In a nutshell, cryptocurrency is a digital or virtual currency secured by cryptography, which is based on a distributed network, called blockchain. The latter is a distributed ledger enforced by a network of independent computers. Unlike traditional currencies, cryptocurrencies are generally not issued by any central authority, making them theoretically immune to government interference or manipulation. The term “crypto” refers to the various encryption algorithms and cryptographic techniques that secure online payment transactions.

Blockchain technology is being explored for various applications beyond cryptocurrency, including supply chains, online voting, and crowdfunding.

How Does Crypto Work 

Central to the appeal and functionality of cryptocurrencies like Bitcoin is blockchain technology. A blockchain is a connected series of information blocks on an online ledger. Each block contains a set of transactions which are independently verified by each validator on the network. Every new block must be verified before being confirmed, making it nearly impossible to forge transaction histories. The ledger’s contents must be agreed upon by a network of individual nodes, or computers, maintaining it.

Types of Cryptocurrency

Many cryptocurrencies were created to facilitate work on the blockchain they are built on, such as ETH for Ethereum, which is used for validating transactions and staking on its blockchain, and XRP for Ripple, which is designed for financial institutions to facilitate cross-border transfers.

Understanding the types of cryptocurrencies is crucial for investors, so let us outline them below:

• Utility Tokens serve specific functions on their blockchains, like XRP and ETH;
• Transactional Tokens are designed as payment methods, with Bitcoin being the most well-known;
• Governance Tokens represent voting or other rights on a blockchain, such as Uniswap;
• Platform Tokens support applications built on a blockchain, like Solana;
• Security Tokens represent ownership of an asset, such as a tokenized stock like MS Token.

Trading Crypto 

Crypto can be traded in:

1. Centralised Exchanges (CEX) 

A centralised crypto exchange operates similarly to traditional financial institutions, acting as an intermediary in transactions. These virtual marketplaces, overseen by a centralised entity, facilitate the buying and selling of cryptocurrencies. Notable names include Binance (large crypto selection and trading features), Coinbase (user friendly and strict regulatory compliance), and Kraken (great offering of coins and services).

In a CEX, users deposit their cryptocurrencies into an exchange-controlled wallet. The exchange manages trades and provides custodial services, ensuring regulatory compliance and user assurance, generally have user-friendly interfaces and strong liquidity. There are some drawbacks however, such as: 

• Higher Transaction Fees: Due to intermediary costs;
• Potential Security Vulnerabilities: The central authority holds users’ funds, making it an attractive target for hackers;
• Regulatory Scrutiny: May restrict functionalities or availability in specific regions.
  

2. Decentralised Exchanges (DEX)

A decentralised exchange operates independently, without intermediaries or central authorities. Such platforms are powered by blockchain technology to enable direct transactions between users. Popular names are Uniswap, PancakeSwap, SushiSwap, Curve Finance etc. 

Transparent smart contracts, open-source protocols responsible for managing and documenting trades on a decentralised ledger, govern DEXs. A key DEX feature is user control – users retain complete control over their funds because the DEX doesn’t hold custody of user assets. Transactions occur directly between users’ wallets. 

Prices on DEXs are determined through automated market maker protocols, eliminating the need for a centralised authority. While decentralised exchanges offer advantages such as lower transaction fees and increased user control over funds, they also present challenges:

• User Experience: Less user-friendly for beginners;
• Liquidity Issues: For less popular tokens;
• Impermanent Loss: For liquidity providers due to price fluctuations.
  

3. Brokerages

There is a third way to trade Cryptos is via Brokerages and Prop Firms like Funded Prop Trading. Buying there does not grant ownership over the cryptocurrency and you are not able to withdraw it to your wallet. However, you bear no risk of your coins being stolen. You simply benefit from the price difference between the moment of your purchase and the moment of your sale. Different jurisdictions allow for different crypto trading conditions, the main purpose of which, from a Regulator’s standpoint, is to protect the retail customer. Therefore, make sure to check the conditions before jumping in.

For further reading you can visit our FPT Trading Academy​.