Cryptocurrency has been in existence for more than a decade now. If you still don’t know what it embodies, you’re not alone. We’ve made a dummies guide for crypto, because, honestly, everyone could use one. Let’s begin!
What Is Cryptocurrency (for Dummies)?
“Cryptocurrency” is a combinaton of cryptography and currency.
This fintech (financial technology) solution allows you to move digital assets between individual parties securely using encryption and decryption.
That is, crypto serves as an alternative to our current financial and monetary systems. It’s also changing how the internet works.
The crypto world consists of nonprofits, technologists, for-profit organizations, and investors that play selective roles.
At this present time, the total market capitalization was over $1.4 trillion.
“Cryptocurrency” isn’t always the same as “a cryptocurrency”, however. Semantics is possibly the largest venture newbies have to contend with when exploring the world of crypto.
To clearly get a hold of the fundamentals of cryptocurrency, you have to know that bitcoin is just one of the thousands of cryptos. On some occasions, a cryptocurrency may not always pertain to a virtual currency either.
A cryptocurrency can mean distinctive things. You have to be conscious of each and every context in which people use the term to understand the crypto financial system more easily.
So what are cryptocurrencies?
Cryptocurrencies Are Engineering Projects
Every cryptocurrency is a fintech venture conceived to tackle a real-world problem.
The advent of Bitcoin was revolutionary, for it has leveraged existing technologies that have been previously not used together.
To name a few, Bitcoin uses:
blockchain
peer-to-peer (P2P) network
cryptographic hashing functions
the Proof-of-Work (PoW) consensus mechanism.
Despite Bitcoin’s elegance, there was no assurance that it would get this massive when it was rolled out. Plus, to this day it is a work in progress
So far, the biggest fulfillment of the first crypto challenge was inspiring software engineers to enhance on it. Its code is open-source, giving technologists a cheat sheet for constructing their very own blockchains.
The crypto domain has taken on a lifestyles of its own. Thanks to Ethereum (the second-most popular crypto), it’s unexpectedly convenient to get cryptocurrency tasks off the floor through preliminary coin choices (ICOs).
However, not every project is a paradigm shifter.
Due to the relative ease of cryptocurrency advent and rapid access to capital, Ponzi schemes have infiltrated the cryptocurrency market. Also, some engineers have delivered stupid cryptos to existence simply because they could.
The modern cryptocurrency growth has many similarities to the dot-com bubble in the ‘90s.
Back then, nearly each and every tech stock was hot. But only those with real value survived to this day.
Many crypto ventures will probable go through the same fate as the now-defunct internet startups of the dot-com era. But the ones whose networks grows the largest will be in a position to continue to be relevant in the long term.
Cryptocurrencies Are Protocols
Protocols are the underlying code that dictate how cryptocurrencies work. They’re units of approaches that define how entities can change information.
The web makes use of distinct protocols on which websites run. Internet apps can use the same protocols.
Conversely, cryptocurrency protocols (also known as blockchain protocols) are special from one another. It’s the cause why a blockchain doesn’t function precisely in the same way as another.
Decentralization sets the said two protocol types apart.
Cryptocurrency protocols permit simply a single or a few apps to run on them. Internet protocols, on the other hand, let hundreds or even millions of apps function.
Cryptocurrency protocols usher in Web 3.0 and the Internet of Value.
The protocol is what offers cryptocurrency value.
It’s a fundamental phase of how cryptocurrencies work.
It determines a project’s tokenomics, defining the era and distribution of crypto.
Also, protocols set the regulations for accomplishing consensus when validating transactions and incentivizing network participants.
As long as you believe what the protocol permits, you don’t have to depend on an person party. You can assume everybody to behave accordingly.
Cryptocurrency protocols aren’t static. They go via updates to scale and keep up with demand.
Who decides what adjustments to pursue or abandon relies upon on a crypto’s governance system. Generally, the neighborhood makes decisions via deliberation, persuasion, and volition.
No one can stop you from cloning an existing blockchain and making it your own to implement the upgrades others don’t agree with. That’s why Bitcoin Cash is available for trade independently from the original Bitcoin cryptocurrency.
Many engineers draw inspiration from open-source blockchain software. Others create entirely new cryptocurrency protocols from scratch.
Taking the path much less traveled is an effective way to introduce unseen innovations. Novel protocols arise when same technically inadequate blockchains can’t help certain use cases.
Every cryptocurrency makes use of a decentralized verbal exchange model where peers (also referred to as nodes) can alternate information without a central server. In other words, global networks of computer systems validate and add information to blockchains.
Node operators take part in cryptocurrency networks to earn incentive. They get paid for making sure the integrity of their chosen blockchains in the structure of block rewards, transaction fees, etc.
Cryptocurrencies can use unique consensus algorithms to define the network’s decision-making process. Such mechanisms are fundamental to maintain the blockchains up to date and to make certain each person in the community has same records.
Ideally, any party with an ordinary computer ought to be able to be part of any crypto network. However, devices designed for everyday use are no suit to the computing power of mining-optimized hardware.
Mining pools (groups of independent miners who agree to work together) dominate the present day Bitcoin network. They mix their sources to make bigger their probabilities of incomes rewards and then cut up the earnings they rake in accordingly.
Maybe the only draw back to highly decentralized cryptocurrency networks is the chance of cryptojacking malware. The more not-so-tech-savvy individuals can actively take part in crypto networks, the more vulnerable they are to hackers.
Cryptocurrencies Are Digital Assets
Cryptos don’t have a bodily form. Every digital forex is purely a programmable asset that’s nothing but data on the computer screen. That’s why it can be hard to think about bitcoin replacing actual money.
Crypto is native to the internet
The most tangible representations of cryptocurrencies are the portions of hardware storing the private keys to them.
Cryptocurrencies Are Blockchain Residents
Cryptocurrency and blockchain are inseparable. So when you purchase cryptos, you can’t actually take them with you.
So, how does cryptocurrency work if it doesn’t leave the blockchain?
It’s all about personal key custody. As long as you control and put security on the private keys to your crypto assets, nobody can steal your funds.
Your cryptocurrency wallets contain privacy keys to your property and allow you to do transactions. They permit you to sign transactions, encrypting them in the process.
Private keys generate their corresponding public keys. The latter generate wallet addresses, which are what other parties need to send cryptos to you.
Crypto networks use your public keys to decrypt your encrypted transactions.
Once decrypted, network participants can verify if your private keys (without exposing them) were used to sign the transactions initiated. Then, the nodes can test whether or not you have adequate funds, verify the transactions, and completely report them on their respective blockchains.
Cryptocurrencies Are Mediums of Exchange
Like fiat currencies, cryptocurrencies allows you to obtain goods, services, or both. How environment friendly one is as a medium of exchange and where you can spend it is another story.
You can use some cryptocurrencies for payment without a centralized intermediary. Bitcoin is the best example.
If you’re wondering, what’s the point of bitcoin? It’s a form of digital money exchangeable immediately between peers.
Unlike each fiat currency, bitcoin is past the control of any authorities and knows no boundaries. Its censorship resistance makes it handy to ship to or to receive from any party positioned in any jurisdiction. Best of all, it’s proof against confiscation.
Bitcoin is pseudo-anonymous. Your transactions in it won’t reveal your identification to the network. It’s neutral and permissionless. Anybody can use this crypto cash without discrimination.
BTC
Bitcoin isn’t the most environment friendly medium of exchange amongst the cryptocurrencies of its kind, however.
On average, it takes 10 minutes to verify a bitcoin transaction. In instances of extraordinary network congestion, transactions ought to go unconfirmed for days or even weeks.
Many related cryptocurrencies are higher than bitcoin in positive areas.
Bitcoin Cash is extra scalable. Litecoin gives you quicker transaction processing and charges less expensive fees. Monero’s XMR, Zcash’s ZEC, and Bytecoin’s BCN provide higher privacy.
Despite the top cryptocurrency’s technical downfalls, 11% of its holders use it to pay for goods and services.
The majority of bitcoin traders don’t barter this crypto for something else, though. That’s due to the fact of its extraordinarily confined supply.
Furthermore, some cryptos are protocol tokens. They’re the native tokens on cryptocurrency protocols.
Also, there are app coins. These cryptocurrencies are treasured only in their corresponding apps, which are constructed on top of protocols.
Usage tokens characterize one of the two corporations of app cash that feature as mediums of exchange.
Likewise, utility tokens are cryptocurrencies that work in a similar way to digital coupons. Usually, buyers can get them all through ICOs. Holders can spend them to get entry to services presented on the crypto platforms on which the utility tokens natively reside.
Is it viable to spend blockchain currencies outdoor of the crypto space?
Yes, it is!
On May 22, 2010, a bitcoiner made history with the aid of using a cryptocurrency to purchase two Papa John’s pizzas from a private individual for 10,000 bitcoin. It’s the first time that any one used crypto cash to buy anything from the real world.
By 2021, some merchants had been accepting bitcoin and some altcoins. People in countries experiencing excessive inflation, however, have been gravitating more towards cryptos as mediums of exchange.
Cryptocurrencies Are Units of Account
Due to the relationship between blockchain and cryptocurrency, there’s no questioning the utility of cryptos as units of account.
Cryptos are divisible, countable, and fungible. You can use them for valuing goods and services, calculations, and recording monetary transactions like repayments or debts.
Cryptocurrencies Are Stores of Value
A store of value is an asset whose worth grows or stays the same no matter what happens.
So, thinking about the market’s infamous roller-coaster charge movement, how does cryptocurrency work as a store of value?
Every asset in the world experiences price fluctuations. But the historical price performance of bitcoin has been exceptional. It can actually preserve your wealth, despite being known for its boom-bust cycles and bubbles.
Bitcoin’s 2011-2020 compound annual growth rate has been about 200%. Based on this benchmark, the king crypto has outperformed gold and the S&P five hundred over any multi-year period.
Other than bitcoin, most cryptocurrencies aren’t great stores of value. The purchasing power of most altcoins is unreliable because of their small valuations. The majority of them are speculative assets at best.
The few exceptions are stablecoins. These altcoins are collateralized. They’re typically pegged to fiat currencies, different cryptos, and/or commodities.
Some stablecoins are non-collateralized. Smart contracts modify their prices.
Cryptocurrencies Are Investment Wheels
Cryptocurrencies are liquid property you can preserve to generate returns. Security tokens, a class of altcoins, supply you a voice in the governance of the corresponding crypto projects. Some of them function like company stocks and provide dividend payouts.
You can do spot transactions to get your crypto-assets instantly. Or, you can do bitcoin buying and selling using derivatives like options, futures, or swaps. These high-risk economic instruments can be beneficial for hedging towards risk. They can assist offset any losses if you take contrary positions on the identical cryptos.
If you choose to understand how to make investments in bitcoin and altcoins with much less risk, strongly think about exchange-traded products.
Many governments classify cryptocurrencies as property. So, promoting them at a earnings is a taxable match underneath positive jurisdictions.
Cryptocurrencies can fulfill the usual definition of monetary assets, which must be problem to securities laws. But there’s nonetheless loads of legal confusion about this matter.
In 2018, some officers of the U.S. Securities and Exchange Commission (SEC) stated that bitcoin and ether shouldn’t be regulated like stocks and bonds. But the same organisation initiated a lawsuit against Ripple for its alleged unregistered sales of XRP tokens.
So what is cryptocurrency as an investment vehicle, officially?
For the time being, it’s uncertain which cryptocurrencies the SEC categorically views as securities. The regulator could nonetheless alternate its position on bitcoin and ether and unfold doubt.
Keep this in mind when gaining knowledge of how to make investments in bitcoin and altcoins.
Cryptocurrencies Are Brands
Many crypto traders can’t tell the distinction between value and price. That’s why the valuations of property with little to no realistic fee may want to skyrocket.
As brands, cryptocurrencies represent exclusive ideals.
The Bitcoin community believes that the top crypto is the best hedge against inflation. They additionally view it as ideal to the US dollar as a reserve asset.
The Ethereum community is made up of individuals that aid the decentralization of the net and open-source collaboration.
The Dogecoin community attracts the same breed of rebels that have gotten in the back of GameStop.
Blockchain currencies with massive followings have a tendency to accumulate significant capital via social proof.
They appear more newsworthy than others, so they regularly hit the headlines in cryptocurrency information sites and not only. Good or terrible press, they frequently get lots of media mileage. And the more famous they get, the more vague others become.
That’s why the bitcoin cryptocurrency copycats have a tendency to have notably excessive valuations. Many informal buyers suppose that they’re as treasured as the authentic simply due to the fact they have “Bitcoin” in their names.
Crypto founders recognize the power of branding to attain success
The taglines “Litecoin is silver to Bitcoin’s gold” and “Cardano is the Ethereum killer” are the purpose why Litecoin and Cardano are particularly considered in their niches.
It’s no marvel why Mark Zuckerberg and Co. have repackaged Facebook Libra as Facebook Diem. Keeping the Libra company could cease the crypto mission for good since it roused the ire of governments years ago.
Bitcoin has strived greater manufacturer assassination attempts throughout its history. But it hasn’t gone the way of Libra.
Other than its strong fundamental qualities, the mystery surrounding its creator Satoshi Nakamoto has made Bitcoin more difficult to attack.
Nakamoto walked away from the assignment on December 10, 2010. Since then, the network has had no single distinguished figurehead. The facelessness of Bitcoin makes it appear extra egalitarian than most cryptocurrency networks.
The truth that no one has been in a position to unmask the pinnacle crypto’s inventor reinforces the Bitcoin company as a groundbreaker.
Also, Nakamoto’s publicly recognized bitcoin wallet is nevertheless dormant to this day. So, no one ought to accuse this legendary personality of a profiteer.
How Does Cryptocurrency Work?
As discussed in this cryptocurrency for dummies guide, cryptos operate distinctively from one another. Each one of them tries to be unique and accomplish different tasks.
In general, the nature of crypto is decentralized and private. One makes use of a P2P network to keep its distributed ledger.
Network members can sanction transactions privately and securely. The network examines whether or not the sending party does have enough money before approving the transfer.
A consensus mechanism maintains individual network participants honest. The majority has to agree throughout the information verification section before completely including it to the blockchain.
This machine prevents double-spending. It’s a phenomenon the place an asset proprietor reproduces a digital forex and spends it a couple of times.
In a PoW system, miners make investments in highly-priced hardware and devour widespread quantities of electrical energy to take part in a cryptocurrency network. They make cash via transaction prices on top of the crypto reward they acquire for their work.
A cryptocurrency protocol sets the rules, even though it’s no longer always set in stone. A crypto’s governance machine affords a means of upgrading the infrastructure to scale as demand increases.
Cryptocurrencies are made up of interdependent foundational technologies. If one is missing, the entirety should crumble. That’s why cryptocurrency and blockchain generally go together.
What Is Blockchain?
Giving that this is a information to cryptocurrency for dummies, we won’t focus on blockchain. But to put it simply, it’s a kind of decentralized disbursed ledger.