What Is Cryptocurrency Used For?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Favorable long-term price movements in cryptocurrencies have attracted many people. Many people buy crypto hoping to get higher returns, but cryptocurrencies have uses that extend beyond trying to get a return on your investment. Businesses and consumers use cryptocurrencies for various reasons. We will highlight some of the ways people use crypto and get you up to speed with investing in crypto.

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What is Cryptocurrency?

Cryptocurrencies are digital assets based on a decentralized currency. The lack of a central authority leads to more transparent transactions and minimizes manipulation. The central bank cannot artificially increase the supply of Bitcoin and dilute coin holders in the process. Crypto derives its value from its user base, while fiat currencies derive value from the government’s ability to back them. While Bitcoin is the most popular cryptocurrency, investors can choose from thousands of cryptocurrencies. Some smaller altcoins have outperformed Bitcoin over the past few years.

Crypto holders store their virtual currency in a cryptocurrency wallet. Investors can choose between the less secure but more convenient hot wallet or cold storage, a more secure solution that takes more time to access. Each transaction they make gets recorded on a digital ledger known as a blockchain. This ledger increases transparency and cannot get changed. 

Cryptocurrency and Blockchain Technology

Cryptocurrencies rely on blockchain technology to facilitate transactions between users. This technology helps prevent fraud and provides more transparency in the crypto market. In addition, cryptocurrencies have different models that impact how digital currencies get distributed.

Consensus Mechanism

Cryptocurrencies use a consensus mechanism to verify transactions. Nodes on the blockchain synchronize to approve transactions and put them on the ledger. Proof of work and proof of stake models each use the consensus mechanism for transactions.

Proof of Work

Proof-of-work systems rely on incredible computing power to solve complex mathematical problems. Crypto miners scramble against each other to solve problems and receive blocks as rewards. Each block contains a set amount of crypto. For example, solving a problem and validating a block on Bitcoin’s blockchain will yield 6.25 BTC. 

This incentive has led to a crypto mining boom, but most miners break even due to the intense resources required to solve these problems. The proof of work also has environmental concerns because of the amount of electricity and resources committed to this endeavor. Bitcoin is a proof-of-work currency, but most cryptos are proof of stake. Ethereum has been a proof-of-work cryptocurrency but is shifting to the proof-of-stake model.

Proof of Stake

The proof of stake system requires fewer resources and takes far less of a toll on the environment. Crypto investors must lock up some of their cryptos to verify transactions and potentially receive rewards from the blockchain. Staking more crypto increases the odds of getting selected to verify transactions. This process also speeds up transactions. While it can take over 10 minutes for a Bitcoin transaction to finalize, Solana can conduct 3,000 transactions per second on its blockchain.  

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The cryptocurrency market has thousands of digital currencies available. In exchange for higher risk, you can explore under-the-radar altcoins for a greater potential payoff. Many investors start with the most popular cryptocurrencies before branching out to smaller altcoins.

Bitcoin (BTC)

Since its 2009 launch, Bitcoin has attracted investors seeking high returns. Only 21 million Bitcoins exist, and there is no way to change this number. Almost every merchant that accepts crypto as a form of payment lets you pay with Bitcoin. The coin’s first-mover advantage, increased viability, and limited supply have turned it into a juggernaut in the cryptocurrency market.

Ethereum (ETH)

Ethereum is the second-largest cryptocurrency, only behind Bitcoin. While Bitcoin caters to consumers and businesses exchanging money for goods and services, Ethereum helps users create decentralized applications. As a result, the Ethereum blockchain network is a popular choice for NFT platforms.

Tether (USDT)

Tether is a stablecoin that has aimed to mimic the U.S. dollar since its 2014 launch. The cryptocurrency is pegged to the dollar at a 1-to-1 ratio. This cryptocurrency provides more stability than Bitcoin and Ethereum. Stability in crypto can help people transfer money overseas without incurring fees from financial institutions.

Top Cryptocurrency Uses

Cryptocurrencies have many capabilities. Some people use blockchains to create Web 3.0 games and apps. Among the many ways you can use cryptos, these are the most common ways people use cryptocurrencies.

Money Transfer and Other Transactions

Some people use cryptocurrencies as a medium of exchange. People send cryptocurrency to each other to avoid excessive fees from a middleman. Cryptocurrencies can arrive in your digital wallet quicker than an overseas wire transfer. Cryptocurrencies provide consumers with more flexibility with money transfers and other transactions.

Store of Wealth

Some people compare cryptocurrencies to gold and view them as an inflation hedge. However, cryptocurrencies are a store of wealth that can appreciate over time. This is because cryptocurrencies rely on users for intrinsic value instead of governments. This structure creates more risk and can generate higher payoffs for long-term crypto investors.

Purchase Products and Services

More businesses are warming up to cryptocurrencies. Thousands of merchants let their customers buy goods and services with crypto. Square has made it easier for small businesses on the fence to accept crypto as a form of payment. Microsoft, PayPal, Whole Foods, Etsy, Starbucks, and Home Depot are some of the many companies that accept Bitcoin and other cryptocurrencies. Current trends suggest more businesses will become receptive to crypto payments in the future.

Investments

Investors diversify across many assets to tap into more opportunities and minimize risk. The past performance of crypto assets has attracted significant attention. Some people have become millionaires by investing in crypto in the early years and holding onto their positions. Crypto’s strong demand and functionality make these assets desirable for long-term investors. Some investors stick with cryptocurrencies with large market caps, while others invest in various small-cap altcoins for a higher potential payoff.

Earn Interest (Active/Passive)

Cryptocurrencies sitting in your portfolio can generate interest similar to payouts from a dividend stock. You can stake your crypto on a platform and let other people use it, similar to a certificate of deposit. Agreeing not to touch your crypto for a longer period of time enables you to access higher interest rates. Some cryptocurrencies provide double-digit interest rates just for holding onto them. You will get paid in crypto and can convert it into fiat currency. Check the cost basis before selling your newly acquired crypto. Incurring too many capital gains can lead to an unpleasant tax day.

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