10 Key Points About Cryptocurrency You Must Know Before You Invest | by Rani’s insights | The Capital | Jan, 2025

A cryptocurrency (often shortened to crypto) is a type of digital or virtual currency that uses cryptography for security. Most cryptocurrencies are not controlled by any central authority, such as a government or bank. Instead, they rely on a distributed network of computers (nodes) to maintain the system. If you have zero idea about cryptocurrency then go through this blog first. In this blog, I explained some important points you must know before you buy so that you invest in something you know instead of following the trend.

All Cryptocurrencies are centralized?

1.Not All Cryptocurrencies Are Fully Decentralized
While decentralization is a foundational principle of cryptocurrencies, certain aspects, such as mining and governance, can become centralized over time.

Bitcoin is designed to be decentralized, but mining is dominated by a few large pools like F2Pool, AntPool, and Foundry USA, which collectively control a significant portion of the network’s hash rate.

Ripple is not decentralized as Ripple Labs controls the majority of validators, token supply, and governance.

If they are decentralized then who verifies the transaction?

2. Miners Play a Critical Role in Transaction Verification
Miners validate transactions by solving complex mathematical problems in PoW systems. This process secures the network and rewards miners with newly minted coins.

Bitcoin miners use PoW to validate blocks.

How cryptocurrencies are getting generated? Does all the currencies are mineable?

3. Not All Cryptocurrencies Are Mineable
Some cryptocurrencies, like Bitcoin, have a capped supply, and mining becomes increasingly difficult over time, especially after “halving” events. Others, like Ripple (XRP) and Stellar (XLM), are pre-mined and distributed.
Bitcoin has a maximum supply of 21 million coins, and mining rewards are halved approximately every four years. This deflationary model ensures scarcity and drives value appreciation.

What is the mining Process?

4. There are varieties of options nowadays to generate cryptocurrency. The important processes are:

Proof-of-Work (PoW)
PoW requires miners to solve complex cryptographic puzzles to validate transactions. While highly secure, it is energy-intensive and less scalable.
Bitcoin uses PoW, where miners compete to solve mathematical problems, consuming significant computational power and electricity.

Proof-of-Stake (PoS)
PoS allows validators to confirm transactions by staking their coins, often criticized for potentially creating a system where “the rich get richer.” This is because PoS validators are chosen based on the amount of cryptocurrency they stake (lock up as collateral), which means those with more coins have a higher chance of being selected to validate transactions and earn rewards.

Ethereum 2.0 transitioned to PoS in September 2022 to reduce energy consumption and improve scalability.
Cardano has used PoS since its launch in 2017, enabling efficient transaction validation with minimal energy use.
Tezos and Algorand are other prominent PoS-based blockchains.

How do they maintain Security?

5a. Cryptocurrency Transactions Are Irreversible
Once a transaction is recorded on the blockchain, it cannot be reversed. This immutability provides security but also demands caution from users.
In Bitcoin, once a transaction is confirmed and added to the blockchain, it is irreversible, eliminating the risk of chargeback fraud. This feature is particularly useful for merchants but requires users to double-check transaction details.

5b. Crypto Wallets Rely on Cryptographic Hashing
Crypto wallets use cryptographic hashing algorithms to secure transactions and protect user data. These algorithms ensure the integrity and authenticity of transactions. Each block contains the hash of the previous block as well as the hash of its own block contents.

Is cryptocurrency transactions completely anonymous?

6. Cryptocurrency Transactions Are Pseudonymous, Not Anonymous
While transactions are recorded under pseudonymous wallet addresses, they are publicly visible on the blockchain. Privacy can be compromised if wallet addresses are linked to real-world identities.

Bitcoin transactions are pseudonymous, but tools like Blockchair or Chainalysis can trace transactions back to wallet addresses, potentially revealing user identities. Privacy-focused coins like Monero and Zcash offer enhanced anonymity.

7. Emerging Trends in Consensus Mechanisms
Beyond Proof-of-Work (PoW) and Proof-of-Stake (PoS), newer methods are being developed to make cryptocurrencies faster, more energy-efficient, and more decentralized. Here are some of them in simple terms:

Proof-of-History (PoH) — Solana: Think of it like a timestamped logbook. PoH records transactions in order before they are confirmed, making the system much faster.

Delegated Proof-of-Stake (DPoS) — EOS, TRON: Instead of everyone competing to validate transactions, token holders vote for a small group of trusted people (delegates) to do the job. This speeds things up and saves energy.

Proof-of-Authority (PoA) — VeChain: Instead of mining or staking, a few trusted individuals or companies are chosen to confirm transactions. This makes it fast and reliable for businesses.

Proof-of-Space (PoSpace) — Chia: Instead of using powerful computers, PoSpace lets users store extra hard drive space to help secure the network, making it more eco-friendly.

These new methods help solve issues like slow transactions, high energy use, and centralization in traditional cryptocurrencies.

8. The Role of Smart Contracts
Smart contracts are like digital agreements that automatically execute themselves when certain conditions are met. Instead of relying on a middleman (like a lawyer or bank), the terms of the agreement are written directly into code and run on a blockchain. This makes them secure, transparent, and tamper-proof.

9. The Rise of Layer 2 Solutions

Layer 2 solutions handle transactions off the main blockchain and then update the final results on the main network. This reduces congestion and makes transactions faster and cheaper.

Lightning Network: A Layer 2 solution for Bitcoin that enables fast, low-cost transactions.

Polygon: A Layer 2 scaling solution for Ethereum that enhances transaction throughput and reduces fees.

Other Points:

10a. Bitcoin’s capped supply of 21 million coins creates scarcity, which, combined with increasing demand, has contributed to its rising value. Similarly, Litecoin has a capped supply of 84 million coins.

10b.Environmental Impact and Sustainability
The energy consumption of PoW blockchains like Bitcoin has sparked debates about sustainability. Many projects are transitioning to PoS or exploring alternative consensus mechanisms to reduce their carbon footprint. Ethereum’s transition to Pos in Ethereum 2.0 is expected to reduce its energy consumption by over 99%.

10c. Regulatory Challenges and Adoption
Governments and regulatory bodies worldwide are grappling with how to regulate cryptocurrencies. While some countries embrace them, others impose strict regulations or outright bans.
El Salvador made Bitcoin legal tender in 2021.

10d. As of early 2025, there are over 9,000 cryptocurrencies in existence approximately. Some cryptos may have discontinued and some are still active.

As the crypto space continues to evolve, staying informed about these foundational concepts will help you navigate its complexities and seize opportunities in this transformative technology.

If you found this guide helpful, why not show some love? Give it a Clap 👏, and if you have questions or topics you’d like to explore further, drop a comment 💬 below 👇. If you appreciate my hard work please follow me. That is the only way I can continue my passion.