known as smart contracts. These smart contracts are pre-written code that can automatically execute the terms of a contract when specific conditions are met, without any downtime, censorship, fraud, or third-party interference. If Bitcoin is like a simple computer focused on recording transactions, then Ethereum is more like a powerful, decentralized world computer capable of handling more complex computations.
The native cryptocurrency of the Ethereum platform is called Ether (ETH). ETH plays a vital role in the Ethereum ecosystem, primarily used to pay for fees required to execute transactions and run smart contracts, known as “Gas”. The Gas mechanism is designed to allocate network resources reasonably and prevent malicious behavior from congesting the network.
Smart contracts are a revolutionary innovation of blockchain technology. They are self-executing contracts with the terms of the agreement directly written into code. When preset conditions are triggered, the smart contract automatically executes the corresponding actions. The applications of smart contracts are extremely broad, not limited to financial services but extending to supply chain management, voting systems, decentralized autonomous organizations (DAOs), non-fungible tokens (NFTs), and many other fields. Applications built on smart contracts are known as decentralized applications (DApps), which inherit the decentralized, transparent, and immutable characteristics of the blockchain. Developers can even easily create new cryptocurrency tokens through smart contracts, such as tokens following the ERC-20 standard.
The emergence of Ethereum and its smart contract functionality has greatly propelled the evolution of blockchain technology from a simple payment system to a vast application ecosystem. This programmability has laid the foundation for innovations such as decentralized finance (DeFi), NFT art and collectibles, and community-governed DAOs, marking a new stage in blockchain development, often referred to as “Blockchain 2.0.”
However, Ethereum’s “Gas” mechanism also brings some challenges. While Gas fees are crucial for the rational allocation of network resources and preventing spam transactions, during periods of high network congestion, Gas fees can become exceptionally expensive. This is particularly detrimental to the user experience for those executing small transactions and has spurred the development of solutions like Layer 2 scaling and other competing blockchain platforms with higher transaction efficiency. This reflects the ongoing tension between maintaining network security and stability and improving user accessibility and cost reduction.
Stablecoins are a special class of cryptocurrency designed to minimize price volatility. They typically achieve price stability by pegging their value to a stable asset, most commonly a fiat currency like the US dollar. Stablecoins were created to bridge the gap between the traditional financial world and the world of digital assets, combining the advantages of cryptocurrencies such as transparency, global liquidity, and low transaction costs with the price stability of fiat currencies.
Due to their relative price stability, stablecoins play multiple roles in the cryptocurrency ecosystem, including as a medium of exchange, a store of value, and a safe haven asset during times of high market volatility.
Stablecoins can be primarily categorized into the following types:
The use cases for stablecoins are very broad. They are often used on cryptocurrency exchanges as stable trading pairs against more volatile cryptocurrencies. Additionally, they show great potential in cross-border payments and remittances, as they can offer faster and cheaper transactions than traditional banking systems. In decentralized finance (DeFi) applications, stablecoins are an indispensable component, widely used for lending, borrowing, liquidity provision, and yield farming activities.
It is worth noting that stablecoins, particularly those pegged to the US dollar, are to some extent promoting a trend of “digital dollarization,” allowing the influence of the dollar to penetrate digital realms beyond the traditional banking system. This phenomenon not only has significant geopolitical and economic implications but has also attracted high attention from global regulators. Governments and financial regulatory bodies are actively studying how to effectively regulate stablecoins to balance their innovative potential with potential financial stability risks.
Not all stablecoins are equally “stable.” Their design mechanisms and collateral structures directly affect their risk profile. Historical experience has shown that, compared to stablecoins with full fiat currency reserves, algorithmic stablecoins are less capable of maintaining their peg under significant market pressure and are more prone to de-pegging. Therefore, when choosing and using a stablecoin, one should not assume equal price stability based on its name alone but should carefully understand its underlying mechanism and risk characteristics.
Once you own cryptocurrency, securely storing and managing it is crucial. This requires understanding the types and principles of cryptocurrency wallets. Unlike the wallets we use in daily life for physical cash, cryptocurrency wallets act as guardians in the digital world.
First, a common misconception needs to be clarified: cryptocurrency wallets do not actually store cryptocurrencies. Cryptocurrencies always exist on their respective blockchains. The role of a wallet is more like a secure safe that stores the cryptographic keys required to access and control those cryptocurrencies, namely the Public Key and the Private Key. A wallet serves as a user interface, allowing users to interact with the blockchain to send, receive, and manage their digital assets.
Understanding the principles of public and private keys is the cornerstone of cryptocurrency security:
This private key-based asset control method returns the control and responsibility for asset security directly to the user (specifically for non-custodial wallets). This is fundamentally different from the traditional financial system where access is managed by institutions like banks. This shift gives users unprecedented autonomy but also means that users must bear the full responsibility for properly safeguarding their private keys. If a user loses or leaks their private key due to mismanagement, there is often no institution that can help recover the assets.
Cryptocurrency wallets are mainly divided into two categories based on whether they are connected to the internet: Hot Wallets and Cold Wallets.
In addition to the above classifications, wallets can also be divided into Custodial Wallets and Non-custodial Wallets based on the control of the private keys:
Choosing a wallet is essentially a trade-off between convenience, accessibility, and security, control. Hot and custodial wallets offer greater convenience and are suitable for beginners or users who need to trade frequently. Cold and non-custodial wallets prioritize security and control, making them more suitable for storing large amounts of assets or for long-term investment. Many experienced users adopt a hybrid strategy, for instance, keeping a small amount of frequently used funds in a hot wallet while storing the majority of their assets in a secure cold wallet.
Protecting your cryptocurrency assets is crucial, as once stolen, they are often difficult to recover. Here are some basic yet critical security practices to enhance the security of your wallet:
Following these security guidelines, while not eliminating all risks, can significantly reduce the likelihood of your cryptocurrency assets being lost.
We have learned what cryptocurrency is and how to store it, but how do new cryptocurrency units enter circulation? For many cryptocurrencies that use the Proof-of-Work (PoW) consensus mechanism (like Bitcoin), this process is called “Mining“.
Cryptocurrency mining is the process of using computational power to compete in solving complex cryptographic equations to validate new transactions, bundle them into blocks to be added to the blockchain, and thereby receive newly created cryptocurrency as a reward. This process is carried out by a decentralized network of computers (i.e., miners) spread across the globe, who contribute their computing resources to maintain and secure the integrity and security of the blockchain.
The specific process of mining is roughly as follows:
So, what incentivizes miners to invest in expensive hardware and electricity costs to participate in mining? The main incentives come from two sources:
These economic incentive mechanisms ensure that there are enough miners willing to contribute their computing power to maintain the operation and security of the network.
However, with the development of cryptocurrency, some noteworthy trends have emerged in the mining industry. Initially, anyone could participate in mining cryptocurrencies like Bitcoin using a standard home computer. But as the total network hashrate and mining difficulty have increased, mining has gradually become more professional and centralized. Today, most mining is done by large mining farms or pools with specialized mining hardware (like ASIC miners), often located in regions with low electricity costs. While this trend has increased mining efficiency, it has also raised concerns about the potential impact on the network’s degree of decentralization.
Furthermore, for cryptocurrencies with a fixed total supply like Bitcoin, the block reward will continue to decrease and will eventually disappear entirely. At that point, miners’ income will depend solely on transaction fees. This raises a question about the network’s long-term security budget: will transaction fees alone be sufficient in the future to incentivize enough miners to secure the network, which could affect future transaction costs and the network security landscape.
Cryptocurrency and blockchain technology have not only given rise to new digital assets but have also pioneered a new financial model—Decentralized Finance, or DeFi for short. This is an experiment aimed at reshaping traditional financial services, with the core idea of using blockchain technology to build a more open, transparent, and permissionless financial system.
DeFi refers to the various financial applications running on public blockchains (primarily Ethereum) that aim to replicate or improve traditional financial services in a decentralized manner, such as trading, lending, saving, insurance, derivatives, etc., without relying on traditional financial intermediaries like banks and brokerage firms. The vision of DeFi is to create a financial system where everyone can participate equally, lowering barriers to entry, and increasing efficiency and transparency.
Smart contracts are the cornerstone and key driver of DeFi. These self-executing protocols allow users to interact directly with contracts without the involvement of intermediaries. Smart contracts encode the rules of financial agreements on the blockchain, and when preset conditions are met, the contract automatically executes the corresponding actions, which not only improves transaction efficiency but also reduces reliance on centralized institutions and potential counterparty risk.
The DeFi ecosystem includes numerous sub-sectors and application scenarios. Here are some common examples:
A key metric for measuring the size of the DeFi ecosystem is the Total Value Locked (TVL), which represents the total value of cryptocurrency assets currently locked in the smart contracts of all DeFi protocols. The growth of TVL is often seen as a reflection of the adoption and activity in the DeFi market.
The emergence of DeFi promises greater accessibility and transparency. In theory, anyone with an internet connection and a cryptocurrency wallet can participate in DeFi without going through the cumbersome approval processes of traditional financial institutions. All transaction records are publicly and transparently recorded on the blockchain for anyone to verify. However, this openness and innovation also come with new risks. Vulnerabilities in smart contracts could lead to users’ funds being stolen or locked. Users who provide assets to liquidity pools may face the risk of impermanent loss. Furthermore, the regulatory environment in the DeFi space is still unclear, which also introduces a degree of uncertainty.
DeFi protocols are often designed to be composable, meaning different DApps can be interconnected and built upon each other like Lego blocks. This feature greatly promotes innovation and the rapid iteration of new financial products. On the other hand, this high degree of interconnectivity can also create systemic risks, where the failure of a foundational protocol could have a domino effect on other protocols that depend on it, thereby impacting the entire ecosystem. Therefore, while DeFi demonstrates immense potential for financial innovation, participants also need to have a clear understanding and cautious assessment of its unique risks.
After understanding the basics of cryptocurrency, its different types, and the technology and innovative applications behind it, it is crucial for those interested in trading cryptocurrency to recognize its unique market characteristics and potential risks before engaging in any actual operations.
The cryptocurrency market differs significantly from traditional financial markets in its operation and characteristics, with two of the most prominent points being its 24/7 trading nature and high price volatility.
First, unlike traditional stock markets with fixed opening and closing times, the cryptocurrency market operates 24 hours a day, 365 days a year, and remains active even on weekends and public holidays. This 24/7 trading model provides traders from all over the world the opportunity to participate in the market at any time, but it also means that prices can change significantly at any moment, placing higher demands on traders’ attention and risk management capabilities.
Second, cryptocurrency is known for its extremely high price volatility. The magnitude of its price fluctuations often far exceeds that of traditional financial assets like stocks and bonds, and it is not uncommon for prices to rise or fall by tens of percent or more in a short period. This intense volatility can bring considerable profit opportunities for sharp traders, but it also comes with huge risks of loss. If leverage is used in cryptocurrency trading, the impact of this volatility is further amplified, potentially leading to disproportionately magnified profits and losses.
This round-the-clock, highly volatile market environment is a major test of a trader’s psychological fortitude. The continuous market operation and drastic price movements can make traders feel anxious, fearing they might miss opportunities or fail to stop losses in time, which can lead to emotional trading decisions or over-trading, and even physical and mental exhaustion. Therefore, developing a clear trading plan, setting strict risk control parameters, and maintaining discipline are essential for coping with these market characteristics.
The dramatic price fluctuations of cryptocurrencies are the result of the interplay of multiple complex factors. Compared to mature traditional financial markets, the cryptocurrency market is more susceptible to non-fundamental factors. Here are some of the main influencing factors:
Understanding these intricate influencing factors is crucial for analyzing cryptocurrency price trends and developing trading strategies. However, due to the market’s youth and high speculative component, short-term price movements are often difficult to predict accurately.
Participating in cryptocurrency investment and trading, like any other investment activity, comes with various potential risks. Due to its emerging and highly dynamic nature, the risks in the cryptocurrency market are particularly prominent, and investors must conduct a thorough assessment before participating.
In the highly variable cryptocurrency market, effective risk management requires investors to stay vigilant, continuously learn, and make good use of reliable information sources and analytical tools.
Cashback Island is committed to providing users with the latest market intelligence and professional calculation tools. These resources can assist users in risk assessment and decision-making to some extent. At the same time, trading through our partner platforms allows you to enjoy rebates, adding extra value to your trading journey. However, no tool or information can replace personal prudent judgment and a clear understanding of one’s own risk tolerance.
If you have developed an interest in cryptocurrency and wish to start exploring this vibrant and emerging field, understanding some basic first steps will help you begin your journey more smoothly. It must be emphasized that the following is a general description and not investment advice.
Cryptocurrency and its underlying blockchain technology, although still in a relatively early stage of development, have already demonstrated immense innovative vitality and the potential to disrupt traditional industries globally. From its initial conception as a peer-to-peer electronic cash system to now encompassing decentralized finance, digital collectibles (NFTs), the metaverse, and broader Web3 applications, the boundaries of cryptocurrency are constantly expanding.
Entering or continuing to explore the world of cryptocurrency is undoubtedly a journey full of opportunities and challenges. It requires traders to maintain a rigorous learning attitude, have a clear awareness of the risks involved, and adopt a responsible approach to participation. As you explore this exciting and ever-changing market, Cashback Island hopes to be your trusted partner.
Cashback Island continuously updates its trading educational resources. Traders can visit the “Cashback Island Tutorial Guide” section to master more forex knowledge and investment skills.
Cryptocurrency is a digital asset based on blockchain technology. Its core difference is its decentralized operation, which does not require intermediaries like banks or governments, and it uses cryptographic algorithms to ensure transaction security and anonymity.
Blockchain records transactions on a distributed ledger and uses hash encryption and consensus mechanisms (like PoW, PoS) to prevent data tampering, ensuring transactions are transparent and irreversible.
Its peer-to-peer transaction model eliminates intermediaries, significantly reducing fees and speeding up the transfer process. For example, a Bitcoin transaction confirmation takes only about 10 minutes, much faster than traditional banking systems.
“Trading in financial derivatives involves high risks and may result in the loss of funds. The content of this article is for informational purposes only and does not constitute any investment advice. Please make decisions carefully based on your personal financial situation. Cashback Island does not assume any liability for trading derivatives.”
