Making sense of bitcoin and cryptocurrencies within the blockchain ecosystem

bitcoin graphic

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It is no secret bitcoin is the leading force in the world of cryptocurrency, but what is less readily understood is the technical relationship between the original digital asset and the rest of the surrounding landscape.

The way bitcoin and every other form of cryptocurrency in the world – generally referred to as altcoins – interact is critical to understanding market movements and strategies for diversification for those in the early stages of building their portfolio.

Here is a closer look at what blockchain technology is, how bitcoin fits into the blockchain ecosystem, and how altcoins have evolved to provide continued innovation within the space.

Please note that this post does not explicitly endorse or recommend any particular strategy or form of cryptocurrency. For specific investment advice, please contact your financial advisor.

What is blockchain technology?

A blockchain is a decentralized peer-to-peer network wherein each party involved manages its own independent ledger that tracks all transactions and that works off everyone else’s ledger to verify transactions and to form a consensus. Blockchain automates trust among users by verifying the credibility of all transactions for the whole community to see, thus removing the risk of corruption and manipulation by any one party.

You can think of a blockchain network within the analogy of a Google Doc. Everyone working on the doc has access to the same file and can see and verify updates in real-time. With a local Word doc (i.e., a centralized network), changes have to be made by one party at a time before being sent on to the next for further editing.

Blockchains – as the name implies – are made up of blocks, chains, and nodes.

  • A block is a piece of digital information that includes records of the most recent transactions within the network. Blocks can be thought of like puzzles, with each piece representing a different transaction and its related data.
  • A chain can be thought of as the shelf that stores all completed puzzles (or blocks) within the history of the network.
  • A node refers to the individual users working to solve blocks to receive a reward. Each node manages its own version of the chain, which can be seen by every other user on the network.

Learn more about what blockchain is and how it works.

What is cryptocurrency?

Cryptocurrency (crypto for short) is a digital medium of exchange that uses encryption to control the creation of new units and to verify the transfer of funds. New units of crypto are created and stored on the blockchain, which means they have no physical form and exist only on the network on which they were created.

The key points of crypto are that its networks are decentralized, its supply is not determined by a central bank, and it has no intrinsic value that could make it redeemable for another commodity (e.g., gold).

What is bitcoin?

Bitcoin is the original, best-known, and most popular form of cryptocurrency. It is the type of cryptocurrency for which blockchain technology was initially invented when it launched in January of 2009, which is also the main reason bitcoin sits so massively within the world of crypto.

Bitcoin uses a consensus mechanism known as proof-of-work to create blocks and confirm transactions, which is a highly energy-intensive and time-consuming process. It is more closely followed, legitimate, and trustworthy than other forms of crypto due primarily to its longevity, popularity, and prominence within the space.

The number of bitcoin that can ever be mined into existence is capped at 21 million, which together with periodic halvings of bitcoin’s block reward, contribute to it being a deflationary asset. This means over time, its buying power is designed to increase rather than decrease as with the inflation of fiat currency.

The lively debate about whether or not bitcoin is generally better than every other type of crypto has helped contribute to a clear divide between it and the rest of the industry. And when we talk about every other type of crypto, we are talking about altcoins.

What are altcoins?

Generally speaking, forms of cryptocurrency that are not bitcoin are known as altcoins – more and more of which are coming into existence every day with the purpose of carving out their own lanes or serving a particular need for users and investors. There are currently more than 12,000 altcoins and counting, combining to account for nearly 60% of the total crypto market.

Most altcoins are based on many of the same principles as bitcoin but with their own unique features that often aim to improve on some of bitcoin’s perceived shortcomings. Like bitcoin, altcoins enable secure peer-to-peer transactions between parties in a decentralized nature and all transactions are recorded on the blockchain. Beyond that, the rules of a given altcoin may be changed to perform differently and to offer different advantages to users.

Binance Coin and several other altcoins, for example, operate on a proof-of-stake basis compared to bitcoin’s proof-of-work mechanism. This helps minimize energy consumption, the time required to create blocks and validate transactions, and more. Learn more about the differences between proof-of-work and proof-of-stake here.

Altcoins might also produce new coins and process payments at a different rate, in addition to varying in supply, value, cost, and difficulty to mine. This makes it fairly easy to diversify within your crypto portfolio by investing in a variety of coins that may all perform differently over given periods of time. It is important to note, however, that because most altcoins are derived from the same overarching concept as bitcoin, their price movements tend to correlate.

In addition to Binance Coin, some of the most popular and fastest-growing altcoins on the market today include Cardano, Litecoin, and Polkadot. As crypto continues to grow and evolve, an increasing number of miners and investors continue to stake their claim to the future of this revolutionary technology – and so can you.

So whether you fall into the bitcoin-only crowd or the crypto-agnostic crowd, it is clear to see that both sides of the aisle serve a critical purpose for miners and investors, especially as it pertains to advancing the growing use cases and future of the industry.

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