Crypto basics for beginners
Bitcoin ushered in a new era of money that is technically superior to fiat currencies. In this crypto basics feature, I will discuss the key information you need to explain cryptocurrencies to grandpa with mind-numbing results.
“Wealth is not about having a lot of money. It is about having a lot of options.”Unknown
Crypto basics summary
Since you are here, you have heard about people ‘investing in cryptocurrency’. But what does that mean, and how exactly can you start move away from tradfi, and into crypto? This crypto basics write-up will start you down the path of cryptofinance, and breakdown the complexity into bite-sized chunks. In this write-up, ‘cryptofinance’ is an umbrella term for all aspects of the emerging financial landscape. If you’re new, stick around and read till the end. Here’s what I’ll discuss:
- What is cryptocurrency?
- A brief history of crypto
- How do cryptocurrencies work?
- What are the benefits of crypto?
- Are cryptocurrencies all the same?
- What is cryptofinance?
- How do you self-custody crypto?
- Which are the best wallets to keep crypto assets safe?
- Are there custody solution for cryptofinance?
- What is the future of crypto?
- How do I put money into crypto?
- Crypto basics; key takeaways
1. What is a cryptocurrency?
A cryptocurrency is a currency that only exists on the internet. For all intents and purposes, it is digital money. This basic definition does not include all 30-odd-thousand projects but it will suffice for the time being.
Like normal currencies, a cryptocurrency is a medium of exchange and serves a similar purpose to the US Dollar or Euro at a surface level. The difference is that cryptocurrencies such as Bitcoin and Litecoin cannot be altered, debased or changed. This is because ‘bearer assets’ or ‘digital commodities’ use cryptographic technology like SHA-256 and Scrypt to enable safe and convenient and secure transactions.
A government or statutory body cannot stop a transaction from being processed on these networks.
A ‘proof-of-work’ (PoW) or ‘proof-of-stake’ (PoS) consensus mechanism is used to secure transactions and ensure network integrity. Bitcoin and Litecoin (PoW) cannot have their monetary models changed. On the other hand, Ethereum (PoS) users can vote on changing the monetary policy and inflation rate of Ether.
Bitcoin’s inflation rate is 1.74%, which is programmatically halved every 4 years, roughly. Ethereum’s model is not dissimilar to that of a central bank, which can be altered provided there is consensus among top shareholders.
2. A brief history of cryptocurrencies
Satoshi created Bitcoin in 2008. The founder(s) are believed to be a single person or a group of people.
Satoshi envisioned peer-to-peer electronic cash and made that idea a reality using bitcoin. It was a new way to transfer value directly to recipients without fees, provided the recipient had an internet connection. Satoshi’s original creation gave rise to many cryptocurrencies such as Litecoin, which was fairly launched by Charlie Lee in 2011, and Ethereum, which was launched by Vitalik Buterin in 2015.
Over the years, Bitcoin and Litecoin emerged as base layers. A medium of payment, storing wealth and frictionless transacting. In 2017, crypto hit over $800 billion, while in 2021, the total crypto market capitalisation reached $2 trillion.
The fork wars constituted a major attack vector against Bitcoin which eventually failed. Forks included Bitcoin Cash and Bitcoin SV, both of which have been mostly selected out of the market due to their bad faith trajectory. Notably, Litecoin was never a ‘fork’ of Bitcoin, as Litecoin launched fairly in 2011 and operates its own chain from the genesis block. Attempts to characterise Litecoin as a fork have been made, but they are erroneous, misguided and potentially malicious. Litecoin has remained a top 20 coin for its history, and continues to climb up the ranks in 2023.
Besides being the two most verifiably decentralised cryptocurrencies around, Bitcoin and Litecoin’s main attractions are self-sovereignty, absolute digital scarcity, fast transaction times and did I mention self-sovereignty?
In 2022, privacy became a big topic as rumours of ‘operation chokepoint’ turned out to be real. The rollout of Central Bank Digital Currencies which threaten basic civil liberties also raised concerns. Additionally, rampant fraud throughout the year placed a spotlight on the importance of transparency standards and moving funds off centralised exchanges that have a history of bad behaviour.
3. How do cryptocurrencies work?
Bitcoin uses SHA-256, which is a set of cryptographic hash functions that constitute the bedrock of bitcoin’s proof-of-work system.
In April 2011, the first altcoin, Namecoin, was created to form a decentralised DNS in order to create a censorship-resistant internet. In October that same year, Litecoin was released and quickly became the first successful crypto to use Scrypt as its hash function instead of SHA-256. This gave the general public the ability to mine Litecoin without having to buy graphics hardware such as the ASIC machines used today.
Litecoin started getting media attention in 2013, reaching a market cap of $1 billion. Today, Litecoin’s market cap is around $7 billion.
Ripplecoin came shortly after in 2011. Today, the coin’s founders are embattled in legal disputes with the United States Securities and Exchange Commission. Ripple has funded attacks against proof-of-work consensus layer and is in league with banking cartels to build CBDCs.
At one point, cryptocurrency projects began spreading like wildfire, with over 25,000 coins being built today. Much like the dotcom bubble, the vast majority of these coins are vapourware.
4. What are the benefits of crypto?
Cryptocurrencies are becoming more common as the pioneer crypto makes headlines. Still, the idea of investing or dabbling in cryptofinance is far not fully accepted. Regardless of how far the technology has come, most people prefer fiat or cold hard cash.
Cash transactions are attractive due to their fungibility. But with the onset of CBDCs, the last remaining feature of fiat money is going to be phased out. Meanwhile, privacy features, fungibility, scarcity and self-ownership have been reincarnated in crypto.
Here are some perks that come with the cryptocurrency space:
- Own your own money: Anyone on earth with an internet connection (even without one), can create a Bitcoin or Litecoin wallet and store value there. Patreon, PayPal or any banking institution cannot deny a transaction. Central bankers are working on central bank digital currencies (e.g. the digital euro), where middle-men (private banks) are removed. Soon, a central bank (the state) will own your money (IOUs), instead of a private bank.
- Easy transfers: People want to earn money, which is why they would often affiliate themselves in different business transactions by working as a middleman. And while their services can make the transition easier, this can entail more costs from the customers. The more people involved, the more money they have to pay for everyone’s services. You won’t have to worry about this because cryptocurrency cuts out the need for working and paying several middlemen during a single business transaction.
- Low fees: You can now pay for your transactions online, but most of these have transaction fees. If you are experiencing high fees, use USDT or Litecoin, which have near-zero fees, unlike banks and credit cards.
- Possibility for confidential transactions: Not everyone is confident in letting other people know about their transactions. As much as possible, people would want to practice confidentiality, especially if the transaction involves a lot of money. You can achieve this goal when you choose to use cryptocurrency. This transaction will only involve two parties, which means that you don’t always have to use a reference document for banks and other credit institutions.
5. Are cryptocurrencies all the same?
Cryptocurrencies are not all interchangeable, far from it. In cryptofinance, top tier cryptos are referred to as ‘blue chip’ cryptocurrencies. Blue chips include Bitcoin, Ethereum and Litecoin.
Broadly speaking, bearer assets like Bitcoin, Litecoin and perhaps Monero are regarded as such because they are proof-of-work coins that do not change, fundamentally. The supply is capped and the inflation rates are known. Bearer assets are sometimes referred to as ‘digital commodities’. In fact, Bitcoin and Litecoin are regulated as property in the United States. Ethereum is in regulatory limbo as of April 2023.
Bitcoin is viewed as a store of wealth, while Litecoin is viewed as a payments mechanism because of its faster transaction times and lower fees. The two retain value regardless of central bank policies. The two blockchains have never been hacked or altered, unlike Ethereum.
On the other hand, centralised stablecoins like USD Tether and USD Coin are tokens built on infrastructure like Ethereum and Tron. Their purpose is stability, instant settlement and negligible fees. Tether is the leading fiat-pegged token in crypto.
Meanwhile, Litecoin’s Mimblewimble through extension blocks (MWEB) upgrade builds on keys features lacking with Bitcoin, namely fungibility and privacy.
These distinctions barely scratch the surface of the cryptofinance space.
What are alternative coins (altcoins)?
An altcoin is fundamentally a cryptocurrency that shares similar source code with Bitcoin. However, alterations and differences in the open-source code makes the project distinct from bitcoin. Since Bitcoin is the pioneering crypto, everything that is not bitcoin is considered a de-facto altcoin by hard-line Bitcoiners.
The term became popular during the 2017 bitcoin fork war, and now serves to include around 30,000 coins on the market today. Ethereum and Litecoin are among the coins that have gained sufficient traction and staying power to be considered on their own merits.
Altcoins that have become household names in crypto:
- Litecoin (LTC) – Launched in the year 2011, it is often referred to as ‘silver to Bitcoin’s gold.’
- Ethereum (ETH) – Launched in 2015, it can be used to decentralise, codify, secure and trade anything.
- Monero (XMR) – Launched in April 2014, it is a private, secure and untraceable currency.
Regardless, most of the 30,000-odd coins are called ‘alternative coins’ or altcoins. Initially, altcoins were considered to be modified versions of Bitcoin. Today, cryptofinance has changed to include a variety of assets with different consensus mechanisms, and projects built on top of them. A consensus mechanism refers to the method chosen for securing the network and relaying transactions. Consensus mechanisms generally fall within two categories: proof-of-work (PoW) or proof-of-stake (PoS).
Beyond that, cryptofinance is much like traditional finance, but without the red tape or regulation. Assets include: bearer assets (BTC, LTC), finance platforms (ETH), decentralised finance, stablecoins (USDT, USDC), non-fungible tokens (NFTs) or ordinals, and other synthetic or derivative assets which have yet to be created.
What are tokens?
Tokens generally serve a utility and are built on a platform like Ethereum, Cardano or Tron. For example, the Tether (USDT) stablecoin is a token that represents a 1:1 peg to the US Dollar. Ethereum is among the various platforms used for issuing such tokens. Tokens are not necessarily decentralised. In fact, the vast majority of them are not, and are unregistered securities. Platform decentralisation is also questionable. For instance, Solana is not decentralised and should be thought of as a company. Arguably, Ethereum is also a company, but this is an open question as of April 2023.
All projects built on the ERC-20 platform are tokens. Utility tokens provide access to features of a project, and are designed to give holders access to products and services. These typically involve access to special deals within the project and voting rights on improvement proposals. While this is a grey area especially for regulators, it’s worth noting that utility tokens do not grant the same type of ownership as traditional stocks do.
Tokens come in various forms, with initial coin offerings being extremely popular in the 2017 bull run. Other types of tokens are built with different incentives in mind, but growth and development of the project are typically a core design implementation. Typically, this means a strong revenue-generating business which results in a token appreciating in value. A hybrid token could be a mix of a utility, network and security token.
6. What is cryptofinance?
Millennial and Gen Z investors are looking beyond traditional assets such as stocks, bonds or real estate to find opportunities. Since legacy assets are mired in red tape and saturated, emerging financial markets powered by cryptofinance is gaining traction. Seeing this evolution of finance, countries are creating legal frameworks for Bitcoin and cryptocurrencies as money moves from highly saturated traditional markets to a new, open and globally accessible network.
Despite being thwarted by some abrasive regulatory bodies in the United States and elsewhere, cryptocurrencies such as Bitcoin, Litecoin and Ethereum are still rising to prominence because of their frictionless nature.
Since the top-most cryptocurrencies have reliably solved the problem of monetary duplication online, this has created major opportunities also from a decentralised finance aspect. Beginner traders or investors might find it somewhat difficult to draw the similarities and differences between coins, tokens and altcoins, partly because the industry hasn’t adequately bridged the knowledge gap. For example, you can store coins, tokens and altcoins together in a multi-cryptocurrency wallet, rather than having separate wallets for Bitcoin and Ethereum and other tokens.
This piece of information should help you to differentiate between asset classes.
7. How do you self-custody cryptocurrencies?
Before anything else, you’ll need a crypto wallet. Even digital money requires a wallet, which can be an exchange wallet, an internet browser wallet, a phone app or a personal hardware wallet.
The benefit of having your own wallet means you can easily access decentralised finance via metamask (or other wallets) to buy, sell or execute smart-contracts on the decentralised marketplace.
Every wallet has a public address and a private address. The public address is the address where you receive funds from people. The private address is the “password” to access and send funds. Never share your password. Otherwise, you might lose all the money in your wallet.
How do you secure your crypto?
- Online Wallet – It is the easiest way of storing money. And also, the least secure. However, it is fine for purchasing things and funding your trading accounts.
- Paper Wallet – The least convenient but hacker proof wallet of all times. It contains all data necessary to generate any number of private keys.
- Mobile Wallet – This wallet works when you download a mobile app such as Phoenix wallet.
- Desktop Wallet – It is similar to the mobile wallet, but installed on desktops instead (BTC/LTC Core, Wasabi wallet).
What are private keys?
A private key is a secret alphanumeric code mathematically paired with your public key. This alphanumeric code is connected to your address where you receive payments. Private keys allow you to spend your bitcoin and ensure that ownership remains under your control, provided you keep the alphanumeric code a secret.
Private keys can be stored in a number of ways:
If you setup a crypto wallet, you might need to figure out the mnemonic phrase or associated mnemonic seed. Typically this is a set of random words that the software client provides to you, which you must back up and take note of in the exact order it was given to you.
The phrase is used to recover your cryptocurrency, using either the same wallet or a different one.
A backup JSON file
The files must be safely secured on a computer via encryption to prevent unwanted access.
Importing and sweeping
Import and sweep are methods of transferring a private key onto a software wallet. Import keeps the Bitcoin on the original private key, while Sweep sends the Bitcoins to a new private key connected to the software wallet. As a rule of thumb, sweeping is more recommended than importing. That’s importing and sweeping in a nutshell.
All methods mean that you are in full control of your bitcoin and crypto. The main benefit being that you can essentially be your own bank without anyone telling you otherwise.
Alternatively, exchange wallets are also a solution. However, exchanges are intermediaries which operate as a third-party within strict legal frameworks. Exchanges can freeze user funds if ordered to by the state. Still, the service providers offer simple solutions with user-experience in mind for those who do not want to worry about private keys and other details.
8. Which are the best wallets to keep crypto assets safe?
Following the year of rampant fraud, epitomised by the FTX meltdown, keeping assets safe is a major priority. Another Scam Bankman Fraud will rear his ugly head in the future, so it’s best to take precautions. For maximum security, a personal hardware wallet ensures full ownership of your Bitcoin and Litecoin.
Cryptocurrency wallets come in two forms, either as a connected device which performs various tasks of any other wallet by helping you select which deals you wish to trade in, or the other option is a disconnected device.
- Ledger Nano: One of the more affordable hardware wallets, available in the market which enables storing multi-currencies, is made as a smart card device. It needs a USB port connection to make transactions and manage the user’s account. It has free updates, and its user interface is compatible with all software, making it a hassle-free device.
- Trezor: It is another form of a cryptocurrency wallet that can be used to store bitcoins and make easy transactions. Accompanied with advanced security options, Trezor is compatible with Windows, OS and even Linux. Whenever the user wants to make a transaction, the deal is directed to Trezor for the user’s digital signature. The user can validate transactions through the device, merely by clicking the correct buttons.
9. Are there custody solutions for cryptofinance?
Many purchased their first digital currencies using pioneering exchanges like Coinbase in 2017. The landscape has evolved today. Crypto apps are useful, but securing funds after doing business is never a bad idea.
Both KYC-compliant and non-KYC exchanges are available for crypto users nowadays. For those who wish to avoid KYC due to privacy concerns, or oppressive governments, then exchanges with e-mail only signups are useful. A VPN service may be worthwhile.
Needless to say, using a centralised exchange defeats the purpose of decentralised cryptocurrencies. Placing funds on an exchange means trusting a third party, which is no different to a traditional IOU with a bank. As such, exchanges should be treated as public bathrooms; a place to do your business and get out when your business is done.
As discussed, storing crypto on an exchange means you don’t need to worry about your private keys. However, this means you are trusting the third party to give you your coins on request.
Veteran bitcoiners will tell you ‘not your keys not your coins’, due to the fact that traditional financial payment rails and banks have consistently blocked people from using their own hard earned money over the years.
The trade-off is palpable and is for every individual to judge.
Since bitcoin is technically still an experiment and hasn’t even reach 5% of the world population, it remains to be seen how government’s will react to cryptocurrency exchanges. This means that storing some bitcoin on a private wallet ensures that you are protected against malicious or rogue governments. The threat of this happening will probably taper off with increased mainstream adoption.
In order to maintain ownership of your cryptocurrency, you must store your private keys in a secret location.
10. What is the future of crypto?
Unless you happen to come across a crystal ball, it’s impossible to know what the future holds. However, that won’t stop people from building the industry and speculating on what’s to come.
If you are familiar with crypto, you’ll know that it has endured many peaks and troughs since its inception in 2009, the most recent one being over 50% drawdown from $65,000 to $28,000.
This trend has been continued over and comes along because bitcoin and crypto is new technology. The market still does not know how to price this monumental innovation, which ends up manifesting as wild swings in prices.
Will bitcoin and crypto decline in volatility as the space grows and matures? Possibly.
Regardless, the some of the brightest minds are not choosing to work in traditional finance, but in decentralised finance and bitcoin. That should tell you quite a bit about where the future of cryptocurrency is likely heading.
Is crypto a bubble?
Bubbles come and go in the blink of an eye, and this can be incredibly lucrative. Those assets that stick around and rise from the ashes are the cryptocurrencies to pay attention to.
Since its inception, Bitcoin has increased on average about 200% per year. Last year the global USD money supply grew by 22% of the total issued currency, all the while bitcoin’s supply remains the same.
As the fiat money supply expands indefinitely, bitcoin’s supply cannot be changed.
If anything at all, the bubble exists in the faith we still attribute to fiat currencies which lose between 2%-10% in purchasing power per year.
With this knowledge, you are now armed with the basics of Cryptocurrency 101, and can begin your journey down the bitcoin and crypto rabbit hole.
Stay tuned for our trading 101 guide and learn the basics of trading bitcoin and cryptocurrencies!
11. How do I put money into crypto?
If you are a beginner, sticking to time-tested apps is the name of the game. However, securing your funds on a private ledger is the gold standard.
Putting money in crypto is straightforward. You can use mobile applications or advanced cryptocurrency exchanges. The most straightforward way to purchase your first bitcoin or litecoin is through a mobile application.
Every exchange application has its own guidelines and rules, so you must be certain of these guidelines before using them. If you are about to make your first purchase and would like to know where to begin, here’s are two applications to get you started.
- Crypto.com is a popular mobile application to buy, exchange and spend crypto. It allows customers in nearly every country to buy bitcoin and is supported by Visa and Mastercard.
- Revolut is a fintech mobile bank which allows users to buy, sell and exchange cryptocurrencies as well as traditional assets. Revolut introduced a method to send coins off the app, which is an improvement.
Use the above referral links and get a signup bonus on your first deposit.
12. Crypto basics; key takeaways
Cryptofinance could would not exist if it weren’t for Bitcoin, Litecoin and Ethereum. Relative volatility is part and parcel with novelty. Nowadays, double digit inflation is normal even in legacy finance; banking giants and household names such as Facebook have lost 90% of their value, and more.
Volatility is inescapable, no matter where you go. There is no safety except for the optional safety provided by self-custody. This is only available in crypto.
Meanwhile, cryptofinance innovations, economic changes, and our developing understanding of what is and isn’t valuable is paramount for building a better financial system. When Bitcoin drops 80% year-on-year, this knowledge will help you find the fortitude necessary to hold at least a portion of your bitcoin in cold storage.
You are now armed with the crypto basics to explain the budding cryptofinance sector to your grandpa. And if he doesn’t get it, you can always choose to explain it away instead.
No information will be seen or construed as financial advice.