What is Cryptocurrency – Crypto Beginner’s Guide
The world of digital currency is currently not only a booming market but is also becoming more adopted into the mainstream as digital tokens become a more widely accepted means of payment. So what are cryptocurrencies? This article is cryptocurrency, explained. You’ll learn cryptocurrency basics and everything you need to know about cryptocurrency.
What is a Cryptocurrency?
A crypto currency, simply put, is a digital or virtual currency that is designed to operate as a medium of exchange. These coins are limited entries in a database, or network, that no one can change unless specific conditions are filled. In fact, the simple way to define a currency is that it is a limited entry that no one can alter. Cryptocurrency can be compared to money that exists in bank accounts, or to physical coins and notes. Money is about verified entry in a network that holds and keeps track of accounts, balances, and transactions; cryptocurrency follows just this.
Cryptocurrencies are so-called because the consensus-keeping process is ensured by cryptography. To define cryptocurrency is to understand that cryptography is used to secure and verify transactions, as well as to create new units, hence the word “Crypto”. These units are also known as digital coins, or digital tokens. The coins and tokens are the entries that are put into decentralized consensus databases, and they are secured not by people or by trust, but by math.
Within cryptocurrency networks, miners have the power to both confirm transactions and create new coins by solving cryptographic puzzles. Transactions are taken, marked as legitimate, and spread across the network, then every node adds them to the database. The miner receives a reward and transaction fees.
Cryptocurrencies are essentially digital gold. They are a sound form of payment that is secure from any political influence, and thanks to built-in defensives against inflation, they promise to preserve and increase their value as time goes on. They are a fast and comfortable means of global payment and are private and anonymous.
Every transaction that occurs is stored as a file on the blockchain and consists of both the sender’s and the recipient’s public keys (also known as wallet addresses), as well as the amount of coins transferred. Once completed, these transactions are irreversible, are publicly available, and are signed off by the sender with their private key. Eventually, the transaction is broadcasted within the coin’s network, once it is confirmed by an individual participant, a miner. This whole system is basic cryptography.
The first mainstream-adopted crypto currency, Bitcoin, was developed by Satoshi Nakamoto and operates on a decentralized, peer-to-peer (P2P) exchange system. Certain factors that are essential features of cryptocurrencies take away the need for third parties and blind trust; no central banks or governments can control or meddle with cryptocurrencies, which has contributed to their popularity. Not only do many people flock to the aspect of a coin that they have absolute control over, but cryptocurrencies are also globally accessible, as anyone can become involved as long as they have an internet connection.
Today, cryptocurrencies have become a global phenomenon that is being adopted by the masses. Governments, banks, and companies are very aware of its presence, promise and importance; cryptocurrencies no longer belong just to the world of geeks and computer coding. Instead, they are accessible and available to everyone, and currently, someone would be hard pressed to find a big accounting firm, a major bank, or software company that doesn’t have research on cryptocurrencies or involvement in a blockchain project. Blockchain technology is the technology that cryptocurrencies operate on; it is what allows them to be decentralized.
The market of cryptocurrencies is fast and fluctuates wildly. Every day, new coins are introduced and old or defunct ones disappear; users become wealthy, and investors lose money. Every cryptocurrency that is put on the market comes with promises that it is faster, more secure, and different. However, many coins don’t survive the first few months of their existence, and many users empty their wallets as they lose hope that they’ll ever see any returns on their high-risk investments.
The development and introduction of cryptocurrency created an incredibly dynamic and fast-growing market for both speculators and investors. Exchanges enable the trade of hundreds of coins, and there are websites where users can track the future and promise of coins they hold. Daily trade volume exceeds that of many major European stock exchanges. In this rich ecosystem, there is extreme volatility, which means that coins are high-risk investments. A coin can commonly gain 10 percent in one day, sometimes even 100 percent, but can lose all of that the very next day.
The Legality of Cryptocurrencies
An unfortunate, central concern for cryptocurrency is how it fits within legal frameworks. Some countries have outlawed digital currency, due to fears of hacking and the fact that some cryptocurrencies have been developed as schemes and scams. Cryptocurrency also often appeals to criminals and traders of illegal goods and services, as well as people involved in money laundering and tax evasion.
With the anonymity supporting cryptocurrency, it can be hard to confirm who is behind a coin and what their intentions are with it. Regulators are often uncomfortable with the fact that decentralized, self-sustained currencies don’t exist in any singular shape or form.
As of November 2017, Bitcoin and other digital currencies were officially banned in Bangladesh, Bolivia, Ecuador, Vietnam, and Kyrgyzstan. China soon followed suit, and Russia is on the verge of outlawing them as well. Laws and regulations surrounding digital currency can vary widely, depending on the country.
As cryptocurrency becomes more and more mainstream, global law enforcement agencies, legal regulators, and tax authorities are trying to understand the concept and how it fits in with existing regulations and laws. Once Bitcoin was introduced to the world, a completely new paradigm was created, and the impact of it spread far and wide. There have been many discussions and disagreements as to how to adapt to this new form of payment, and how to regulate it. The legality surrounding cryptocurrency is still currently under debate.
The History of Cryptocurrency
Although cryptocurrency experienced a boost in popularity and mass adoption in the 2010s, the first emergence of digital currency actually began during the 90s tech boom. Systems such as Flooz, Beenz, and DigiCash gave the world an introduction to cryptocurrency and emerged on the market only to fail due to fraud, financial problems, and internal issues. After these failures, the creation of a digital payment system was considered a lost cause for quite a while.
Notably, all of the systems utilized a Trusted Third Party approach; the companies behind the systems verified and facilitated the transactions. This means that the systems were centralized, which is the opposite of the decentralization that is a major aspect of cryptocurrency today.
The fate of cryptocurrency completely changed in 2009, when Bitcoin was introduced to the world. Either an anonymous programmer or group of programmers (how many people were involved has not been confirmed) under the alias Satoshi Nakamoto developed Bitcoin and reintroduced the idea of digital payment. Bitcoin was created as a completely decentralized, peer-to-peer electronic cash system. As a decentralized system, Bitcoin had no single, central controlling authority, and complete control over the digital token was given over to individual users.
Bitcoin represented a global solution to many of the problems that persisted with the original digital payment systems and inspired many people to learn about cryptocurrency. Instead of having a third party that served as a central authority, individual participants are relied on to do their job, and the only way Bitcoin continues to exist is with the support of its participants. Bitcoin also introduced blockchain technology—a public ledger that contains public data that reveals all the transactions that ever occur on the network. The blockchain holds every individual accountable for their actions with the digital token, and all records of balances and transactions are publicly available for anyone to check.
Essentially, any cryptocurrency network relies on the absolute consensus of all of its participants when it comes to the legitimacy of its balances and transactions. The blockchain comes with rules that are pre-programmed that prevent the network from falling apart.
Although early cryptocurrencies tried to stay on the market, Bitcoin was the first system that presented a viable solution to the world and had hundreds of people asking, “What is crypto currency?” In 2009, the market for digital finance changed forever, and now there have been hundreds and hundreds of digital coins that have been developed based on the example of Bitcoin.
Unique Features of Cryptocurrency: Transactional Properties
So, how does cryptocurrency work? The key to understanding cryptocurrency is the idea that cryptocurrencies were developed to be viable alternatives to a real-world currency such as dollars and gold. As part of a digital system, there are properties to cryptocurrencies that make them unique and different from other currencies. They are a permissionless, irreversible, secure, and anonymous alternative to traditional monetary means.
The properties of cryptocurrencies are best described by making a distinction between transactional and monetary properties. Transactional properties are features that involve transactions of digital tokens, and monetary properties are the features associated with cryptocurrency as an asset.
Transactions are Irreversible
After transactions are confirmed on the blockchain by a miner, they can’t be undone or taken away; transactions can never be reversed or meddled with. Banks, governments, or central authorities can never go back and claim the transaction never happened, or that the amount was different. Once money is sent, it is sent.
They are Pseudonymous
All transactions that occur on the blockchain and all accounts on networks, while connected to real-world identities, are promised to be anonymous. Users receive their coins using addresses, which are random-seeming chains of thirty characters. While it’s possible to analyze transaction flow, it’s not possible to connect identities with those scrambled addresses. Many coins promise complete anonymity, and users can conduct transactions and send money all over the world, without worrying about being revealed. While this makes cryptocurrency appealing, unfortunately, is also appeals to the crime community, and there have been many issues with criminals conducting their payments using cryptocurrency.
Fast and Global
All transactions, no matter which cryptocurrency a user is utilizing, are propagated nearly instantly. Thanks to miners, these transactions are confirmed in just a few minutes. Since networks are global, not only can anyone all around the world use cryptocurrencies as long as they have an internet connection, but physical location doesn’t matter and doesn’t have an impact on accessibility or use. Global networks also provide users with the opportunity to send tokens to someone on the other side of the world without having to meet them face-to-face, which leads to a worldwide system of trading and spending.
With digital wallets, cryptocurrency funds become locked in a cryptography system. Only the owner of the private key to these wallets can send their coins. Depending on the cryptocurrency, some networks are more secure than others, but a fundamental feature of all cryptocurrencies is that they have a high level of security, both with the assets themselves and with the identities of the users. Users need not worry that their personal information will be leaked, and they will always be in complete control of their finances.
Users don’t have to ask anybody, including governments or banks, for the opportunity to be able to use cryptocurrency. Absolutely anyone and everyone can download software, become a miner, install wallets, and send and receive digital tokens. As long as someone has access to the Internet, they can become an active user within the cryptocurrency community. There are also many platforms that allow people to safely and securely create their own, personalized digital currencies. Users have the option to send and trade tokens, or they can create their own token, and all of this is accessible.
Unique features of Cryptocurrency: Monetary Properties
To prevent inflation, which is a central issue surrounding real-world money and one of the aspects that cryptocurrency was originally developed to provide a solution to, most cryptocurrencies limit the supply of their tokens. Cryptocurrencies control the supply with a schedule written into the coding of the coin. In every given moment, the monetary value of the future can be calculated.
This means that miners can only create a certain amount, and networks will only support a limited supply. As demand for a coin increases, the value associated with the coin goes up. This not only prevents inflation but also presents a unique opportunity for investors to earn money if they obtain coins early and wait until the supply begins to dwindle.
No Debt but Bearer
Fiat money is created by debt and is based on a system of IOU. Traditional banks borrow money that is deposited by users; cryptocurrency doesn’t operate on this and doesn’t represent debt, only themselves and the actual monetary value of each and every coin. The best real-world comparison is gold. As money that has a limited, controlled supply that cannot be influenced by banks or any government, cryptocurrencies present a viable alternative to traditional monetary policy.
Bitcoin, as the first cryptocurrency that was introduced to the world and was built on reliable, decentralized technology, is the most famous coin and is a gold standard for the entire digital industry. Any cryptocurrency in existence is based off of this. After only nine years in existence, its price and transaction volume has increased exponentially. Bitcoin is considered as the intro to cryptocurrency for many people.
Ethereum is perhaps the second most popular cryptocurrency in existence. It was developed by crypto-genius Vitalik Buterin, and its blockchain doesn’t only validate accounts and balances but also validates complex contracts and programs. Ethereum is extremely popular because it was built with distributed apps and technologies that don’t work with Bitcoin. The flexibility makes Ethereum perfect for blockchain application, and many cryptocurrencies, in fact, rely on the Ethereum blockchain, or are ERC20-based tokens.
Litecoin was one of the first cryptocurrencies that was developed after Bitcoin, and has been tagged as the silver token to the digital gold Bitcoin. Litecoin is faster, with a new and different mining algorithm and a larger amount of available tokens. Litecoin was an innovation as the smaller brother to the most popular cryptocurrency. The coin is widely developed and traded around the world and is hoarded as a backup, in case Bitcoin ever fails.
While Ripple is less popular and disliked by many users, banks have enjoyed this cryptocurrency and have adopted it in an increasing pace. Ripple has a native cryptocurrency called XRP, however, the network processes more IOUs than the digital token itself. XRP also doesn’t serve as a medium to store and exchange value, but is more a token that protects the Ripple network against spam.
Unlike many other cryptocurrencies, Ripple also does not use blockchain technology to reach network-wide consensus for transactions. Often, XRP is not considered as a good store of value and is dissed as not a real cryptocurrency within the crypto community.
Monero is the most prominent example of the Cryptonite algorithm, an algorithm that was invented to add extensive privacy features that Bitcoin didn’t have; with Bitcoin, every transaction leaves a trail that can be followed by hackers. The Cryptonite algorithm was developed to disrupt that trail. While there are other incarnations of Cryptonite, Monero has achieved the most popularity. The coin’s popularity peaked in 2016 when several darknet markets accepted it as currency, and it contains one of the most active communities.
What You Can Do With Cryptocurrency
Buy Goods and Services with Cryptocurrency
The answer to how cryptocurrency works in real life is surprisingly simple. As cryptocurrency has increased in popularity and is becoming more and more adopted by the mainstream, it has become a lot easier to find merchants that accept digital tokens as a means of payment for goods and services. Many merchants, both online and offline, now accept Bitcoin. These merchants range from large online retailers such as Overstock and Newegg, to small local bars, shops, and restaurants. Bitcoin can even be used to pay for flights, hotels, jewelry, apps, computers, and even college degrees. Apple has also authorized over ten different cryptocurrencies as a viable payment on the App Store.
However, users need to be careful as to which cryptocurrency exactly they try to use to buy products. While Bitcoin is widely accepted, other digital currencies aren’t, and even popular ones such as Litecoin, Ripple, and Ethereum aren’t as adopted. Before spending cryptocurrencies, users should look into what’s accepted and where; there are marketplaces such as Bitify and OpenBazaar that accept digital tokens only, and gift card websites like Gift Off, which does accept over twenty different cryptocurrencies.
Crypto currencies offer a hot investment opportunity; indeed, there are stories about people becoming millionaires through their Bitcoin investments. In November 2017, the price of one Bitcoin exceeded $7,000. Ethereum is also a good investment; in May 2016, its value had increased by 2,700%. The earlier that users invest in coins, the better; they can mine or trade for the coins cheaply in the infant stages of a cryptocurrency’s existence, then as the coin increases in popularity and demand, each individual coin will be worth more. It should be noted that depending on the jurisdiction that a user lives in, they may need to include cryptocurrency in their tax report, whether they have made a profit or a loss in their investments.
However, while the rewards may be worth it, cryptocurrencies are high-risk investments. Their market value consistently fluctuates, often extremely. There are risks of hackers, and since the coins are unregulated by any central parties, there are always risks that they will become outlawed in certain jurisdictions. While someone may earn millions, they could potentially also lose their entire investment in one day.
As with any other investment, users need to pay close attention to the market value of any cryptocurrency they have obtained, and follow any related news. There are many websites that do just this; Coinmarketcap.com is a popular one that offers a one-stop solution for looking at the price, circulation supply, volume, and market cap of many cryptocurrencies that are on the market.
Accept Cryptocurrencies as Payment
Business owners may find access to millions of potential new customers worldwide, if they begin to accept cryptocurrencies as payment. Cryptocurrencies give customers from across the world the opportunity to buy products and services, and the best time to get involved is now, since the interest and mass adoption of cryptocurrencies has never been higher and will likely increase. Accepting digital tokens is exactly the same as accepting any gold, gift cards, or cash.
Payments can be accepted using touchscreen apps, hardware terminals, or wallet addresses through QR codes. There are also a wide range of services that can accept cryptocurrency payments, such as CoinPayments, which currently accepts over 75 different digital currencies. There are other popular services such as BitPay, Cryptonator, and CoinGate.
How to Obtain Cryptocurrencies
Trading on Cryptocurrency Exchanges
There are several exchanges available where users can either trade the cryptocurrencies they already have for others, or they can use fiat money such as US Dollars to buy coins directly. Popular exchanges include BitStamp, Kraken, BitFinex, and Cryptopia. While it’s very easy to buy Bitcoins, since they are the most popular cryptocurrency, others aren’t as easy to acquire. As digital currency becomes more adopted into the mainstream, this situation is slowly improving and access to all cryptocurrencies is becoming more readily available.
On top of trading on exchanges, there are several other different ways to begin obtaining coins. Users can trade face-to-face, or in real life, with a seller. Or, Bitcoin ATMs are also becoming more popular and there are many ATMs globally that will accept fiat money, and in return give cryptocurrency.
To learn cryptocurrency, mining is another concept that must be understood. Mining is another kind of investment in digital cryptocurrency. It is the single most important part of any network, as those networks are supported by the active participation of miners. Anyone and everyone can become a miner; since cryptocurrencies are decentralized, they rely on task delegation and the prevention of one ruling party. Miners find a hashing algorithm, which is the basis of a cryptographic puzzle, and when the puzzles are solved, a new block is added to the blockchain. This is the only way to create valid digital tokens.
As a miner, individual users solve cryptographic puzzles, which are necessary to confirm transactions and record them in the blockchain, and provide a computing power service for cryptocurrency communities. The difficulty of those puzzles increases as more people try to solve them, so the more popular a cryptocurrency is, the more difficult the process becomes. This creates a competitive arms race that rewards early adopters; the sooner someone becomes involved, the higher the rewards they reap.
The more computing power an individual miner can accumulate, the more chance they have of solving a cryptographic puzzle. Once a puzzle is solved, the miner receives a reward in the form of digital tokens, and get a percentage of the transaction fees. Many cryptocurrencies have hard caps on the supply of their tokens, so as more tokens are mined, the reward decreases.
While some cryptocurrency can be mined using common computer software, other coins, such as Bitcoin, can only be mined using industrial-grade hardware that incurs huge electricity bills. Given this, many alternative coins have been developed that are more user friendly, and environmentally friendly. Some of these coins have puzzles that are made for beginners and are less difficult, require less power, or are more cost-effective.
On top of the cryptographic puzzles, miners are also responsible for confirming transactions. Confirmation is a critical aspect to digital finance; once a transaction occurs, it sits pending on the network, and after a certain amount of time, it becomes available to be confirmed. As soon as it can be confirmed, the transaction is set in stone and is on public record in the blockchain. Only miners can confirm transactions and timestamp them; this is part of their job. They are rewarded with tokens for confirmations as well.
How to Store Your Cryptocurrencies
Unlike traditional currencies, cryptocurrencies are digital, which means that it requires a completely different approach for storing. Many individual cryptocurrencies have digital wallets that are available for download from their websites. These digital wallets will allow users to hold and store coins for as long as they need to or wish to, and should be compatible across many different devices and operating systems.
All major exchanges also offer wallet services, however, while it’s convenient, it’s best to store assets in a wallet on a hard drive; this is the most secure and private way of controlling coins, and having control over all assets. This method is also known as having a “cold”, or offline, wallet.
The Future of Cryptocurrency
The world has been asking, “What’s cryptocurrency?”, and digital finance has answered. Out of everything from cryptocurrency’s background, the most exciting aspect of cryptocurrency is that it is a global example of what can be done with digital assets, and shows all the different ways that the internet and the digital world can be applied to real-world transactions and businesses. Digital currency may be a cheaper and more accessible option for payment to many people around the world, as they don’t need to have a physical presence in order to conduct transactions, and all they need is an Internet connection.
The decentralization of cryptocurrency may also be a key aspect of future finance. With the removal of any central authorities, all power is put into individual hands, and many people like the idea of having complete control over all of their assets. Blockchain technology could possibly replace the function of treasuries, banks, and even governments. This is an idea that appeals to many people.
Bitcoin represented a remarkable cryptographic achievement and for the first time, presented a viable digital payment system. Since 2009, cryptocurrencies have taken over many markets and continue to grow every day. What is crypto? Crypto is a revolution has been introduced to the financial industry. Banks and governments are losing the control they have, and individual users are granted the freedom and control they haven’t had before over their own assets. Cryptocurrencies are here to stay—and they are here to change the world forever.