Cryptocurrency explained to a five-year-old

Editor’s Note: This series of “ELI5” articles is for beginners entering the world of cryptocurrencies, DeFi, NFTs and Web3 with lots of questions in mind. ELI5 refers to the famous English acronym, which means “Explain me as if I were five years old”. The goal is not to infantilize the reader, but simply to give him keys to understanding, so that the cryptosphere’s complicated vocabulary in a broad sense becomes, as if by magic, a child’s play!

That cryptocurrency is a term that has become very popular lately. However, it is not always easy for a neophyte to understand what it is. The general public often associates Bitcoin with the term cryptocurrency, but that is generally the only thing they know.

In this post we will try to explain to you as simple as possible what a cryptocurrency is. This will allow you to better understand this rather special universe.

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Crypto tours, digital assets, virtual currencies, etc. Kezako?

When you consult specialized sites, you will notice that the term cryptocurrency is not the only one used. In fact, it is possible to use many different names to talk about the same topic.

Depending on the sources you go to consult, you may hear about cryptocurrencies (sometimes without hyphens), digital currencies, cryptocurrencies, virtual currencies, digital assets, virtual currencies, and many other terms often used to talk about cryptocurrencies.

While not all of these terms are necessarily synonymous, and some are not the most appropriate, they will still be used as such by many authors. You will therefore need to learn to deal with this situation.

Can we consider cryptocurrencies as a real currency?

In fact, cryptocurrencies do not really have the characteristics of a traditional currency. To put it simply, the major criticism of this new asset class is its high volatility. In fact, it is not uncommon for the unit value of a cryptocurrency to be multiplied or divided by 2 in a few days.

Because of this, many people in this industry prefer to use a term that does not refer to the term “currency”. This avoids creating confusion and critics criticizing this new asset class because of this reference.

However, some people believe that cryptocurrencies can be used as currency. For example, it is possible to receive your salary in Bitcoin, to transfer money in the form of cryptocurrencies to friends or to pay for certain services with digital assets.

What is the difference between a coin and a token?

As you read, you will no doubt notice that we sometimes talk about coin or token to designate a cryptocurrency. Although it does not change anything when you invest, it is still interesting to understand the basic differences between these two types of cryptocurrencies.

To simplify, a coin is a cryptocurrency that has its own blockchain. It is possible to create new coins through a mining process or some other form of consensus. A token, on the other hand, uses blockchain from another cryptocurrency to function, such as the Ethereum network and ERC-20 tokens. All tokens are generally issued as soon as they are created, although some are sometimes not immediately in circulation.

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Nevertheless, most specialized sites regularly make the mistake of confusing these two terms. Therefore, they very often use coin and token as two synonyms. You should therefore be aware of this when reading.

What are security tokens and utility tokens?

The different tokens can also be classified into two main categories. Those called “security” and those called “utility”. We use the term token, but it also groups coins into these categories, such as Bitcoin or Ethereum.

Again, to simplify things, a utility token is a cryptocurrency that has at least one utility. For example, it could be a token that provides discounts on currency exchange fees or that provides access to additional services.

A security sign, on the other hand, must be regarded as a financial security, as a share e.g. At least that’s how the US stock exchange policeman, the SEC, sees it. In addition, whether a cryptocurrency is a security or a utility can also vary from country to country. The United States can, for example. decide that a cryptocurrency is a security, while France can consider it a tool.

Cryptocurrency: what to remember

The term cryptocurrency refers to projects that are evolving in the blockchain universe. In general, you can find the list of different cryptocurrencies on sites like CoinMarketCap Where CoinGecko.

The various cryptos on CoinMarketCap

Strictly speaking, we can not really talk about money if we rely on traditional definitions. Instead, we should rather classify cryptocurrencies as a new class of assets that tend to be accepted little by little by economic circles.

Cryptocurrencies can be coin type or token type depending on their technical characteristics. In addition, each digital asset can be considered as an aid or a security, although countries sometimes have different legal qualifications for a given cryptocurrency.

Discover more crypto vocabulary concepts

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