A Beginners Guide to Cryptocurrency
Learn the basics about bitcoin and other cryptocurrencies, how it works, how to start trading and investing, exchanges, blockchain technology, and more.
What is a Cryptocurrency?
Cryptocurrencies are distributed digital currencies, much like a form of digital cash. They allow for seamless, direct, and extremely fast transactions between parties. You have full control over your payments and balance, and can spend and earn with ease and transparency.
Because you have full control over your cryptocurrency, you don’t need to rely on a central authority to validate your transactions, all validation is done by the cryptocurrency network. Today, credit card companies, banks, and others act as the ‘gatekeepers’ to your money. You trust them to protect your information and your money, and in exchange, they manage transactions to ensure that everything is in order.
However, cryptocurrencies don’t require a central authority and instead manages transactions in a distributed fashion. As such, while a bank might have a database that’s an obvious target for hacking for someone to steal your money, cryptocurrencies aren’t susceptible to these attacks. Additionally, cryptocurrencies can process transactions in a matter of seconds or minutes, and not hours or days as it may take to send money today.
Cryptocurrencies, often referred to as coins, are stored in digital ‘wallets’ that you use to manage your payments. Your wallet is protected by a private key – think of it like an extremely complex password – that only you know about. You can spend or send money by submitting a transaction from your wallet to someone else’s.
Like cash, you can spend the money however you want – whether lending to a friend, paying for lunch, or even paying an employee. Unlike cash though, as cryptocurrencies are digital you can pay with a wallet app on your phone, with a special keychain, and in other ways that make cryptocurrency easier to use.
How Do Cryptocurrencies Work?
Cryptocurrencies were developed as an application on top a cryptographic invention known as blockchain, hence the name cryptocurrency. Blockchain is a technology that will support multiple technologies – cryptocurrency is just one of them. But importantly cryptocurrencies, as we have them today, would not be possible without the blockchain technology. So, what is blockchain?
A blockchain is a digitized, decentralized, public, append-only ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central record keeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically.
Originally developed as the accounting method for the virtual currency Bitcoin, blockchains – which use what’s known as distributed ledger technology (DLT) – are appearing in a variety of commercial applications today. Currently, the technology is primarily used to verify transactions, within digital currencies though it is possible to digitize, code and insert practically any document into the blockchain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority.
What Can You Do With Cryptocurrency?
The four main things you can do with cryptocurrency are: buy products, invest and trade, mine, and accept as payment for your business.
1. Buy Products
There are a lot of merchants (both online and offline) that accept Bitcoin and other cryptocurrencies as a form of payment. They range from massive online retailers likeOverstock.com and Newegg.com to small local shops, bars and restaurants. Bitcoins can be used to pay for hotels, flights, jewelry, apps, computer parts and even a college degree.
2. Invest & Trade
Many people believe that cryptocurrencies are the hottest investment opportunity currently available. Indeed, there are many stories of people becoming millionaires through their cryptocurrency investments. Bitcoin is the most recognizable cryptocurrency (digital currency) to date. However, it is worth noting that cryptocurrencies are high-risk investments. Their market value fluctuates like no other asset’s. Moreover, it is partly unregulated, there is always a risk of them getting outlawed in certain jurisdictions and any cryptocurrency exchange can potentially get hacked. Click here to learn more about investing in bitcoin and other cryptocurrencies.
Miners are the single most important part of any cryptocurrency network, and much like trading, mining is an investment. Essentially, miners are providing a bookkeeping service for their respective communities (keeping record of all exchanges on the blockchain of their respective cryptocurrency network). They contribute their computing power to solving complicated cryptographic puzzles, which is necessary to confirm a transaction and record it in a distributed public ledger called the Blockchain.
One of the interesting things about mining is that the difficulty of the puzzles is constantly increasing, correlating with the number of people trying to solve it. So, the more popular a certain cryptocurrency becomes, the more people try to mine it, the more difficult the process becomes.
A lot of people have made fortunes by mining bitcoin and other cryptocurrencies. Back in the day, you could make substantial profits from mining using just your computer, or even a powerful enough laptop. These days, bitcoin mining can only become profitable if you’re willing to invest in an industrial-grade mining hardware. This, of course, incurs huge electricity bills on top of the price of all the necessary equipment. However, there are some cryptocurrencies that are more cost-effective to mine.
4. Accept as Payment for Business/Merchants
If you happen to own a business and if you’re looking for potential new customers, accepting cryptocurrencies as a form of payment may be a solution for you. The interest in cryptocurrencies has never been higher and it’s only going to increase.
There are many different services that you can use to be able to accept payments in cryptocurrencies. For example, CoinPayments currently accepts over 75 different digital currencies, charging just 0.5 percent commission per transaction. Other popular services include Cryptonator, CoinGate and BitPay, with the latter only accepting Bitcoins. The payments can then be accepted using hardware terminals, touch screen apps or simple wallet addresses through QR codes.
The original cryptocurrency, Bitcoin (BTC) is the market leader due to its established reputation worldwide, its security and the huge community base powering it. It holds significant value and has received media attention around the world. Retailers such as Overstock.com accept payments and Bitcoin, and Amazon allows consumers to purchase gift cards with the cryptocurrency. Currently, Bitcoin is the most valuable cryptocurrency and is valued at $96 billion, or about 57% of the market.
While Bitcoin was designed as a digital currency cash system, Ethereum (ETH) is designed to help companies deploy applications on the distributed blockchain. The underlying currency, called Ether, acts as the fuel that powers these applications. Ethereum is often referred to as a ‘Swiss Army knife’ and supports numerous use cases which can range from ticket sales, escrow agents, online gaming betting, and more. Currently, Etherum is valued at $28 billion.
A digital asset, Ripple (XRP) was made to help financial institutions make global payments faster and cheaper. To meet the demand of these institutions, their technology also focuses on transaction throughput and already can handle about 200 times more transactions per second than Bitcoin can. They already boast a strong list of customers which includes RBC, UBS, Santander, CIBC, and more than a dozen other banks, exchanges, and payment providers. Ripple is currently valued at $7.8 billion.
Released in 2012 as a ‘lite’ version of Bitcoin, Litecoin (LTC) is built using much of the original Bitcoin code base. Its primary advantages are that it supports much faster payments and far more transaction throughput than Bitcoin, capable of handling global payments in less than one second. Litecoin is sometimes referred to as the ‘test bed’ for Bitcoin because it is known to adopt and implement technological advancements much quicker and more smoothly than Bitcoin. It is currently worth $2.9 billion.
The Origins of Cryptocurrency
Satoshi Nakamoto is fictional name provided as the inventor of the first ever cryptocurrency, Bitcoin. Some believe that Satoshi Nakamoto is, in fact, a pseudonym for a group of people. The community believes that Nakamoto started working on the project in 2007.
In 2008 the Bitcoin domain was registered on a site that allows the anonymous registration of domain names. Bitcoin.org was up and running a year after Satoshi started working on the concept.
Nakamoto then quickly moved to publish a piece that explained in full what Bitcoin was, how it worked and how double spending would be prevented. The first mining took place in January 2009 after the project was registered on SourceForge.net – a website focused on open source software. A few days later the first ever transaction using cryptocurrency was made on January 12th, 2009 by Bitcoin founder Satoshi Nakamoto, sending Hal Finney 100 bitcoins (which today would be worth well over $1 million).
Bitcoin was actually intended to be a peer-to-peer electronic cash system and not a currency. Many had tried and ultimately failed in their attempts to design digital money previously. He wanted to create a digital payment system that was decentralized in the same way files are shared over a peer-to-peer network.
How Do You Buy Cryptocurrencies?
There are a lot of different options when it comes to buying bitcoins and other cryptocurrencies. For example, there are currently almost 1,800 Bitcoin ATMs in 58 countries. Moreover, you can buy BTC using gift cards, cryptocurrency exchanges, investment trusts and you can even trade face-to-face.
The most common way to buy cryptocurrencies is via exchanges where you can buy, sell, and trade different cryptocurrencies. Some exchanges are very beginner friendly (like Coinbase) make it extremely easy for users to buy and sell cryptocurrencies with credit Card, debit Card, or bank transfer.
While other exchanges (like Binance and Bittrex) are more complex, but give users the ability to buy, sell and trade over 150+ cryptocurrencies using Bitcoin, Ethereum, or USDT (Tether). Please note – each exchange has it’s own nuances and rules, so be sure you understand them before trading any significant amount of money.
How Do You Store Cryptocurrencies?
With fiat currency like US Dollars, you can store them at the bank or in your wallet. It’s pretty straightforward. But with digital currencies, there are a few wrinkles that you need to get your head around, but the idea is similar. Let’s take a look at how cryptocurrency storage works. You store your cryptocurrencies on the blockchain in a “wallet.” This is simply an address on the blockchain. It’s like how the website address tradingheroes.com directs you to my website, on the internet.
Each wallet has a public address and a private address:
The public address is the address that people send funds to.
The private address is the “password” that you use to access and send your funds. Never expose your private key until you are ready to spend your funds, otherwise you will probably lose all the money in your wallet.
Now that you understand the basics of cryptocurrency wallets, let’s look at the different wallet options out there. Here are the different ways that you can store your cryptocurrency:
This is probably the easiest way to store your money. But it is also the least secure. So, it’s not a good long term storage solution, but it is fine for buying things and funding your trading accounts. Exchanges like Binance or Bittrex also have their own wallets built in.
You can download a mobile app like Breadwallet or Coinomi to store your spending money. It is more secure than an online wallet, but if your phone ever breaks or it gets hacked, everything in your wallet will be gone.
Similar to a mobile app but just for desktop computers.
Hardware Device Wallet
These are hardware devices that are built especially for storing cryptocurrency keys. They are safer than the options above, but they are still susceptible to the things that can damage all electronic devices.
You can also store your private key on paper, like in the picture above. This is the most hacker proof, but it is also the least convenient. If you are going to go this route, be sure to store them in a safe place (like a safety deposit box) and don’t actually use paper. Use something like this to make sure that your money isn’t lost to something as simple as a spilled beer.
Apps for Tracking and Monitoring Cryptocurrency Prices
As you begin to trade and buy different cryptocurrencies, you will probably need an app to track your trade and monitor cryptocurrency prices on your phone. So here are a couple of apps that might work for you.
A simple app that allows you to add a watchlist and add trades so you can track your portfolio, ala stock trading apps. The most useful thing about this app is that it displays all currencies on your watchlist in the currency of your choice. Some apps insist on displaying the value in Bitcoin, which is annoying.
Similar to the mobile app above, the Delta app has a more intuitive feel and better user experience with a good interface and wide array of coins to add. They keep real-time 24-hour data to show you how your portfolio is doing, while even allowing you to have multiple portfolios (if you manage anyone else’s). You can set alerts, merge ICO entries with real-time coins, and much more.
When someone wants to look up the price of a coin and see its position they typically use coinmarketcap.com. CoinMarketCap is a phenomenal resource for keeping track of the cryptocurrency market. Their app offers very similar features. Besides showing a conglomerate of the coin data from exchanges around the world, you can also add to your portfolio to monitor it on the apps. This is both convenient and easy to use.
What Can Affect the Price of a Cryptocurrency?
There are many things that affect the price of a particular cryptocurrency (sometimes very quickly). Here is what you need to be aware of when you trade cryptocurrencies. Of course, there is no guarantee that these things will move the market. But based on trends here are the most common reasons:
Supply & Demand
At a basic level, the price of cryptocurrencies will be driven by its availability. The scarcer a particular cryptocurrency is, the higher its price or perceived value. In contrast, a cryptocurrency with a larger supply will likely experience a lower price.
In the case of proof-of-work cryptocurrencies (or blockchains) such as Bitcoin, the mining difficulty of a coin can also have a direct relationship with its price. A higher mining difficulty means that it is harder to mine an additional unit of a coin. This can have an impact on a coin’s perceived value, and subsequently its price, as increasing a coin’s supply will require more computing power to be used in the mining process.
A major factor that can influence the price of a particular cryptocurrency is its perceived utility. A cryptocurrency that possesses no practical use (or real world application) will likely be viewed as having no value, which may be reflected with lower market price levels. For example, the chance in price of Ethereum (or ether) can be linked to its perceived practical utility, which is a user’s ability to build and launch their own decentralized applications on the Ethereum platform.
Some cryptocurrency platforms, like Ethereum, host other applications. These applications, in turn, can have their own digital currencies or tokens. If one of these DApps or Decentralized Apps does very well, this can have a positive effect on the underlying platform currency.
New Exchange Listing
When a cryptocurrency gets added to a new exchange or trading platform it often times leads to an increase in exposure for that particular cryptocurrency. With an increase an exposure it can either lead to demand for that cryptocurrency (driving up the price) or a lack of demand (which can lead to a decline in the price of it).
Market news often times can affect the price of a particular cryptocurrency. Positive or negative news reporting can be a heavy influencer of general public opinion regarding a particular cryptocurrency. News about a network hack for example can result in negative market opinion is likely to drive a cryptocurrency’s price down, whereas, news about a cryptocurrency’s new partnership with another tech company can result in positive market opinion and can lead to an increase in the cryptocurrency’s price/value.
Another factor (similar to market news) is a matter of community opinion or rumors about a particular cryptocurrency. Opinions or cosigns by an influencer or expert in the crypto community (or rumors being spread throughout the crypto community) can lead to it rising or decreasing in that cryptocurrency’s value. These opinion or rumors are often times shared with others in the crypto community shared via blogs, social media, online chat and messaging groups, as well as other online mediums/channels.
Upgrades & Announcements
Announcements about improvements or upgrades to the network, code, or platform that a particular cryptocurrency or blockchain runs off of can affect the price of that cryptocurrency.
Finally, government regulation can have a huge effect on the value of a cryptocurrency. For example, a crackdown by a government on cryptocurrency mining, or a government ban on citizens in that country buying and selling cryptocurrencies (or using cryptocurrency exchanges) can have an affect on the market price.