Cryptocurrency Explained
In this document, I talk about the basics of cryptocurrency and how it is changing how we spend money and invest.
Table of Contents
Cryptocurrency
So, what is cryptocurrency? It is digital money that is decentralized and intended to be used over the internet. Think of digital money just like any other currency, except there are no bills or coins. There can be debit cards, though, which are tied to your bank account that hold cryptocurrency.
Decentralization is another really important concept. It means there are no banks involved. When you make a debit or credit card transaction, there are often minor charges taken out by the bank that gave you the card. With cryptocurrency, you do not have to pay for this anymore. It lets two people, from anywhere in the world, exchange money with no banks in the middle.
The Beginnings Cryptocurrency
Bitcoin is the most famous and the first cryptocurrency. It is the largest and most popular digital money. Satoshi Nakamoto supposedly created it. This person is completely anonymous and could even be a group. They created bitcoin with freedom of the internet in mind.
Eventually, other digital coins were created. These include Ether, Litecoin, and XRP. These are not in any order, but just examples of some of the popular ones. They each expanded what they do and added features. Originally, none were as valuable as they are now.
Security of Cryptocurrency
Security is often a concern when dealing with money. So, they secure most digital money with a blockchain. A blockchain is a digital ledger that keeps track of every transaction in its history. Every computer connected to that constantly checks the blockchain. This makes it pretty safe. You can also think of a blockchain as one huge distributed network. No one person, company, or nation is in charge of it. That is why it is called decentralized.
Advantages of Cryptocurrency
There are several advantages, which is why it has been so popular. The first major advantage is that it makes it easy to transfer money to anywhere in the world. If you perform a service for someone in China, they can send digital money to you without having to convert it to your nation’s hard currency or pay any bank fees. It is also much, much faster to send than a wire transfer.
Cryptocurrency is private. You do not need to provide a name, address, or your phone number in order to complete a transaction. You keep your financial information hidden from banks, advertisers, and credit agencies. This makes it virtually impossible for your identity to be stolen. How many times has someone stolen your debit card when going through a drive thru somewhere? You don’t have to worry about that when you use cryptocurrency.
Digital money is portable. You don’t have to carry a mound of cash or worry about your credit card being stolen. You just need internet access and then you have access to your money from anywhere in the world. All current phones have internet access, do they not?
Cryptocurrency and the blockchain it is on, is transparent and open for all to see. This means transactions can’t be manipulated or money amounts changed.
Digital transactions like this can’t be reversed. This means it is less likely for merchants to be defrauded.
Alternative To Banks
Cryptocurrency is the first alternative to banks. This makes it very important because banks have historically controlled all aspects of money and their associated transactions. They make everyone equal and give people the same access, no matter where they are in the world.
What many people do is invest in one or more digital coins and use another for making actual purchases. This is a very effective strategy. As the investments gain in value, you can convert that to the coin that you use for making purchases. The USD coin is a good choice to make purchases with. It mirrored our dollar as close as possible. This makes it a valuable digital currency.
Investing In Cryptocurrency
There are many opportunities here. Just remember, like with stocks or anything else, only invest in what you are prepared to lose. Many coins are volatile. They go up and down. So, be aware of that. Many people invest in Bitcoin, Ethereum, and many others. Just don’t put everything in crypto so that your portfolio is diverse. That way, if one market goes down, you will have a better chance at being protected. Every market experiences trials.
To invest in cryptocurrency, you normally use an exchange. This is something like FTX, Binance, or Coinbase. At these sites, you just sign up and deposit money into your account to use. This can be digital or regular currency. You then buy a coin that you can hold and sell when you are ready. At first, I would recommend sticking with the popular coins. This is because they will have the largest market cap and thus be safer. Once you buy something, the exchange holds it in your account, but many also let you download it to a personal wallet.
Many coins earn regular interest, just like dividends from a stock or interest from a savings account. You can buy part of a coin, for example. This is called fractional buying. You can purchase $10 of an Ethereum token. This is nice because many coins, such as Bitcoin, are very expensive right now.
There is another way to invest in cryptocurrency. It is through the regular stock market. There are funds that trade there, which will give you a broad exposure to cryptocurrency. The reason is they invest in many kinds of coins themselves. So, like any other fund, their price follows the crypto market as a whole. GBTC, by Grayscale, is a very popular fund and is a good way to get your feet wet in the cryptocurrency world.
Stablecoins Options
I mentioned the USD coin earlier. It is an example of a stablecoin. It uses this term because it follows the U.S. dollar as closely as possible. Stablecoins have very little volatility, which makes them perfect for spending. However, you still get all the advantages of it being a crypto currency.
People will also use stablecoins to save money. While they are not likely to increase in value, they also will not lose in value. Plus, they can earn interest by just holding them. This makes them valuable for multiple reasons.
Blockchains Networks
Many cryptocurrencies run off a blockchain. As mentioned earlier, this is a distributed network of computers that acts as a digital ledger and can constantly verify all transactions that took place on the network. A blockchain can do other things, though. Developers can create and run applications on them. These can be databases or games. So, they have many acceptable uses and increasing privacy on the internet.
Smart Contracts
Another key feature is the use of smart contracts. These are really just applications that live on the network. They will run when conditions are met. This lets them automate workflows and trigger more actions. Smart contracts are efficient and fast. They take the human out of the equation, which means fewer errors and time wasted.
They work by following typical programming logic statements. These statements are how the application determines if we have met the condition. Once a condition is met, some action will follow. This action is determined by the developer of the application itself. After it is done, the blockchain is updated, and the information is transferred to all the nodes connected to that blockchain.
Mining Cryptocurrency
Most cryptocurrencies are generated by mining on the network. Your computer has to be connected to the network, usually by the blockchain software. As we verify transactions on the network, more currency can be issued to the winners. The winners have to solve a mathematical puzzle that is hard, even for computers.
It usually takes very large computers or even groups of computers to mine cryptocurrency. Large and fast GPUs are often more valuable for miners because they work quicker for these tasks. So, unless you are prepared to spend lots of money on equipment, mining is usually not profitable.
Cryptocurrency Value
You might wonder how all this digital money gets their value. It is simply supply and demand. Bitcoin, for example, has a very limited supply. This makes it valuable when lots of people want to use it. The supply refers to how much is available. Demand is how many people want to use it. The value of any one cryptocurrency is always the balancing act of these two factors.
Buying Cryptocurrency
Earlier, I mentioned the easiest way to buy cryptocurrency is through an exchange. There are several available. I would advise picking an exchange that lets you transfer your crypto to your own digital or hardware wallet. You can buy fractional coins too, so don’t forget that. If you want to buy Bitcoin or Ethereum, then that is the way to go.
Storing Cryptocurrency
All exchanges that I know of want you to store your coins with them. There are obvious reasons for this. However, there are several ways to store your cryptocurrency. These include both online and offline ways. You can also transfer funds to your bank account, assuming it is set up to do so. There are also online and offline wallets. An online wallet is just an application that keeps track of it for you. Offline wallets are hardware devices that you can buy to transfer your coins too.
Blockchains
Blockchains power many cryptocurrencies. As I have talked about before, it is a digital ledger and contains a list of all transactions that occurred on that network. They make it possible to complete transactions without a bank or other financial institution. Banks, for instance, make a lot of money acting as a middleman. At first, most banks called blockchains and cryptocurrencies rubbish because they stood to lose so much money to them. They could not stop this progression and so have invested heavily in cryptocurrencies themselves.
To continue with blockchains, they are really just networks of computers running the blockchain software. Each blockchain and its software is different and not interchangeable.
Blockchains are more secure than debit or credit cards. This is because the network and its transactions have cryptographic hashes applied to them. This makes them far more secure. The problems arise from networks getting hacked like any other network or person. However, another good part is it is very hard to have your identity stolen.
Sending and receiving money over a blockchain is pretty easy. First, you decide on a currency to use. This could be Bitcoin, Ether, XRP, Dogecoin, Solana, or Cardano. There are countless others. I would recommend sticking to one of the more popular ones I have mentioned.
Whichever blockchain and its currency you choose, you will get an address on that network. The address comprises a public and private key. The public address is how others send money to you. Strangers can only send to this address, they can do nothing else with it. The private address is your password to your account. You never give this away. It is like giving all your account information away from your bank. You will lose all your money if you do this.
So, when you want to spend money, you can use your password or private key to allow the transaction. Your money is held in a digital wallet and there are several types with distinct advantages.
Blockchain Without Cryptocurrency
Blockchains can totally exist without a cryptocurrency associated with them. Remember, a blockchain is a specialized network. These networks can be divided into public or private blockchains. You do not need permission to join a public blockchain like Bitcoin. However, you do need permission to join a private blockchain. The private networks do not need a cryptocurrency to work.
Most blockchain networks have a cryptocurrency associated with them but that is not a requirement. On its own, it is still a distributed ledger. This ledger can handle NFT’s, financial transactions, and metaverse activities. In fact, handling payments is a primary use of a blockchain.
The blockchain still keeps track of everything that happens within its domain. It does this through a shared database that can not be altered. This is one of its advantages. It is a decentralized storage of information.
Bitcoin
Bitcoin is the first cryptocurrency. It is the most popular and has the largest market cap. It is digital money and you can send it to someone or receive it directly.
Introduction
Bitcoin gives you privacy when you complete financial transactions. There will only be 21 million Bitcoin mined. The closer it gets to the 21 million total, the harder it is to mine the last coins. This ensures Bitcoin is always rare and they cannot manipulate it by making more.
The Token
BTC is the abbreviation used for Bitcoin. The price for Bitcoin varies wildly. When the price stabilizes over a period, it will be a better usable currency. I would not want to spend Bitcoin and then have its value increase 300%. So, it makes for a better investment vehicle right now. Just remember, only invest in what you can afford to lose. So, don’t get emotional about your investments or you will surely lose.
The idea behind Bitcoin is simple: let two people conduct a secure transaction from anywhere in the world. There is no country or company controlling it. Therefore, it is called decentralized.
They track every transaction on the blockchain. This includes Bitcoin and most other cryptocurrencies. The blockchain is both a digital ledger and a network of all the nodes connected to it.
Future Prospects
Bitcoin has been considered a bubble many times. I do not think this is true. Bitcoin seems to reach new highs, crash, then reach new highs again. So, by that history, it indicates that it is not a bubble. It just fluctuates a lot. Keep that in mind and buy small portions after a crash and you will probably do well. Just do not put in too much at once. Some people put their whole life savings in it. I see that as a big mistake. You can not trust any investment vehicle that much. I would not at least.
It's History
Bitcoin has been useful in its history. It is used for payments and investments. Banks and financial institutions have bought large amounts of it. They do this because it is a good inflation hedge most of the time. The reason why they think this is because Bitcoin gets more and more rare as time goes on. This is just how it was created. It was meant to do this so people could not just make more and ruin its value. Look at the United States today with its high inflation. We have this high inflation because the federal reserve printed large amounts of money during the pandemic and passed it out to companies. It helped short term but I argue that it has hurt them far more than it helped. Many companies have gone out of business because consumers buy a lot less now. They buy less because inflation is way too high. See how that works?
Currently, it has no competitors. Other coins have intended to replace Bitcoin but none have come close. I can’t say that it will never happen, but it does not appear it will happen anytime soon. Other coins may have some advantages, but those advantages have not made a dent in the large market cap that Bitcoin has.
Investing in Bitcoin
If your purpose is to invest in Bitcoin, remember it is volatile. It is just like most coins or stocks, its value can change any time and to any value. So, treat it like any other investment. If you are going to buy some as an investment, it is always wise to do so when its value is half or less of its all time high.
I would consider Bitcoin itself to be very secure. Its network has never been hacked. All the nodes in its network make this possible. It was a very smart move by its creator. What has been hacked are the people that use it. That applies to every currency, though. People are always the weak links. This is just to be expected as people make decisions based on emotions rather than logic.
Environmental Concerns
In my opinion, Bitcoin has a smaller effect on the environment than most other digital systems as a whole. It is true mining uses a lot of electricity. However, there are immensely fewer nodes and miners in the world than ATM’s, banks, credit card readers, office buildings, and anything that helps power a bank transaction. Since they are smaller, miners and nodes are able to use renewable energy a lot more than a financial institution. That is the reality of things. So, mining coins does not have the same environmental impact as other things do.
The Lightning Network
The Lightning network is a distinct section of the Bitcoin blockchain. It is only used for payments. The idea of it is to make payments faster, less expensive, and avoid other traffic on the regular network. Any business or country can use the Lightning network. It is used in apps, in particular.
At first, Bitcoin was intended for use as a payment system. However, its price has fluctuated too much and people use it as an investment vehicle. A single Bitcoin is worth a little more than 20k at the time I am writing this. With value like that, people prefer to just invest in it. So, that is another reason the Lightning network was implemented. We needed a better way to send payments using Bitcoin.
To use the Lightning network, you need a Lightning compatible wallet. These are divided up into custodial and non-custodial. Custodial wallets have a company that manages the keys for you. With a non-custodial wallet, you manage your own keys.
Ethereum
Ethereum is the second largest cryptocurrency. It trails Bitcoin but not by too much. It is a decentralized platform that runs many applications on its network.
Introduction
Being decentralized means it does not rely on a bank to process its transactions. It was created in 2015, but it was not supposed to be a form of digital money. Ethereum’s goal is to make use of blockchains. Blockchains are specialized networks.
Uses of the Blockchain
Financial applications and games are the most common types of programs on the Ethereum blockchain. As you can see, developers can run almost anything here. I think all exchanges list Ethereum. While crypto is down lately, you can see that Ethereum and Blockchain have very large market caps.
Ethereum is very popular with investors. The price fluctuates nicely, which makes it easier than some to invest in.
Smart Contracts
Applications on the Ethereum blockchain are built using smart contracts. These are simple programs that define the rules of a transaction. They are programmed to execute automatically when the right conditions are met.
Smart contracts run as code on a blockchain. They execute automatically when the right conditions are met. This makes them smart. Developers create programs and tokens. Some of the most popular applications are finance apps and games. They are called decentralized because no one is managing them or taking a cut off their transactions.
Ethereum is the most popular platform for smart contracts, but there are several others. The others also execute transactions, but have their own twists to things. Smart contracts are written in Solidity and Web Assembly, for example. These are programming languages that work well for the blockchain. Anyone can look at the code for a smart app. This makes everything transparent.
Cardano
Cardano is one of the largest digital currencies by market cap. In this section, we will talk about the basics and what you need to know about it.
Introduction
The Cardano blockchain is designed to be a very scalable platform to run smart contracts. Its creators designed it to be sustainable, which is a big plus if they can pull that off. This blockchain platform will allow many types of decentralized finance apps and games.
As mentioned above, Cardano is one of the largest cryptocurrencies and it was designed to improve on what Ethereum does. It is still being developed so not all of its planned features are available yet. However, this goes for many cryptocurrency coins. Most are being updated with new features on a regular basis and this is a good thing.
The Token
Cardano’s token is the ADA. You can buy this at almost every exchange. Many people use the coin to invest money or make payments with it. As with all stocks and cryptocurrencies, it fluctuates regularly. This does create buying opportunities if you are an investor. So keep that in mind.
How It Works
Its creators envisioned it to be a sustainable blockchain. To achieve that goal, it uses a proof of stake system instead of a proof of work system that uses much more electricity. Using a validation system, people stake their own ADA instead of mining. Whoever has staked the longest and with the most coin, wins and gets the reward. Others will validate the transaction at this point. Once this is done, ADA will be distributed as rewards in accordance with how much ADAyou staked on your own.
Metrics
At the time of writing, the ADA coin is valued at $0.43 per token. It has a market cap of $14.79 billion dollars. This makes it one of the largest cryptocurrencies. The 24 hour trading volume is $24 million dollars. Since it’s all-time high is $3.10, this is probably a good buying opportunity if you are a fan of Cardano. Remember, only invest what you can afford to lose and use a reputable exchange.
Cardano, being a third generation blockchain, will likely become more developed and useful. It is already making headway in that direction. Its token, the ADA, has many people looking at it. Since this is a proof of stake platform, it has generated much interest because this helps the environment.
Cryptocurrency is changing our world. From banking, investing, and spending money, we have options now. These options empower us and the rest of the world. Cryptocurrency gives us freedom without having to rely on governments.