Originally published at: Cryptocurrency for Beginners | GoVisaFree
In 2021, you should be living under a rock not to hear about cryptocurrency. This new worldwide phenomenon will be like the internet, from experimental obscurity to global takeover. If you have none, minor, or only vague knowledge of cryptocurrency and wish to know more but at the same time want a source that introduces you to the topic with digestible beginner-friendly content, you are in the right place! What is a cryptocurrency and how does it work? Continue reading to deep dive and learn more on cryptocurrency for beginners!
What Is Cryptocurrency and How Does Crypto Work?
Cryptocurrency, or as it is otherwise known as crypto, is a digital form of currency created to replace or use in the place of fiat money/currency (like dollars and euros) as a medium of exchange. Crypto is similar to fiat money in a non-commodity-backed currency but is different by not being a government-issued legal tender.
Since the governments don’t issue a cryptocurrency, it has power for manipulation or intervention. So, no central authority has command over it. Crypto only exists on the internet and it is a virtual token that has no physical form. This attribute makes crypto quite fitting for this era and the value of the crypto is proportional to its demand in the market.
What Is Blockchain?
Blockchain is the second part of the puzzle that is cryptocurrency. Most of the cryptocurrency is built on blockchain technology. The answer to the question “how does cryptocurrency work?” or “how does crypto work?” is blockchain. You can call blockchain a publicly distributed ledger (digital) technology. In other words, it’s a collection of interconnected records that are highly resistant to alteration and protected by cryptography.
Owing to blockchain-like technology, the existence of crypto as a viable alternative to fiat money is possible. Whenever a crypto transaction is being made, a new block is created, and onto it, the said transaction is written. The newly generated block will be linked to the one before it, which will be related to the one before that, and so on.
POW and POS
There are two ways to acquire crypto via consensus processes. POW, also known as Proof-of-Work, is the first. POW is a method in which a number of computers compete to gain cryptocurrency. Creating crypto is called mining, and a computer involved in it is called a minor node. The minor nodes compete to guess the NONCE or Number Only Used Once (a pseudo-random number). This complex number will be hard to guess and verify by other minor nodes and the incentive for guessing the NONCE is that the winner will be rewarded the cryptocurrency’s native coin.
A minor node must spend hash power/computer power/processing power to solve the puzzle or guess the number. Stronger the hash power, the more likely it is for the minor node to guess the complex number. However, the network will adjust its difficulty to the computer’s hash power to avoid supercomputer supremacy. Also, individual nodes are allowed to pool their hash power and split the reward playing field for the non-wealthy to compete.
POS or Proof-of-stake is the other consensus mechanism where the reward is acquired irrespective of the hash power of the nodes. The people who go about this mechanism are called validators, as they validate blocks (transactions) and earn the reward. Thus, they do not mine but mint or forge new blocks. To become a validator, a node must stake a certain amount of coins in the network as security, and by staking higher, the node can increase his/her chance of being selected as the validator even though the selection process is random. If the validator is involved in any form of malpractice by any chance, he/she will be punished by taking away their security, called slashing.
Why Is Crypto So Popular?
Bank transactions could fail from one of the following scenarios: technical issues, transfer limits, hacked accounts, or additional charges like transfer charges. This problem doesn’t happen with crypto because of how crypto works. Also, unlike fiat money, they are immune to counterfeiting and don’t require a centralized authority to govern and manipulate it. Its appeal stems from the fact that it’s secure, enforced by robust encryption algorithms. Its unpredictable nature of value hike due to its demand and the limited quantity is another reason for its popularity.
History of Cryptocurrency
Cryptocurrency is a portmanteau word for cryptography and currency. The words “cryptography” derived from the ancient Greek words “kryptos,” meaning “hidden,” and “graphein,” meaning “writing.” Thus, the intention behind the word was to imply a hidden message which the correct recipient can only read. In the same vein, to understand how cryptocurrency works, one must first examine the history of cryptocurrency, from its humble beginnings to the present day.
1991-2008: Creation of Bitcoin
Scott Stornetta and Stuart Haber developed a secured cryptographic chain of blocks in 1991 that no person could tamper with a document’s timestamp. The duo incorporated Merkle trees or hash trees into their system in the following year for collecting more documents on a blog. But it was only in 2008, the history of the cryptocurrency really started with the genesis of Bitcoin (BTC) by the mysterious Satoshi Nakamoto.
2008-2015: Creation of Ethereum
Soon when bitcoin started to make some noise in the financial scene, Satoshi Nakamoto disappeared in 2011 from the web (which was a huge turning point in the history of Cryptocurrency in hindsight) and has never been heard of since. The next major turn of events happened with the creation of Ethereum by Vitalik Buterin, who wanted blockchain technology to be more than just a peer-to-peer network. Ethereum became the first blockchain application technology to support smart contracts.
2018-present: Crypto Future
From 2015 to 2018, the cryptocurrency had increased its value steadily. Other than Bitcoin and Ethereum, many other projects hit the market developed from blockchain technology, which had varied attributes. In 2018 to be precise, there was a boom in Bitcoin, which was the first time cryptocurrency had a global audience’s attention.
Types of Cryptocurrency
Bitcoin is the most famous of the cryptocurrencies. BTC is a transparent peer-to-peer transaction cryptocurrency, but at the same time secure, i.e., the transaction can be seen by everybody, but only the owner can decrypt it with their “private key.” Litecoin (LTC) is second only to Bitcoin, which does almost everything BTC does while improving certain aspects like transaction speed, coin limit, etc. Ethereum, which brought a new dynamic to blockchain technology, is among the favorites of blockchain investors.
Other must-know names in the cryptocurrency world are:
- Cardano (ADA)
- Tether (USDT)
- Polkadot (DOT)
- Bitcoin Cash (BCH)
- Stellar (XLM)
- Dogecoin (DOGE)
Safety and security are some of the crypto fundamentals that attract the public towards them. It is surprising but confirmed that it is safer than a transaction with your bank. The blockchain environment is encrypted by cryptography, making it nearly impossible for even a highly-skilled hacker to breach or decipher codes.
Cryptography is how crypto works so well. Even if someone were to override a block’s code successfully, they would have exerted much higher hash power to the degree that the cost of decoding is more than the reward; as a result, such breach efforts are less likely to occur.
No, the government does not back cryptocurrency as the fiat money is backed by the reserve bank or by no private entities, for that matter. So it is hard for many countries to accept it as legal tender. Countries like China, Egypt, Bangladesh, Qatar, Morocco, Iraq, Algeria, Tunisia, and Nepal have an absolute ban on crypto, among others implicitly banning them. At the same time, countries like Denmark, France, Japan, Germany, Iceland, Mexico, Spain, and the United Kingdom have approved Bitcoin transactions and have developed regulations to enforce them.
An important point to note is that even though crypto is looked upon as currency, the IRS (Internal Revenue Service) treats it as property or asset, which in turn means that any capital gain through trading or selling is taxable.
Crypto Trading Strategies
Following are some of the popular ones:
Day trading is a fast-paced trading strategy where traders buy and sell digital assets/cryptocurrency on the same day. This nature comes with a risk of losing a significant stake. Therefore day trading is not advisable for beginners.
Despite the capitalization in the term looking like a typo, this is how the term is written. But it was a typo in the Bitcoin forum that has gained clout through repetition by experts. In this trading strategy, the traders hold on to the crypto without swaying.
Hedging in crypto is an investment strategy where traders can mitigate the risk of adverse movement of price in their assets. Traders generally use financial tools such as bonds for different or future to hedge cryptocurrency.
Trend Trading is the most popular form of trading, not just in crypto but in all of the tradings that people know of. In this strategy, Traders buy and sell cryptocurrency based on the market trend (high or low).
Advantages and Disadvantages of Cryptocurrency
- Cryptocurrency is not affected by inflation like fiat money. Every cryptocurrency has a fixed value when they are launched. The value is written in the source code because Bitcoin has only 21 million coins; the value will increase as the demand increases.
- Crypto is a secure form of transaction compared to the bank, (which is one of the crypto fundamentals) and there are further measures that the user can take to make them more secure.
- Crypto is self-governed and maintained by miners/developers, with each transaction stored on their hardware. And because of the reward structure for maintaining by the developers, the integrity of the transaction records remains unblemished.
- Crypto is decentralized. Due to this, any possibility of monopoly by any big entity is eliminated.
- Crypto is a faster and cost-effective mode of transaction. The transaction cost of fund transfer across the borders is negligible or zero (which is the most likely scenario).
- Due to the security and privacy offered by the cryptocurrency, it can be used to transfer money for illegal deals.
- Data loss is punished with financial loss. Due to the involvement of untraceable codes, impenetrable authentication protocols, and hacking defense, the loss of a private key means the account cannot be retrieved.
- Data mining is not environmentally friendly. The Crypto ASIC miner computer used in mining farms consumes a lot of energy. These high-priced computers are practically useless/junk and need to be replaced when a new version of the computer or hardware comes out with varied cryptocurrency fundamentals.
How To Buy Crypto?
Now that you have an idea of how crypto works let’s see how you can buy crypto. Following are the four steps concerned with the buying of cryptocurrency.
Select a cryptocurrency trading service or venue in accordance with your requirements and the type of crypto in consideration. Cryptocurrency exchanges, brokerages, and payment services are the user favorites that enable you to buy, sell, and manage coins. Cryptocurrency exchanges are recommended for beginners because of their security and user-friendliness.
Submit various proof documents such as passport, driver’s license, etc., to verify your exchange. The proof required will depend on the residing countries’ legal system. After verification, a payment option should be linked, whether a bank account, credit card, or debit card.
After verification and the payment plan linking, you can start buying crypto from various available order types and investment options. Exchanges also offer recurring investment schemes for the users.
Use cryptocurrency and Bitcoin wallets outside your exchange to ensure more safety to your digital assets. These wallets will ensure that only you have control of the personal key to the account.
To Wrap it Up
The above 101 guide to cryptocurrency must have answered how cryptocurrency works for beginners as entrepreneurs, digital nomads, or even regular people who need to know anything and everything about cryptocurrency.
Cryptocurrency has come from relative experimentation in the obscurity of the 2000s to a global takeover of the 2020s. Its attributes, like security, indifference to inflation, and its hiking value, make it more desirable for the user to adopt it in the future to replace the transaction method completely. So, keep a watch out and your ears open for all things about cryptocurrency.
Note from the editor: Buying and selling cryptocurrencies carry risks, including the possibility of substantial losses. For additional information, please visit our disclaimer. We at GoVisaFree make no suggestions about how to buy or sell bitcoin. Consider consulting with a financial and tax advisor for further information.
How to get cryptocurrency?
You get cryptocurrency as a reward for solving the complex problem using your computer’s processing power, or you can purchase them through brokers.
What is a 51% attack?
If anyone manages to hold 51% of the hashing power in POW, they can essentially control the entire blockchain.
What do ASICs mean?
ASIC or Application Specific Integrated Circuit is a specialized computer with high hashing power to mine cryptocurrency.
How many LTC coins are there?
There are 84 million Litecoins