Cryptocurrencies for dummies
So what is a cryptocurrency?
The crypto world is incredible and well worth the buzz that is surrounding it. Whether you believe in it or not, you are seeing unprecedented global transition, fuelled by the need for more and better access to more advanced, quicker, and secure financial operations. It's an exciting moment!
Like it or not, blockchain is almost everywhere these days, and it's no longer just for enthusiasts and professional investors.
It's for everyone.
A growing number of traditional businesses are incorporating blockchain into their services or using it to introduce new goods.
Quick facts about cryptocurrencies
- Cryptocurrency is the sort of a currency that uses digital files as money.
- Cryptocurrency is a digital commodity that uses blockchain technologies to operate.
- Cryptocurrency is a digital currency that doesn't exist in the real world. It's not like EUR or USD which you can actually touch. Cryptocurrency exists only digitally.
- Cryptocurrencies run on blockchain. Blockchain is how all Bitcoin transactions are stored in a ledger. It's a chain of blocks that all contain transaction times, amounts, dates and all other information.
- Cryptocurrencies are created through digital cryptography.
- The biggest selling factor of cryptocurrencies is the fact that they are decentralized - this means that compared to fiat currencies like USD the governments have no direct control over them.
- Demand, supply, and utility all play a role in determining the valuation of cryptocurrencies.
- Bitcoin isn't the only kind of cryptocurrency out there. There are thousands of different cryptocurrencies.
- Cryptocurrencies can be purchased through cryptocurrency exchanges.
- While some cryptocurrencies have infinite supply, such as Ethereum, the supply of some currencies such as Bitcoin is limited. In case of Bitcoin it's 21 million coins. And the less coins are left to mine, the harder it gets to mine them.
- New cryptocurrencies are created every month
The beginning
The first ever cryptocurrency to see the light of day is Bitcoin.
Bitcoin is the first decentralized cryptocurrency and it was created back in 2009 by a person or persons hiding behind the name Satoshi Nakamoto.
In 2011 Bitcoin was followed by Namecoin (NMC )and Litecoin (LTC). While Litecoin is still a very popular cryptocurrency, Namecoin is essentially dead with just around $15 000 - $100 000 worth of NMC's being traded daily.
What exactly is a cryptocurrency?
Cryptocurrency is a form of decentralized digital money that uses blockchain technology to operate.
There are over 5,000 different cryptocurrencies in operation.
Most known cryptocurrencies are still Bitcoin, Litecoin and Ethereum. Lately also a number of other cryptocurrencies have made waves – cryptos such as Dogecoin (DOGE).
Although people invest in cryptocurrency the same way as they would invest in other options such as securities or precious metals, cryptos are not just for trading anymore. Day by day you can find places where you can actually use cryptocurrencies to buy something.
So while it doesn't exist in "real world", you can already use it to buy products and services for cryptocurrencies or even gamble using cryptocurrencies.
Although cryptocurrency is a novel and thrilling asset class, investing in it involves also a lot of risk.
And the risk doesn't go anywhere even if you do a lot of homework to completely comprehend how each framework functions.
Although we still do recommend you get acquainted with any cryptocurrency before you decide to buy it.
In general, all cryptocurrencies have the following features:
- Cryptocurrencies are transferred electronically from one user to the next.
- All cryptocurrencies are sort of similar. They are easily transferable across countries and through national boundaries.
- All cryptocurrency transactions are securely encrypted.
- There are no restrictions for who may use cryptocurrencies or for what purposes.
- There are no banks in the cryptocurrency environment. All cryptos have control over their own capital, which is not held in a bank.
- Because of the way cryptocurrencies are designed, you don't have to trust anybody in the system to make everything function.
How do cryptocurrency work?
Cryptocurrencies use blockchain, an online database and transaction tracker, to keep track of their own records.
Blockchains generate digital records - such as transfers, credentials, and contracts that can only be added to, not altered or erased.
Crypto-converts argue that this independent transaction ledger is much more reliable than paper records or administrative digital accounts, which can be compromised.
The data of both the buyer and the seller is saved as a "hash," which is a string of letters and numbers created by a complex mathematical function.
Since each hash is connected to the one before it, any unauthorized updates to the ledger will be visible as soon as a hash is changed.
The community is transformed into a "block," which is attached to other blocks on the server until it exceeds a certain number of hashes, thus the name "blockchain."
In case of Bitcoin, the blockchain is modified every ten minutes and processed on a variety of servers around the world.
Cryptocurrencies function in a closed structure, which means that there is usually a finite number of them and that new units can only be generated according to a set of rules.
Some currencies, including Bitcoin, have a software-imposed limit on the number of units that can be produced.
Because of the small supply, each unit becomes more valuable, particularly as the currency becomes more common among traders.
Cryptocurrency Fundamentals
You should be familiar with the following technology and concepts in order to comprehend cryptocurrency:
Cryptography
Cryptography is a way of encrypting and decrypting data, to guarantee the protection of user data and secure transactions.
Blockchain
A blockchain is a decentralized database that underpins most cryptocurrencies, non-fungible tokens (NTFs) and other one-of-a-kind digital products.
While blockchain can be used to store any kind of data, it is currently most commonly used to record cryptocurrency transactions.
If a transaction is completed, it is recorded on this public ledger, which is maintained by a decentralized peer-to-peer network.
Decentralization
Decentralization, as seen in Bitcoin, ensures that all administrative control is spread to all peers on a network, with no single point of failure.
To "hack" Bitcoin, for example, anyone will need to gain access to at least 51% of the vast network of Bitcoin-running machines, which is a difficult job.
Peer-to-peer (P2P)
Users can escape the high processing costs associated with more conventional money transfer networks by using these transactions, which have relatively low subscription rates that go to paying the network.
What factors influence the price of cryptocurrency?
Simply put, the valuation of cryptocurrencies is determined by three factors: supply (scarcity), demand, and use (utility).
Its price, like many other products, is dictated by market supply and demand.
Types of cryptocurrency
Cryptocurrency has the potential to function like physical and tangible money, but it does so in the form of digital money that is not controlled by any government or any centralized banking structure.
Cryptocurrency is an actual commodity of the modern era that has no banks, government, or any other middleman involved.
Despite the fact that both types of coins come under the general definition and concept of crypto, there are two kinds of cryptocurrency: altcoins and tokens.
Altcoins
Alternative coins to bitcoin are known as altcoins. These cryptos include namecoin, peercoin, litecoin, dogecoin, and auroracoin, among others.
Since its introduction in 2011, Namecoin has been regarded as the first cryptocurrency to refer to itself as altcoin.
Tokens
While cryptocurrencies have their own blockchain, crypto tokens are actually built on already existing blockchains. This means that tokens are easier to create.
And as tokens live in someone else’s blockchain, they benefit from the blockchain’s tech.
All tokens are based on some crypto coin.
For example there are Ethereum based tokens, Tron based tokens and so on.
Is investing in cryptocurrency a good idea?
You must ask yourself whether it fits with your financial interests, your financial well-being, and whether it’s worth the cost, just as you would with any other form of investment.
Investing in cryptocurrencies is very speculative, and the industry is completely decentralized.
For the time being, the future of cryptocurrencies is unknown; we do not know if it will become universally adopted in the near future or not.
While some US merchants allow Bitcoin as payment, other countries, are considering outlawing Bitcoins and fining anyone who holds them.
As a result, you must consider if you can afford to lose your investment if cryptocurrencies are not universally embraced as anticipated.
At the same time, now in 2021 we can say fairly surely that cryptocurrencies are here to stay.
The only question is in what form exactly and which cryptocurrencies will be leading the way.
Benefits of using cryptocurrencies
- Transactions are faster and cheaper – a crypto transfer is relatively simple and straightforward. There are no agents, brokerage fees, commissions, or additional fees, allowing for a quick, simple, and inexpensive transaction.
- Private and secure transactions – every cryptocurrency transaction is secured, protected, and virtually anonymous.
- Fast global trade – trades that used to take days or weeks can now be done in seconds thanks to cryptocurrency. The waiting period for money transfers is shortened and they are online deposits that do not need to be transferred from one bank to another, regardless of where you are based.
- A rising financial opportunity – it's been a long time since Bitcoin arrived, and there are now thousands of altcoins.
If the digital currency adapts to the needs of the our society, this sector can only expand in the future. A lot of these coins are now in use and in circulation, and anyone interested in investing would have a fantastic investing opportunity.
Things to consider before investing in cryptocurrencies
There are three main threats associated with cryptocurrency:
- It is completely decentalized. The fact that crypto marketplace is private and uncontrolled has sparked concerns about the kinds of taxation levied on profits or losses, as well as the asset's capacity for manipulation.
- It doesn't happen in the real world. Crypto is often compared to blinker light oil, but it isn't the same thing. It's not a tangible commodity like gold or other precious metals. It is not a portfolio or a bond that represents a portion of a business. Cryptocurrency is not written or minted in the same manner as traditional currency is. As a result, it has little intrinsic worth except its exchange value, making it inherently speculative.
- It is highly volatile. Cryptocurrency markets fluctuate greatly, often 10 to 100% in a matter of hours.
Where to buy cryptos?
- For starters, the exchange needs to be trustworthy.
- Secondly, the exchange must accept traders from your country.
- Thirdly, the exchange needs to have a good crypto selection or at least the cryptos you want to buy.
- Fourthly, the exchange should offer the payment options you're looking for.
- Fifth, the exchange should have low crypto trading fees.
Best exchanges to buy cryptocurrencies
- Binance - best for beginners, good payment options, good crypto selection, low fees
- Gate.io - Great selection of altcoins, low enough fees, simple enough interface
- Kucoin - Good selection of altcoins, low fees
Conclusion - to crypto or not to crypto
The days when cryptocurrency was just a fad are long gone. And signs show cryptocurrencies are here to stay.
Not only can they make transactions more available, but they can also make banking processes more secure, since cryptocurrency systems are secured and made spam- and hack-free.
I became interested in cryptocurrencies only a bit more than two years ago. Since then I have been in investing in cryptos using different exchanges. And I also launched Cryptolorium.com when I started trading, just to share my crypto journey and my results.