The Basics Of Cryptocurrency

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.

Decentralized is the other 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.

Beginnings of 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 good to choose to make purchases. 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 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.

Stablecoins

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 close 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

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 triggering 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 And Their Value

You might wonder how all this digital money get 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.

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. 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 insures Bitcoin is always rare and they cannot manipulate it by making more.

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.

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. 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. 

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.

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.

Conclusion

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.