Cryptocurrency for Beginners: Key Concepts You Need to Know
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Cryptocurrency tends to scare people who have never ventured into it. When they think of cryptocurrencies, the first word that comes to their mind is “complicated.” This makes them want to stay away from it instead of learning more, but just because it is a game of numbers and money does not make it complicated. As cryptocurrency is gaining mainstream popularity, there has been a growing interest in knowing how it works. More now than ever, there is a need to learn about what cryptocurrency really is and works. This article will provide you with the necessary knowledge needed as a beginner in cryptocurrency. We will discuss all the key concepts you need to understand the whole process of cryptocurrency.
Table of Contents
1. What is Cryptocurrency?
Cryptocurrency is the combination of the words “cryptography” and “currency.” This is because it is a form of digital currency that uses cryptography to secure itself against malicious attacks. “Crypto” refers to several encryption algorithms and cryptographic techniques that secure transaction information and communication by using public and private keys and other encryption methods.
- Unlike banks or government institutions, there is no central entity that controls cryptocurrency. Instead, it is an electronic cash system that is completely decentralized. This means that it exists in several different networks instead of just one.
- To lock cryptocurrency money, the network makes use of a public key cryptography system. The only person who can send cryptocurrency is the owner of that private key. A complex and strong method of cryptography makes it impossible to break this system or hack it.
- Moreover, you don’t need to ask anybody’s permission to use cryptocurrency. It is simply software that anyone can download on their electronic devices for free and start sending and receiving bitcoins or other cryptocurrencies.
Not just that, cryptocurrency transactions are fast and global. They happen almost instantly in the network and get confirmed within a couple of minutes. Since they solely exist online, they are not limited by the location of the transactions.
2. How Does Cryptocurrency Work?
After witnessing all the centralized systems fail, Nakamoto Satoshi, the unknown creator of bitcoin, decided to build a digital cash system that did not rely on a central ledger. Similar to a peer-to-peer network for file sharing, he created a peer-to-peer electronic cash system.
He gave this cash system the name “cryptocurrency”. In cryptocurrency, the markets are decentralized. They run on a network of computers, yet you can still buy and sell them via normal exchanges and store them in cryptocurrency “wallets.”
Unlike traditional currencies, cryptocurrencies only exist in the form of a shared digital record of ownership. This record gets stored on a blockchain. When a user wants to send you cryptocurrency units, they will send them to your digital wallet. The transaction is not finalized and completed until verification. This happens through blockchain with the help of a process called ‘cryptocurrency mining.
We will discuss both blockchain and crypto mining later in the article.
3. Blockchain and Cryptocurrency
Blockchain technology is a shared register and extremely secure that records data in digital form. In terms of cryptocurrencies, this means a transaction history for every cryptocurrency unit. Blockchain records the data in the form of blocks and places new blocks in front of the old ones, hence giving it the name “blockchain.”
This is mainly due to the decentralization of information. A blockchain file is stored on several different computers across a network instead of a single location. This file is readable by everyone within that particular network which makes the process both transparent and almost impossible to alter. This also makes it less vulnerable to software hacks.
Everyone present within a certain network has to confirm once a transaction takes place. This process confirming a transaction is known as “mining” and the users who can confirm transactions are called “miners.”
Let’s discuss cryptocurrency mining in more detail.
4. Cryptocurrency Mining
The job of a cryptocurrency miner in a network is to confirm transactions and spread them in the network. After the confirmation of a transaction, every node has to add it to its database. The transaction then becomes a part of the blockchain. A node is simply the computer that helps you connect with a cryptocurrency network. It supports the network by verifying and relaying transactions in a blockchain network. For example, any computer that connects with a bitcoin network is a node.
Mining involves checking the details of a transaction against its specific transaction history. Miners also check whether the sender has used their private key in order to authorize a transfer.
These valid transactions are then compiled into a new block. This block is then added to the front of the queue of blocks and gets updated across that particular cryptocurrency network.
5. What Keeps the Cryptocurrency Markets Moving?
Similar to other trading markets, cryptocurrency markets move according to supply and demand. Their main difference, however, lies in the fact that cryptocurrency markets are completely decentralized, unlike all other trading markets. This means that cryptocurrency markets are free from the economic and political factors that affect other traditional currencies.
The following factors have a significant effect on cryptocurrencies and their prices:
1. Supply
Supply refers to the total number of coins that are in circulation and the rate at which their transactions happen.
2. Demand
The value of all the existing coins and how many people are wanting to invest or trade with cryptocurrencies matter a lot. These are the factors that determine its demand.
- Media Coverage
Media coverage has a big impact on how cryptocurrency prices rise or fall. Cryptocurrency’s image in mainstream media influences how the general public is going to react to it. It is a huge deciding factor for the rise and fall of cryptocurrencies. The sudden and monumental rise of cryptocurrencies in 2020 has been a big indicator in this case. With a lot of influential celebrities posting about cryptocurrencies, popularity soared and prices were at an all-time high. - Integration Into Existing Payment Systems
The more cryptocurrency connects with our existing payment systems, the more popular it is going to get. This would increase its image as a viable investment and trading opportunity. - Major Events
Major events like security breaches and software updates affect the cryptocurrency market and how it acts on any given day.
For their role in the transaction process, cryptocurrency miners get rewards with a token of the cryptocurrency they are working with. For example, if a miner is working with bitcoin, they will acquire additional bitcoins.
6. How Many Cryptocurrencies Are There?
According to CoinMarketCap, a popular market research website, there are more than 10,000 types of cryptocurrencies currently available that are publicly traded online. They continue to grow rapidly, raising money through Initial Coin Offerings (ICOs). In February 2021 alone, the total estimated value of cryptocurrencies was about $1.6trillion – with the bitcoins amounting to 969.6 billion.
Further reading: Best Cryptocurrency Wallets for Your Digital Money
7. Types of Altcoins
Altcoins refers to cryptocurrencies other than Bitcoin. It is a combination of the words “alternative” and “coins.” This implies a category of cryptocurrency that is an alternative to the Bitcoin currency. They are also peer-to-peer electronic currencies with a few slight differences here and there.
Other popular cryptocurrencies and blockchain platforms include:
- Litecoin (LTC)
- Bitcoin (BTC)
- Neo (NEO)
- Stellar (XLM)
- Ethereum ETH)
- Polkadot (DOT)
- Cardano (ADA)
- DeFi coins (Uniswap, Chainlink, Aave, PancakeSwap)
8. What to Know Before Buying Cryptocurrencies
Before investing your hard-earned money in cryptocurrencies, here are a few basic steps you need to know:
Step 1: Get a Wallet For Your Cryptocurrency
The first step before you go about buying cryptocurrencies is to set up a digital wallet. This digital wallet will store your digital currency virtually. It will also help you keep track of all the transactions conveniently. There are many different types of wallets available online such as Exodus and Ledger Nano X. You can find which one provides you with the most flexibility according to your needs and work with that.
Step 2: Connect Your Cryptocurrency Wallet With a Bank Account
To buy cryptocurrencies, you need a mode of payment. To make this mode of payment, you would need to connect your digital wallet to your credit or debit card and bank account.
Step 3: Link With a Cryptocurrency Exchange
Once you have linked your wallet with a bank account, you can now buy or sell digital currencies. Different cryptocurrencies have different exchange rates, processing fees, availability, and trading security. As a new cryptocurrency investor, you should research well. You need to make sure that the crypto platform you are choosing is suitable for your needs. To help you devise a concrete plan for your cryptocurrency investing and trading, you should follow crypto guides, like the ones I provide with my articles, to help you make better choices with your cryptocurrencies.
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9. Stablecoin
Since its creation, cryptocurrency has evolved significantly. One of the most famous crypto implementations has been stablecoins. A stablecoin offers a type of cryptography in which the price remains stable.
While bitcoin remains the most popular cryptocurrency, there is a catch. It still suffers from frequent price fluctuations. Their volatility makes cryptocurrencies, in general, extremely risky and unstable for everyday use by the general public. This makes a lot of people hesitant about investing in cryptocurrencies.
This is where stablecoins come in. A stablecoin provides a solution to this price fluctuation problem.
The main reason why stablecoins have exploded in popularity is that it provides the best of both worlds. It combines the best of both fiat and cryptocurrencies. It gives you the stability of fiat currencies while providing you with the security of cryptocurrencies. Stablecoins achieve this goal of price stability via a process called ‘collateralization’. Another method is through the use of algorithm-based mechanisms of buying and selling an asset and its derivatives.
10. Trading and Investing in Cryptocurrency
Many people, especially investors, think of cryptocurrency as an interesting investing opportunity. This is due to the high volatility of the cryptocurrency market. It is not uncommon to see cryptocurrency prices fluctuate more than 10% in a single day. This is great if you are looking for high returns in a short amount of time.
The high volatility can also mean that trading in cryptocurrencies is pretty risky. For a risk-averse investor, cryptocurrencies may not be the best choice of market to trade in.
To start investing in cryptocurrency, you would need to open a cryptocurrency account with a crypto brokerage of your choice. There are many great ones, such as Binance and Coinbase.
Once you have done that, you would need to fund your newly opened account. You can do this by connecting your bank account or credit card with it. After that, it all comes down to choosing the best type of cryptocurrency to invest in. The most popular cryptocurrencies are Bitcoin, Litecoin, and Ethereum.
To invest effectively, you need to follow a well-thought-out and strategic investing strategy. Many investors use stock trading strategies for cryptocurrencies as well. You would then store your earned cryptocurrency in a digital wallet for future use.
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Conclusion
Becoming an expert in the world of cryptocurrencies may take a while for you. But, it is definitely worth all the effort. With time and practice, you will learn how to deal with your cryptocurrency in the best way possible and the best practices to follow. To trade cryptocurrencies, users do not need the services of a broker. Moreover, digital ledgers track these peer-to-peer transactions. They are like virtual accounting systems that allow you to transact like you normally would with your cash or credit cards. To record these transactions, the cryptocurrency system uses digital blocks and signs them cryptographically to make them secure.
My cryptocurrency beginner’s guide will provide you with the tools you need to begin your cryptocurrency journey. It will give you exactly what you need to take the right steps in the right direction. With the help of this article, you can now explore the world of cryptocurrency with confidence and knowledge by your side. Besides Knowing about the evolution of money is just as important, if you like to know more this article can be very enlightening
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