Cryptocurrency were created in protest to the traditional banking system, aiming to build a decentralized financial system.
Today, cryptocurrencies have uses beyond money transfer for market participants [investment, mining, and trading] and businesses [blockchain network development, supply chain management, financing and lending, marketing, and more].
However, this industry is not without its flaws and challenges. For instance, digital currency's decentralized and untraceable nature makes it an attractive tool for illegal activities.
Additionally, scalability and highenergy consumption in Proof of Work (PoW) mechanisms pose challenges for some crypto projects.
What Is a Cryptocurrency?
Cryptocurrency is a form of virtual money that uses blockchain, a decentralized database, for encryption and asset security, unlike traditional money, which governments and financial institutions back.
What Are the Features of Cryptocurrencies?
Decentralization and independence from any government or financial institution are among the most important features of a digital currency.
This very attribute makes digital currencies a revolutionary element in the financial sector and represents the primary difference between cryptocurrencies and fiat money.
Features of cryptocurrencies:
- High Transparency: All transactions are recorded on the blockchain and are publicly visible. While every user can access transaction history, individual identities remain anonymous;
- High Security: Cryptocurrency data is highly secure due to encryption with hash algorithms on the blockchain. Altering this data would require a 51% attack—control by the majority of miners—which is virtually impossible;
- Fast Transactions & Low Fees: With cryptocurrencies, international transactions can be completed within minutes and at very low fees, whereas traditional systems may take days to transfer money;
- Decentralized and Peer-to-Peer (P2P):Digital currencies are decentralized, meaning no institution has full control over them. Also, Cryptocurrency transactions are processed without intermediaries;
- Limited Supply: Some cryptocurrencies (like Bitcoin) have a limited supply of coins, helping them maintain value in the long term;
- Anonymity: Instead of displaying users’ names in each transaction, only the wallet address appears;
- Global Asset:Digital currencies are usable across borders without limitations and is unaffected by political or economicsanctions.
History of Cryptocurrencies
Digital currencies did not emerge overnight; they result from several decades of research in cryptography, decentralized economics, and payment technologies.
Similar concepts had been proposed before Bitcoin, but they failed due to insufficient adoption.
David Chaum – The Father of Digital Money and Privacy
In the 1980s, American computer scientist David Chaum introduced the concept of anonymous digital money. In 1989, he founded DigiCash, whose primary product was eCash, an electronic payment system based on cryptography.
Though Chaum collaborated with reputable banks, DigiCash failed due to bank opposition and a lack of public trust in digital money. Nevertheless, his theories and papers laid the groundwork for the creation of Bitcoin.
The Birth of Bitcoin in 2009
The rise of Bitcoin is closely tied to the 2008 global financial crisis. During this period, major banks like “Lehman Brothers” collapsed, and governments printed billions of dollars to save the banking system—leading to inflation and devaluation of fiat currencies.
Bitcoin was created by an anonymous person or group named Satoshi Nakamoto. It aimed to establish a decentralized, peer-to-peer payment system that eliminated the need for banks and traditional financial intermediaries.
It served as a protest against the centralized banking system and a solution to its shortcomings.
On May 22, 2010, the first-ever Bitcoin financial transaction occurred. A programmer named “Laszlo Hanyecz” bought two pizzas for 10,000 Bitcoins (worth about $41 at the time).
This event marked a pivotal moment in the adoption of Bitcoin as a legitimate payment system and is now celebrated as Bitcoin Pizza Day.
Why Did Bitcoin Succeed While DigiCash Failed?
The success of Bitcoin compared to the failure of DigiCash can be attributed to structural differences and public trust.
Reasons Behind Bitcoin’s Success:
- Perfect Timing: Bitcoin was launched after the 2008 financial crisis, during a period of deep mistrust in the banking system;
- Decentralization: Unlike DigiCash, Bitcoin is decentralized and does not cooperate with banks;
- Limited Supply: Unlike fiat currencies, Bitcoin has a maximum supply of 21 million coins, giving it an anti-inflationary characteristic.
The Emergence of Altcoins After Bitcoin
After Bitcoin, other digital currencies emerged to offer enhanced capabilities. These alternatives are known as altcoins. The first altcoins introduced after Bitcoin include:
- Litecoin: Offers faster transaction speeds compared to Bitcoin’s network. It also uses a different mining algorithm, leading to lower energy consumption;
- Ripple (XRP): Focuses on international payments within the banking system. For example, financial institutions use Ripple for cross-border transactions, which are much faster than traditional systems like SWIFT;
- Dogecoin: A meme coin initially created for funand tipping online content creators. Dogecoin gained massive attention in 2021 due to Elon Musk’s comments, reaching a price of $0.74;
- Ethereum: Launched in 2015 by Vitalik Buterin, Ethereum introduced revolutionary features such as smart contracts and decentralized applications (DApps).
What Are the Use Cases of Digital Currencies?
In addition to being a secure and rapid money transfer tool, digital currencies serve a wide range of purposes for investors and businesses.
Major Use Cases of Cryptocurrencies:
- Trading and Investing: While the Cryptocurrency market is highly volatile, traders can profit using proper market cycles and trading strategies;
Note: The Cryptocurrency market is relatively new and has a small market cap, resulting in high volatility and risk. Therefore, knowing the key points of trading in cryptocurrencies is essential;
- Blockchain and DApp Development: Developers can launch their own digital currency through innovative ideas in areas such as the metaverse, healthcare, education, art, gaming, and more;
- International Money Transfers:Digital currencies like Ripple, Stellar, and Solana enable cross-border transactions that are faster and cheaper than traditional payment systems;
- Mining for Passive Income: Miners can earn rewards by verifying network transactions using either Proof of Work (PoW) hardware or staking in Proof of Stake (PoS) systems;
- Business Adoption: Companies in DeFi, metaverse, and NFTs increasingly utilize digital currencies. Some businesses also accept cryptocurrency as payment or use Bitcoin or crypto-related ETFs as financial tools;
- Lending and Borrowing: DeFi services allow fast, collateral-free loans. Users can lock their digital currency assets as collateral to borrow funds without selling their holdings.
Analysis of the Cryptocurrency Market
The Cryptocurrency market is relatively new, with a small total market capitalization, making it highly volatile. Macroeconomicindicators (external factors), on-chain data (internal factors), and technicallevels influence these fluctuations.
Fundamental Analysis in the Cryptocurrency Market
In cryptocurrencies fundamental analysis, beyond macroeconomics, elements such as the whitepaper (development team and project roadmap), on-chain metrics, and market sentiment (fear & greed index) are also considered.
Key Components of Fundamental Analysis:
- Whitepaper: Technical document that outlines a project's concept, goals, and roadmap. Development team publishes this document;
- On-Chain Metrics: These metrics reflect the technical activities of thenetwork, including transaction counts, exchange balances, hash rate, miner behavior, and active wallet addresses;
- Tokenomics: Involves analyzing token allocation to investors, total supply, maximum supply limits, and deflationary mechanisms;
- Development Team: Factors such as transparency, experience, expertise, and the track record of the project team are essential;
- Fear & Greed Index: This tool measures market sentiment on a scale of 0 to 100. Values below 25 indicate extreme fear and potential market bottoms, while values above 75 indicate greed and possible market peaks.
Note: To become aware of the current market sentiment, you can use the TradingFinder Crypto Fear & Greed tool.
- Macroeconomic Indicators: External market conditions such as economic inflation, unemployment, GDP growth, and monetary policies also significantly affect the cryptocurrency market.
Technical Analysis of Digital Currencies
Technical analysis uses price charts and candlestick behavior to predict market trends. The analysis timeframe depends on the chart’s time frame, but it's particularly valuable for scalping and short-term trades.
Popular Technical Strategies in the Cryptocurrency Market:
- Scalping: Ultra-short-term trades (typically under 30 minutes), aiming for quick profits;
- Price Action: Analysis based solely on chart patterns and candlesticks without relying on indicators;
- Swing Trading: Capturing mid- to long-term price swings, with trades lasting days or even months.
Disadvantages and Challenges in the Cryptocurrency Industry
Despite their wide applications, digital currencies face technical, infrastructure, legal, and regulatory challenges. Some of these issues have potential solutions.
Technical and Infrastructure Challenges
Scalability and transaction speeds remain limitations in many crypto projects. Additionally, the PoW consensus mechanism is highly energy-intensive.
Technical Issues inDigital Currencies:
- Irreversible Transactions: Due to decentralization, mistaken transactions cannot be reversed or traced. If users lose their private keys, they permanently lose access to their funds;
- High Energy Consumption in PoW: Bitcoin, for example, consumes about 127 TWh of electricity annually—more than some countries like Norway. Migrating to PoS is a proposed solution;
- Low Scalability: Bitcoin processes only around 7 transactions per second. Layer-2 solutions aim to address this bottleneck.
Legal and Regulatory Challenges
Even after more than 15 years since Bitcoin's introduction, widespread regulation is still lacking—partly due to the decentralized nature of digital currencies.
Legal Concerns in the Cryptocurrency Market:
- Illegal Activities: Due to being decentralized and untraceable, cryptocurrencies are used for dark web transactions, extortion, and criminal activities.
- Limited Adoption: According to TripleA (2021), only 2% of physical retail businesses accepted Bitcoin as payment. Though by 2024, many companies had integrated digital currencies in B2B infrastructure, mass adoption remains limited.
- Hidden Centralization: Despite being decentralized, wealth is concentrated. For example, 27% of all Bitcoins are held in just 0.01% of wallets. Influential figures in the space can also manipulate markets through public statements.
Conclusion
The Cryptocurrency market began with Bitcoin in 2009 as a protest against traditional banking. It gained momentum with the introduction of altcoins, offering broader use cases than Bitcoin.
Altcoins significantly improved scalability and transaction speed. Ethereum, supporting DeFi and decentralized apps, brought a new revolution to digital currencies.
Key features of digital currencies include decentralization, high speed, low transaction fees, robust security via blockchain hashing algorithms, limited supply in some cases, and anonymous global transactions.
