A Beginner’s Guide: What is the point of Cryptocurrency?

Despite their volatility, cryptocurrencies offer enough benefits to make widespread adoption inevitable. Large companies like PayPal have even started accepting cryptocurrencies, allowing millions of customers to buy and sell crypto with the click of a button.

What makes digital currency so lucrative? You’re about to find out.

This overview takes a look at what crypto is, how crypto generally works, what blockchain is, how to buy cryptocurrency, how to mine crypto, what NFTs are, and how to choose the right cryptocurrency for you.

What is cryptocurrency?

Cryptocurrency refers to the various encrypted, decentralised digital currencies such as Bitcoin. Think of them as virtual currencies that only exist digitally with a different underlying infrastructure than traditional currencies (also known as fiat finance).

While government-based currencies require you to have a bank connection or ATM to get more of it or make transfers, cryptocurrencies allow you to get rid of such intermediaries. Cryptocurrencies rely on blockchain technology which has no central bank or authority.

Blockchain at its simplest is a shared ledger or database which allows access and writing permission for anyone to verify transactions. Transactions are encrypted with an unhackable algorithm using cryptography, making them highly secure and enabling the name cryptocurrency.

Anyone can check the ledger at any time, everything is encrypted, so you need a key for a ledger slot to make sense of what you’re looking at, ensuring the system remains secure and public.

Developers release new coins as a ‘white paper,’ a business proposal for prospective investors. New coins used for crowdfunding are called Initial Coin Offerings (ICOs).

The first-ever cryptocurrency was Bitcoin. It was the first product of the first blockchain developed by Satoshi Nakamoto in 2008. Since then, cryptocurrencies have increased, with over 10,000 cryptocurrencies now available.

How does cryptocurrency work?

Transactions in cryptocurrency are sent between peers using software called cryptocurrency wallets. You use the wallet to transfer balances from one account, referred to as a public address, to another during a transaction.

You’ll need to have a password or private key associated with the account to transfer funds. Peer transactions are encrypted, broadcast to the crypto’s network, and queued up for addition to the public ledger.

You can download and run a copy of a full node wallet software to access the ledger of a given cryptocurrency if you want, as opposed to holding your coins in wallets like Coinbase. Transactions get added simultaneously to create ‘blocks’ added sequentially by miners, creating a ‘chain’ of ‘blocks’ of transactions.

While most cryptocurrencies like Bitcoin work this way, some like altcoins use unique mechanics, some offer fully private transactions, and others don’t use blockchain at all.

Investing in a digital currency offers unique benefits like low transaction fees, protection from inflation, and anonymity by eliminating a central authority.

Remember, cryptocurrencies come with their risks, and you must gain the necessary know-how before investing. Beginners guides like Cryptocurrency Investing For Dummies by Kiana Danial can provide the required knowledge.

Bitcoin mug

What does “blockchain” mean?

The blockchain is a distributed database shared among nodes in a computer network. It’s a decentralized distributed ledger of records or transactions. Many transactions are added to the ledger at once in groups to create blocks. These blocks of transactions are then added sequentially by miners.

It creates a chain of blocks of transactions, giving the ledger and the technology behind it the name blockchain.

How does blockchain work?

The blockchain is like a bank ledger that holds a record of transactions and balances. Blockchain technology allows digital information to be recorded and distributed but not edited.

When crypto-assets or digital assets transactions occur, the transaction is sent out to all users hosting a copy of the blockchain. Users called miners attempt to solve cryptographic puzzles through software that allows them to add blocks of transactions to the ledger.

Miners who solve puzzles get rewarded with newly mined coins plus the fees paid by those who created the transactions. The algorithm relies on consensus, and at times miners can pool computing power and share the new coins.

Blockchain technology achieves decentralized trust and security in various ways. If most users attempting to solve the puzzle submit similar transaction data, the algorithm confirms that the transactions are correct. New blocks are also stored linearly and chronologically, meaning they’re continuously added at the end of the blockchain.

Through cryptography, each block links the data in the last block through one-way cryptographic codes called hashes. It makes tampering with the blockchain almost impossible.

Hash codes involve a mathematical function that turns digital information into a string of letters and numbers. Any edit on the data changes the hash code as well.

The challenge of cracking cryptographic puzzles, the reward of new coins, and the resources required to tamper, fake consensus, or add incorrect data to the blockchain help protect it against bad actors like hackers.

How do you buy cryptocurrency?

Obtaining cryptocurrencies is almost similar to getting other currencies but with a few key differences. There are usually three steps involved, which include:

Step 1: Choose a platform

You first need to decide which platform you’re going to use, and you can generally choose between a dedicated cryptocurrency exchange or a traditional broker.

  • Cryptocurrency exchange – You’ll find many cryptocurrency exchanges to choose from. They usually offer standard trading platforms where buyers and sellers meet to trade crypto. Each offers different cryptocurrencies, account options, and wallet storage, many charging asset-based fees.
  • Traditional brokers – These usually include online brokers who offer you ways to buy and sell cryptocurrency and other financial assets like bonds, stocks, and exchange-traded funds (ETFs). While brokers can help reduce the complexities involved and lower trading costs, they offer fewer crypto features.
    As you make your selection, consider the fees charged, the cryptocurrencies on offer, the security features, withdrawal options and storage, and any available educational resources.

Step 2: Adding funds to your account

After choosing an appropriate platform, you’ll need to sign up or open an account and fund it so you can start trading. Most brokerages and crypto exchanges will allow you to purchase crypto using government-issued or fiat currencies like the British pound, US dollar, or the Euro using their credit or debit cards.

Purchasing crypto using credit cards is considered risky. Some credit companies also do not support crypto transactions because of their high volatility while others impose high fees for crypto transactions.

You may also find platforms that accept wire transfers and automatic clearing house (ACH) transfers. The time for deposits and withdrawals and the payment methods accepted may differ depending on the platform. The time needed to clear deposits may also vary depending on the payment method you use.

Keep in mind the fees, including potential withdrawal and deposit transaction fees, plus any trading fees. You need to research the costs from the outset because they can vary depending on the platform and payment method.

Step 3: Place an order

You can start to trade cryptocurrency once you have money in your account by placing an order through the exchange or broker’s web or mobile platform.

You can purchase different types of cryptocurrencies by selecting the buy option, choosing the order type, the number of cryptocurrencies you wish to purchase, and confirming the order. You’ll also use the same process when you want to sell cryptocurrencies.

Other ways for cryptocurrency investing include using services like Venmo, PayPal, and Cash App, which allow users to buy, hold or sell cryptocurrencies. You can also use investment vehicles like:

  • Bitcoin Mutual Funds provide different Bitcoin EFTs and mutual funds to choose from.
  • Bitcoin trusts allow you to buy Bitcoin trust shares using a regular brokerage account. They provide retail investors with exposure to the cryptocurrency market through the stock market.
  • Blockchain ETFs or stocks allow you to indirectly invest in crypto through blockchain companies specializing in the technology behind crypto and crypto transactions. You can also buy ETFs or stocks of companies using blockchain technology.

You can choose a suitable option for you depending on how much you wish to pay based on cryptocurrency prices, your investment goals, and whether you’re a high-risk or low-risk taker.

Man looking at computer

What is cryptocurrency mining?

Cryptocurrency mining involves solving cryptographic puzzles using computer software to add transactions to the blockchain ledger to get rewarded with coins. To spend or receive cryptocurrency, users must create transactions and broadcast them to the entire network.

For such transactions to go through successfully, they must be recorded on the blockchain permanently. Mining involves adding such transactions to the blockchain and making them a permanent part of the public ledger.

Algorithms make mining difficult to prevent miners from creating fake transaction blocks and adding them to the ledger. Instead of adding transaction blocks to the blockchain at will, miners must solve challenging computational puzzles called proof-of-work schemes. They involve easy to verify but challenging to find solutions.

Therefore, miners are simply competing to solve a complex cryptographic puzzle first. The one who finds the solution broadcasts it to all of the other miners who verify the answer is correct. Once verified, the network permanently adds the successfully mined block to the publicly accepted blockchain.

How does cryptography work with cryptocurrency?

Crypto loosely translates to secret or concealed. The word cryptography means hidden or secret writing, and it involves exchanging messages that can only be read by the intended audience or recipient.

Cryptography technology can apply full or pseudo-anonymity depending on the configuration.

Cryptography guarantees the security of the participants and transactions in cryptocurrency, and it’s usually independent of any central authority operations and protects from double-spending.

There are different methods for encryption in cryptography, including:

  • Public-key cryptography

Public-key cryptography is one-way cryptography used by keys that move around balances in the blockchain. It’s also called asymmetric cryptography and uses a pair of keys to decrypt and encrypt data, with each team consisting of a public key and a private key.

Public keys are disseminated openly, while private keys are only known to specific owners. It enables the two critical functions of encryption and authentication of cryptocurrency transactions. You can encrypt a message using the receiver’s public key, but only its private key can decrypt it.

  • Tokenization

Tokenization is one-way cryptography that points to data but doesn’t contain all the original data. In cryptocurrency, token generally refers to a cryptographic string of letters or numbers standing in for ‘real data.’ It’s also described as symmetric encryption cryptography.

The same secret key is used to encrypt the raw message at the source, and after it’s transmitted, it’s used to decrypt the message at the destination.

Any unauthorized recipients that receive the encrypted message will not know what it means unless they know the encryption methodology.

More than one part of the transaction in cryptocurrency exists as tokenized data.

  • Hashing

Hashing is another cryptography method used in cryptocurrency to verify the integrity of transactions on the network efficiently. Hashes are one-way cryptographic codes that tie together blocks on the blockchain and use cryptography similar to public-key cryptography.

They maintain the structure of blockchain data and encode people’s account addresses. They’re also integral in the process of encrypting transactions occurring between accounts, making block mining possible. Digital signatures complement it, allowing genuine participants to prove their identity on the network.

What is an NFT?

NFT means non-fungible token, and it refers to a unique token that you can’t replace with something else. Things like Bitcoin are fungible because you can replace one Bitcoin with another and still have the same thing. However, a one-of-a-kind trading card is non-fungible because if you traded it for a different card, you’d have something completely different.

NFTs at the highest level, NFTs are part of the Ethereum blockchain. It’s a cryptocurrency similar to Dogecoin or Bitcoin, but its blockchain supports NFTs.

Choosing a cryptocurrency

With so many cryptocurrencies available today, it’s easy to get overwhelmed and confused about which cryptocurrency to choose for investment. Some of the most popular cryptocurrencies include:

  • Bitcoin (BTC)

Bitcoin is the original cryptocurrency and has a market cap of over $846 billion.

  • Ethereum (ETH)

Ethereum is a blockchain platform and cryptocurrency with over $361 billion in market cap. It has its crypto called Ether (ETH) or Ethereum and is a favourite among program developers because of its many applications.

  • Litecoin (LTC)

Litecoin currently has a market cap of $ 9.3 billion and has quickly developed faster processes and payments for increased transactions.

Safety features of cryptocurrencies

Thanks to blockchain technology, cryptocurrencies are relatively complex, and the digital ledger makes it difficult for hackers to tamper with. It also uses two-factor authentication for increased security.

However, cryptocurrency scams still exist and include bogus websites that promise massive returns or Ponzi schemes that promote non-existent opportunities. Before investing in any crypto opportunity, due diligence is vital to avoid falling victim to such scams. And if it’s too good to be true, it probably is.

3 coins with signs

How does cryptocurrency work in simple terms?

In simple terms, cryptocurrency refers to digital money that enables you to get rid of intermediaries like banks.

How do you make money from crypto?

The various ways to make money from crypto include investing, trading, lending, staking, mining, crypto social media, and forks or airdrops. Given the inherent volatility of crypto, most involve high risk, while others require expertise or knowledge.

A Beginner’s Guide: The Basics of Cryptocurrency

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:

  • Security
  • Traceability
  • Speed

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).

Loads of money

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.

Cryptocurrency examples

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.

Advantages

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.

Disadvantages

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.

man at desk with computer

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.