For those unaware of the intrinsic value of cryptocurrency, it’s nothing more than a hype. However, it is a digital godsend for those who know just how much potential the currency (and trading it) holds.
In this beginner’s guide, we take a look at what Cryptocurrency is, how it works, what blockchain is, what NFTs are, and what the pros and cons of crypto really are.
You will also learn how you can buy cryptocurrency and keep it safe.
What is cryptocurrency?
The first thing most newbies to the digital investment world want to know is what cryptocurrency really is…
In short, cryptocurrency is virtual currency or digital currency.
While coins such as Bitcoin, Litecoin, Ethereum and similar are called cryptocurrency, a regular currency backed by the government is called fiat currency. Fiat currency is, therefore, coins and banknotes).
While there is a certain amount of fear surrounding the legitimacy of cryptocurrency, it is nearly impossible to double-spend or counterfeit as it is secured by cryptography. In cryptography, a private key, a secret number used to prove ownership of blockchain addresses, is used to secure transactions. Cryptography also uses public keys, which are codes allowing users to securely receive currency into their crypto account without sharing their private details.
According to Investopedia, cryptocurrencies are set apart from traditional currencies, most commonly used by the public because they are not issued by central authorities, which means they cannot be manipulated by the government.
It is a technology that sets cryptocurrency apart from the world’s mainstream currencies.
While you cannot use cryptocurrency like traditional money (like the pound or the U.S. dollar, for instance), it is expected to become more mainstream and then work similarly to traditional non-crypto currency money.
Cryptocurrency is set to change the financial industry because the average payment system such as credit cards and wire transfers are outdated. Banks are just like go-betweens and take a cut of all of your money; banking systems are slow, and around half the world’s population doesn’t have access to financial services. Cryptocurrencies are set to change all of that.
A quick look at crypto history will show you that Bitcoin was the world’s very first Cryptocurrency even though digital currency creation was attempted many times prior to it. Bitcoin was the very first coin to be released on the first blockchain developed by Satoshi Nakamoto in 2008 and no one had any idea how big it would grow to be.
Satoshi Nakamoto described Bitcoin as peer-to-peer electronic money. The next thing you might be wondering is how crypto is created. The short version is that cryptocurrency is mined but not in the way you would mine coal or diamonds. Instead, the mining process requires a large number of extremely powerful computers to solve a batch of very complicated problems.
Until 2011, Bitcoin was the only cryptocurrency available, but that soon changed. Bitcoin was the only cryptocurrency until people started noticing its flaws. And when the flaws were exposed, the world experienced the birth of alternative coins called altcoins such as Litecoin, Namecoin, and later Ethereum. Altcoins improved Bitcoin in the following ways:
Now, there are thousands of cryptocurrencies available, with new digital assets hitting the market rapidly. At the start of 2022, when this beginner’s guide for crypto was created, cryptocurrency dominated over $1.4 in total market cap (market capitalisation).
How does cryptocurrency work?
Understanding how cryptocurrency works are essential before you leap into the commitment of investing in digital currencies. Below are a few pointers on how cryptocurrency actually works.
- Cryptocurrency is run on a blockchain. Blockchain is a distributed public ledger that records all transactions of currency owners, making it hard to hide transactions and exchanges.
- Cryptocurrency is created using high-powered computers to solve a series of complex mathematical problems in order to create coins – this is called mining.
- Currency, or financial assets, can also be bought from brokers and stored – this currency can be kept in a cryptographic wallet. With the right wallet, investors can have greater peace of mind that their currency is protected.
- Buying and owning cryptocurrency means that you won’t have any physical money to hold. This means that digital money is not tangible. Instead of owning tanging money, you own a key allowing you to move a certain unit of currency without the need for a bank or other financial institution when you own cryptocurrency.
- To spend cryptocurrency, you can transact with traders who specifically accept cryptocurrency. They will provide you with a public key, allowing you to transfer a certain amount of crypto to their account.
- Some debit card companies will allow you to link your cryptocurrency to a card.
- Suppose you want to transact with a trader who doesn’t use cryptocurrency. In that case, you will need to sell your cryptocurrency in exchange for traditional currency (U.S. dollar) and then transfer the funds into your bank account. Once the money hits your bank account, you can spend it as you wish.
Watch this YouTube video on how cryptocurrencies actually work using algorithms.
In the world of cryptocurrencies, there are various popular cryptocurrencies and altcoins from which to choose. So instead of reading a white paper on them to learn more, here’s what you need to know in a nutshell:
Bitcoin: Bitcoin was created by Satoshi Nakamoto (an unidentified entity) in 2009 and is still the world’s most commonly used digital currency. Bitcoin is not backed by any banks or governments and each coin is not a tangible item but rather a digital representation of your financial assets. A quick look at Bitcoin exchanges will show you that it is the most valuable crypto coin on the market today.
Ethereum: Ethereum or ETH (Ether) is the second most popular cryptocurrency in the world. This is a blockchain platform with its own cryptocurrency. Ethereum’s blockchain technology is known to be more robust than Bitcoin’s. While Bitcoin is only a currency, Ethereum is ledger technology, too – this can be used to create new programs.
Litecoin: Charlie Lee, a former Google engineer, developed Litecoin (LTC) in 2011. It is the currency that is the most similar to Bitcoin, which makes sense as it was derived from Bitcoin’s original code, which was of, course, open-source. Litecoin has a faster block generation rate than Bitcoin and is often considered by serious investors.
Ripple (XRP): Ripple was founded in 2012 by Ripple Labs Inc in the USA and is a distributed ledger system.
Ripple is different from other altcoins because it has worked with several banks and institutions. This is because it is not just a cryptocurrency. It is also a currency exchange, remittance network, and real-time gross settlement system – as such, Ripple can be used to track all kinds of financial transactions.
What is blockchain?
If you’re interested in cryptocurrency and are looking around for information, you will undoubtedly come across mention of blockchain, so what is it?
Blockchain functionality aims to create trust in terms of financial transactions and record-keeping. The system records information specifically, making it almost impossible to cheat, hack, or change. It does this by acting as a digital ledger of multiple transactions that are duplicated and then distributed across an extensive network of computer systems on the blockchain.
Every block on the chain contains the information of a certain number of financial transactions. A record is added to every participating member’s ledger when a new transaction is processed. This makes it a decentralised database is known as a DLT (Distributed Ledger Technology). Blockchain is a variation of a DLT. Transactions are recorded within it with a cryptographic signature attached. The signature is called a hash, and the hash can be used to secure the currency.
For a simple yet in-depth explanation of blockchain, check out this YouTube video here.
How can you buy cryptocurrency?
Cryptocurrency investing for dummies is easier than you think. All you need to have is a connected internet device (mobile phone, computer or laptop) and access to crypto trading platforms.
Crypto exchanges may seem daunting to the beginner, but they are really just software and applications that provide you with access to a virtual wallet for your crypto assets. The assets, of course, are the coins or altcoins you choose to invest in.
Simply download the cryptocurrency exchanges software and set up your account. You will be required to provide your personal particulars, and if you wish to fund your account, you will need to link the cryptocurrency wallet to your bank account or debit/credit card. Simply deposit fiat currencies into your account (U.S. dollars, pounds, or whatever currency you are using) and purchase the coins and altcoins you’re interested in.
When investing in cryptocurrency, keep in mind that the cryptocurrency market isn’t regulated and has no set standards, which means that some cryptocurrency exchanges may not support all currencies, and the cryptocurrency prices you are offered may vary from one exchange to the next.
For a quick way to get started when you want to buy cryptocurrency, follow these steps:
- Choose a cryptocurrency platform – Kraken, Coinbase and Gemini are great platforms to look into.
- Prioritise risk management assessment before choosing deciding which platform is best. Make sure that you only invest money you can afford to – don’t go into debt for your cryptocurrency investment.
- Set up your cryptocurrency account and fund it. You will sometimes find that trading platforms charge less for bank transfers than they do for card transactions. Funding your account doesn’t mean that you have bought cryptocurrency. You still have to buy the actual coins.
- Order the coins and altcoins you want to invest in. This is typically different from one platform to the next but requires you to input how much of a particular coin you wish to purchase by putting in the equivalent value you want to spend in fiat currency.
- Secure your digital coins. You can leave the coins on the crypto exchanges platforms you choose to use, but it’s a better idea to transfer the currency to a secure cryptocurrency wallet. Leading cryptocurrency wallets offer various levels of security.
Alternative ways to buy cryptocurrency include purchasing via the following platforms – be aware that not all platforms will allow you to transfer your coins to a wallet.
Advantages and Disadvantages of Cryptocurrency
Using cryptocurrency comes with its pros and cons. Let’s shine a light on the advantages and disadvantages below.
Using cryptocurrency can be advantageous for businesses and individuals in many ways. Here are a few reasons why:
- Transactions are quick and straightforward – all you need is a computer or smartphone.
- Blockchain provides added peace of mind that people cannot spend illegitimate coins, make copies, or reverse transactions as every transaction is recorded in a public list.
- There are no payment processing costs as there are no central banks or financial services involved.
- Many retailers are starting to accept cryptocurrencies, meaning you can spend your money in more convenient ways. The fashion and pharmaceutical sectors are showing the most growth with this.
Below are the disadvantages of the implementation of cryptocurrencies:
- Cryptocurrency is high risk as you could lose your virtual wallet and lose your digital currency.
- Hackers periodically target storage sites for cryptocurrency.
- There’s volatility in the crypto market, and as such cryptocurrency prices can fluctuate.
- Cryptocurrency platforms are not central banks and, therefore, not regulated by the FCA (Financial Conduct Authority). This leaves business investments at risk.
- Potential cryptocurrency investors could be scammed. Sometimes scammers lure investors in via social media and turn out to be high-risk scams. It’s important to investigate all opportunities before jumping right in financially.
Where do I keep my cryptocurrency?
Some digital money investors have no idea that there are several ways to store their cryptocurrency. Whether you are investing your own money in cryptocurrency or have received ICOs (initial coin offerings are when a company raises funds with cryptocurrency and gives investors digital money in return for their fiat finance investment), you need to think of how you keep your cryptocurrency safe.
Many first-time crypto investors have no idea that more secure cryptocurrency storage options exist. You can store your money in a cryptocurrency wallet, a digital wallet that is either web or hardware-based.
Cryptocurrency wallets can be on a computer or mobile device for safety. Each wallet has a private key that is used to access the account. If you lose this key, you cannot get your currency back.
Consider the following cryptocurrency wallet options for storing your digital money:
- Hot Wallet
A hot wallet is a cryptocurrency wallet hosted on your computer, tablet, or mobile phone. This can be risky because the wallet generates private keys to access your coins directly to the device you are using. Hot wallets are convenient, but they lack security. As such, they are not the go-to wallet for people wanting to store large quantities of cryptocurrency.
- Cold Wallet
Cold wallets are considered the safest type of cryptocurrency wallet. This type of wallet is an offline wallet for all intents and purposes as it is not connected to the internet. Software that comes with the wallet enables users to view their coins without risking the safety of their private key.
- Physical Coins
Some services allow investors (especially Bitcoin investors) to purchase physical coins. These are provided with a tamper-proof sticker.
What is NFT?
NFTs are non-fungible tokens. In short, they are digital assets that are bought and sold online using cryptocurrency. Learn more about how cryptocurrency works here. They are typically encoded with the same software as crypto is. NFTs hit the market in 2014 but are only now growng in popularity as they are used for buying and selling digital artwork.
Cryptocurrency and fiat finance are considered fungible. This means you can trade one for the other. They are also equal when it comes to value. For instance, one dollar is worth one dollar, and one Ethereum is worth one Ethereum.
Non-fungible tokens work quite differently from regular cryptocurrencies. Each NFT has a digital signature attached, making them each uniquely valued. One NFT won’t be the same value as another.
Like cryptocurrencies, NFTs exist on a blockchain (remember, this is a public record of all transactions). NFTs are created from digital objects, including the likes of collectables, GIFs, artwork, videos, music and more.
Is cryptocurrency safe?
Keep in mind that the central institutions won’t protect your crypto investment, so you could lose your investment if your account is compromised. Only invest what you can afford (don’t go into debt for your investment).
Look for cryptocurrency exchanges that provide offline cold storage and offer various strong password protections to ensure theft is not a risk; if the crypto assets exchange offers an independent insurance policy, even better.