What Is Cryptocurrency – a Guide for Beginners
Cryptocurrency – definition and all important information
Cryptocurrency is simply speaking digital currency that exists entirely online, not having a physical form. Crypto is decentralised, digital, and based on a blockchain technology.
Cryptocurrency has been named in such a way not by accident. The name crypto represents all the encryption technologies used to make cryptocurrency a safe space.
Digital crypto currency is secured by cryptographic systems, meaning that each and every transaction is encrypted and free from any third party integration.
Working on an open source system, crypto is available to everyone, serving as an alternative to today’s financial and banking systems.
Decentralised system
The cryptocurrency system is decentralised meaning that it is not controlled by any government, entity, nor financial institution, making it accessible to everyone.
Cryptocurrencies work on a peer-to-peer system enabling each individual using digital currencies to send and receive payments without interference of any banking or governmental entity.
Blockchain
The blockchain technology on which cryptocurrencies are based records every transaction made using cryptocurrencies and registers how many cryptocurrencies belong to which address. The addresses however are completely anonymous. Meaning you can see how many cryptocurrencies are based on each address, but not the address owner.
The purpose of crypto
Cryptocurrencies are an online alternative to fiat currencies and have been introduced to serve as an additional option to choose instead of the widely-used financial and banking systems. It’s also worth mentioning that the blockchain technology on which crypto is based is used not only for digital cryptocurrency, but in numerous other instances and fields, such as for various applications used in identity management, smart contracts, digital voting, and more.
If you plan on starting your journey with cryptocurrencies and see for yourself how a decentralised digital currency system works in real life, make sure to read on for all the relevant information dedicated specifically for beginners to help you understand cryptocurrency better.
Cryptocurrency Facts
- First cryptocurrency ever created was Bitcoin
- All cryptocurrencies exist virtually and do not have a physical form
- There are more than 18, 000 cryptocurrencies as of today – (10/04/2022), source: https://coinmarketcap.com/)
- Crypto works on an open source system, being available to everyone
- Cryptocurrency is not controlled by any entity, government, or country
- There are no limitations to crypto transfers – you can transfer any amount to any place in the world within minutes
- Only we have access to our funds kept in crypto wallets, meaning there’s no possibility for debt collectors to seize our funds
- A transaction made using cryptocurrency cannot be changed, altered, or cancelled once it’s been finalised on the blockchain system
Cryptocurrency – how does it really work
Blockchain explained
We have already established that cryptocurrency exists only digitally, therefore, does not have physical form. This part may seem the most confusing since we have for generations connected money or funds to physical coins or notes in paper form. Therefore, it may seem difficult to imagine how crypto works without having a physical form.
It all comes down to the blockchain technology it’s based on. To understand how cryptocurrency works, we must understand blockchain.
Blockchain is a technology of distributed ledgers used to control and register practically everything that’s included in it.
To illustrate what blockchain really is, let us imagine an actual chain. Each chain piece or link represents a blockchain link, which registers and keeps data. Blockchain is therefore a set of links containing registered information.
New data is registered and kept on a new link/piece assembled to the whole chain. Each block/link chain keeps data and hash (a summary of the previous block) – all creating a connected, cryptographically encrypted block chain.
Because of the distributed ledger system, once a piece of data has been registered on any block chain, it cannot be edited, cancelled, or altered in any way.
Please note that blockchain is not only used in cryptocurrencies, but in numerous other industries and fields, such as for record keeping in medicine.
Peer-to-peer system
A peer-to-peer system in which cryptocurrencies work is a computer network that enables peers – users to share the resources, computational power, and data storage without the need to involve any third party or rely on a dedicated central server.
In a peer-to-peer system, each party is equal, meaning anyone can start any session or communication having equal responsibility.
Cryptocurrency is therefore easily available to anyone who wishes to start using it or investing and trading, without the involvement of any third party, entity, government, or bank.
Why were cryptocurrencies introduced?
Cryptocurrency has been introduced to make financial transactions easier by excluding the governments, banks, financial institutions, and any third entities from the process. Creating a decentralised financial system serves as an alternative to the widely used system that includes banks and other entities for making and receiving transactions.
As was already mentioned, you can make cryptocurrency transactions with no limitations, meaning you can transfer any amount to any place in the world in a matter of minutes. As opposed to a regular bank transfer that would have to go from, let’s say USA to China, it would be a much more complicated process that would take much more time and people involved.
Moreover, the access to your crypto funds kept in your crypto wallet belongs solely to you. Your funds will therefore be encrypted and safe from any third party, including debt collectors.
People, traders, investors, businesses, now have another alternative to use instead of banking. As the world is evolving and becoming more digital, so is the financial system.
Bitcoin – history
The first cryptocurrency ever created was Bitcoin, which was a result of the 2008 Great Recession and the growing doubt and distrust in the centralised financial institutions.
Bitcoin was created anonymously by Satoshi Nakamoto and first mined on the 3rd of January 2009. The first transaction took place about seven days later.
It took Bitcoin quite some time to gain value and start being used economically. However, it did eventually take off, effects of which we can all see now, with the All Time High Bitcoin value at $66,974.77, reached on 20 October 2021. Source: https://en.wikipedia.org/wiki/History_of_bitcoin.
Bitcoin was then an inspiration to creating thousands of altcoins (alternative cryptocurrency coins), crypto trading, investing, cryptocurrency becoming a means of payment, and actually serving as an alternative to the centralised financial system we know and use.
Cryptocurrency transactions can be made directly from person to person without the need to involve a bank, a government, or any other entity.
How to start in cryptocurrency – a simplified guide
- Try to understand crypto – read and research
- Evaluate your situation
- Set an amount you can put in crypto (not more than you can afford to lose)
- Observe the volatility and notice patterns
- Set your targets for:
- Selling cryptocurrency – e.g., set a specific price you want to sell BTC at, it could be the $100 000 point and once it does reach it, you sell it according to your earlier set targets
- The quantity of specific cryptocurrency you want to have
- Decide which platform you’d want to use
- Create your account
- Start trading
Please note! If you’re not or do not plan to be a trader and you want to buy cryptocurrency to store it long-term, make sure to keep your digital currency in a wallet to which you have a private key. Do not keep your crypto amount on a centralized crypto exchange market.
What can you buy with crypto?
Although cryptocurrency is not as widely used as a means of payment yet, more and more shops and services accept cryptocurrency in exchange for products and services they offer.
Salvador was the first country to actually consider Bitcoin as an official and legal means of payment, allowing people to use it to trade for goods and services instead of regular cash.
Examples of some of the bigger companies accepting cryptocurrency/Bitcoin:
- Microsoft – accepted cryptocurrency as form of payment back in December of 2014
- PayPal – added crypto in September of 2014 and just recently added a Checkout with Crypto option for its users
- Etsy – allows sellers on their platform to accept payments in crypto
- Starbucks – makes it possible to add Bitcoin to your Starbucks App and pay using it
- Twitch – which is owned by Amazon, makes it possible to pay using different cryptocurrencies, not only Bitcoin, but also Ether, BUSD, PAX, and more
Source: https://www.gobankingrates.com/money/business/10-major-companies-that-accept-bitcoin/.
Are cryptocurrencies safe/legal
Since cryptocurrencies are still a new idea and evolve very quickly, it may be difficult to find a short answer to this question.
Many countries, such as the United States or Canada do not consider cryptocurrency as a legal tender. However, it does not necessarily mean that cryptocurrency exchanges or using crypto as a form of payment online or in the stores that allow it, is not legal.
A legal tender means anything that’s legally considered fit to settle debt or any other financial obligation, including legal fines. In most cases, it is the national currency that serves as legal tender.
Most developed countries, such as the US, Canada, the UK, countries within the European Union, allow its citizens to buy, use, trade, exchange, and invest in crypto.
Since cryptocurrency is becoming more and more popular and is now widely used, each country tries to find its way to regulate the use of crypto when it comes to exchanging it, treating it as legal tender, or using it as a means of payment.
Most of the time, it is not illegal to use cryptocurrencies. The governments of countries are usually only warning about the risks connected with trading, investing, and using cryptocurrency.
Few countries have banned the use of cryptocurrency, such as China, Egypt, Iraq, Morocco, Nepal, Qatar, or Tunisia.
The future of cryptocurrencies
We think that cryptocurrency now resembles the stage Internet and using the World Wide Web was at back in the 90s. Many people thought that the Internet will not stick around, that it is something too advanced, too complicated to use on an everyday basis.
Who would have thought that we would completely eliminate physical newspapers and entirely switch to digital news systems we now know.
And what about emails? Think of the last time you actually sent a physical letter instead of an email.
The internet seemed scary and too complicated to use, but with time people warmed up to it and started slowly using it, to the point where we can’t even imagine our lives without it.
Cryptocurrency may most likely end up being the same. People will eventually grow into it, the more they hear about it or the more they will use it. Private keys, the blockchain technology, currency without physical form, transactions without third party integration, this will all be normal.
We can also assume that cryptocurrency will be the next natural level of evolvement within finance, just like cards replaced paying with cash, or paying with your phone or apple watch replaced paying with a card.
Bitcoin alone is the best example of how cryptocurrency is evolving. This most-well known cryptocurrency has already become known worldwide and is accepted as a form of payment in numerous countries and companies.
Some countries consider accepting Bitcoin as an official form of payment, some already did, such as Salvador.
We can safely assume that not all cryptocurrencies will prevail, but those that will, will definitely help revolutionize the traditional finance, banking-ruled, centralized, and censorship world.
We hope you found this article helpful at the beginning of your journey with cryptocurrencies!