FAQs: Cryptocurrency 101: The Ultimate Beginner’s Guide
What is cryptocurrency 101? If you’re reading this, you’ve probably already heard about people ‘investing in Cryptocurrency’. But what does that mean, and how exactly can you start investing in cryptocurrency?
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“Wealth is not about having a lot of money. It is about having a lot of options.”
Crypto is deemed to be one such option. If you are a beginner, you may be anxious before investing and at times wonder if cryptocurrency is safe. It is normal to be extra vigilant as money doesn’t grow on trees. But contrary to popular belief, digital asset investment is arguably both a lucrative and secure option for long-term investments.
Cryptocurrency 101: What is Cryptocurrency?
Firstly, you’ll need to know what a cryptocurrency is.
A cryptocurrency is a currency that only exists on the internet. For all intents and purposes, it is digital currency. This basic definition does not include newer projects but it will suffice for the time being.
Like normal currencies, it is a medium of exchange and serves a similar purpose to the US Dollar or Euro on the surface. However, cryptocurrencies are designed to exchange information digitally through a process made possible only through mathematical cryptography.
With the advent of advanced cryptographic technology like SHA-256 and Scrypt, safe and convenient transactions will become far more common in the not too distant future. In fact, cryptocurrencies will eventually reach more platforms, services and perks than their traditional counterparts.
More specifically, cryptocurrency is a digital currency that uses cryptography for security. By definition, a cryptocurrency is not owned by any government or statutory body and is safe to trade online for the vast majority of cases (minus dodgy projects that have no users).
Cryptography is used to secure the transactions and to control the creation of new coins. This is in turn controlled by the encoded economic model. For instance, Bitcoin’s inflation rate is 1.74% and this is deterministically halved roughly every 4 years. On the other hand, Ethereum’s model is not dissimilar to that of a central bank, which can be manipulated provided there is consensus among top shareholders.
A Brief History of Cryptocurrencies
The world’s first cryptocurrency is called Bitcoin and it was created in 2009 by a pseudonymous developer named Satoshi Nakamoto.
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.
Bitcoin emerged as an encrypted form of digital money. It has grown in popularity and was worth over $1 trillion by market capitalisation in 2021. Apart from being the most decentralised cryptocurrency in existence, the main attractions are immediacy, self-sovereignty and the digital scarcity encoded within the blockchain.
The Taproot upgrade is set to bring an additional element of privacy later in 2021.
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, Litecoinwas 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. Unlike with Bitcoin, the creator of Litecoin is known.
Litecoin started getting media attention in 2013, reaching a market cap of $1 billion. Today, Litecoin’s market cap is upwards of $11 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.
At one point, cryptocurrency projects began spreading like wildfire, with over 11,000 projects being built today.
What Are The Benefits Of Cryptocurrencies?
Cryptocurrencies are becoming more common as the pioneer crypto makes headlines. Still, the idea of investing or dabbling in this financial medium is far from accepted.
Regardless of how far the technology has come, most people would still opt to pay for their transactions using cold hard cash.
If you’re one of these people, you should realise that cryptocurrencies are not going away. Their eventual widespread adoption is almost inevitable, partly because even traditional financial organisations are keen on the industry.
Here are a few perks that come with the cryptocurrency space:
- Easier transactions: 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.
- Transaction fees: You can now pay for your transactions online, but most of these have transaction fees. If you don’t want to be burdened with paying more just because you use a convenient platform, use cryptocurrency because transactions do not require transaction fees, unlike banks and credit cards.
- More 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.
Cryptocurrencies are not interchangeable
You are now familiar with cryptocurrencies and that Bitcoin is the ‘blue chip’ crypto that set the trend with its inception. However, the cryptocurrency metaverse is as diverse as it is new. These cryptocurrencies that exist because of Bitcoin are called altcoins.
Initially, altcoins were considered as modified versions of Bitcoin, and in a way they are. But today, the altcoins landscape has matured to include traditional aspects of money markets built on the blockchain. This is called decentralised finance or DeFi.
A few examples of successful altcoins includes:
- 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 decentralize, codify, secure and trade anything.
- Zcash (ZEC) – Launched in the year 2016, it claims to provide extra security or privacy to the transactions.
- Dash – Also known as Darkcoin, it is a secretive version of Bitcoin.
- Ripple (XRP) – Launched in 2012, it’s structure doesn’t require mining.
- Monero (XMR) – Launched in April 2014, it is a private, secure and untraceable currency.
Want to invest in crypto? Get started here
Investing in crypto can be a daunting venture, but nowadays it is much easier to buy and sell bitcoin and cryptocurrencies.
The most straightforward way to purchase your first bitcoin is to create an account with an online exchange.
Cryptocurrency exchanges act as a medium where buyers and sellers meet to trade coins per the respective currency selected by the user.
Every exchange has its own guidelines and rules, so you must be certain of these guidelines before using them. Check out these exchanges where you can buy, sell or store bitcoin and crypto.
If you’re about to make your first cryptocurrency purchase and would like to know where to begin, here’s a (non-exhaustive) list of crypto exchanges to choose from to get started.
SwissBorg is a blockchain based wealth management platform that provides its users with the infrastructure and tools to manage their cryptocurrency investments more efficiently. The Swissborg app is among the simplest on the market and offers entry-level functionality for people who are just getting started with bitcoin and cryptocurrencies.
- Fees: Swissborg is transparent about its fees. Standard users are charged 0.5% to 1% while premium members pay 0% on Bitcoin, CHSB and stablecoin exchanges.
- Pro: Swissborg is intuitive, very user friendly and has a great community with a good reputation.
- Con: While the app is transparent, fees are on the higher end of the spectrum.
- User Interface: Easy to Navigate
- Fees: Average
- Reputation: Trusted
Earn up to €100 in rewards on your first deposit with Swissborg.
Crypto.com is one of the most popular mobile applications for cryptocurrency exchanges. It allows customers in nearly every country to buy bitcoin and is fully supported by Visa and Mastercard.
- Fees: Crypto.com charges fess depending on the volume, with the highest fees being 0.4% on purchases. Fees are discounted by 10% if a user stakes the native token CRO.
- Pro: Available in almost every country that supports Visa and Mastercard with wide set of cryptocurrencies to choose from.
- Con: Clunky, confusing interface and relatively unintuitive.
- User Interface: Clunky
- Fees: Average
- Reputation: Trusted
Earn $25 in rewards on your first deposit with Crypto.com.
BlockFi is an American-based platform that offers multiple crypto-related services all under one roof, including compound interest, crypto loans and other services. It strives for convenience and removes the possibility of mishandling your assets.
- Fees: BlockFi is a commission-free exchange. No fees apply to trades but withdrawal fees do apply.
- Pro: No exchange fees with yield-bearing crypto services.
- Con: Not available in some countries.
- User Interface: Simple enough and relatively intuitive.
- Fees: Among the lowest in the industry.
- Reputation: Trusted.
To create an account with BlockFi click this link. Still not sure?
Earn a crypto bonus when signing up with BlockFi.
Bybit is a bitcoin and cryptocurrency derivatives exchange. It gives professional traders the ability to trade perpetual contracts using leverage and is one of the most widely used derivatives exchanges due to its deep liquidity.
- Fees: Fees vary between 0.025% to 0.075%. However, fees on this derivatives exchange depend on the margin used. The higher the leverage, the higher the fees.
- Pro: Deep liquidity for professional traders with extensive trading options. No KYC (know your client) process needed.
- Con: Does not accept US traders.
- User Interface: User friendly for experienced traders.
- Fees: Low.
- Reputation: Trusted.
To create an account with Bybit click this link. Still not sure?
Earn up to $600 in bonuses by signing up through this website.
Phemex allows you to buy and sell bitcoin and crypto except in the United States. It is primarily a derivatives exchange similar to Bybit and offer a wide range of financial products.
- Fees: 0.025% to 0.075%
- Pro: Deep liquidity, no KYC required.
- Con: Does not accept US residents
- User Interface: User friendly
- Fees: Low
- Reputation: Trusted
Bitfinex is a premier destination for veteran traders all over the world and one of the best exchanges in terms of recognition, trading volume and liquidity. It is known for being up and running during the March 2020 crash, where other exchanges could not keep up with market demand.
- Fees: range from 0.10% to 0.2%
- Pro: Widest range of financial products on the market
- Con: KYC required and less intuitive for new players
- User Interface: Difficult to Navigate
- Fees: Average
- Reputation: Relatively trusted
What are the Differences Between Cryptocurrency Coins, Tokens, and Altcoins?
Millennial investors are looking beyond traditional assets such as stocks, bonds, and real estate to find opportunities to make their fortune. The right time to take risks is when you are young, and many people are launching their own startups and joining burgeoning economies with massive upside potential, both in terms of returns and upwards mobility.
Interestingly enough, cryptocurrencies like Bitcoin, Ethereum and Litecoin are also rising in prominence, partly because of the frictionless economic system they provide.
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 dofferences 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.
What are cryptocurrencies?
Broadly speaking, a cryptocurrency is designed to facilitate the transfer of value. Bitcoin, Litecoin, Ethereum and Monero are examples of crypto coins in the market. Bitcoin is regulated as property across the United States. Coins can be further categorised into groups based on their use-cases.
For example, Bitcoin’s current role is for transactions and to become a store hold of value, which retains its value regardless of central bank policies. Bitcoin is the oldest crypto in the market and its blockchain hasn’t been hacked during the entirety of its existence. But with second layer solutions like the lightning network, the line between store of value and instant payments is blurred.
On the other hand, Stablecoins like USD Tether and USD Coin are built on existing infrastructure like Ethereum and Tron. Their purpose is instant settlement and negligible fees and are effectively fiat-pegged tokens built on top of blockchain platforms.
Privacy coins like Monero offer users the original promise of privacy and anonymity made in the early days. Monero’s stealth addresses and ring signatures are popular among cypherpunks. However, with the Taproot upgrade to be implemented later this year, Bitcoin is also exploring deeper privacy solutions.
Litecoin’s Mimblewimble through extension blocks (MWEB) upgrade also builds on keys features lacking with Bitcoin, namely fungibility and privacy.
What are Tokens?
Tokens are built to serve a utility or security purposed on a platform like Ethereum, Cardano, Tron, Solana or Avalanche. Ethereum is itself a platform for building and hosting decentralised applications, and crypto projects are often referred to as tokens. All projects built on the ERC-20 platform are tokens. Utility tokens provide access to features of a crypto 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 the future of the project among other things. While this is a grey area especially for regulator, 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.
What are Altcoins?
An alctoin is fundamentally a cryptocurrency that shares similar source code used to create 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.
The term became popularised during the 2017 bitcoin fork war, and now serves to include upwards of 10,000 coins on the market today. Ethereum is likely the only coin that has gained sufficient traction and differentiation from bitcoin to be considered on its own merits – though this is debatable.
How do you Store 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 to secure your Bitcoin and Altcoin Investments
- 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 apps. Like Blockstream’s green wallet for Bitcoin.
- Desktop Wallet – It is similar to the mobile wallet, just used on desktops instead.
Which are the best Cryptocurrency Wallets to Keep Your Crypto Safe?
There has been an explosion of awareness of cryptocurrencies in the world, especially after the 2017 crypto bubble. With this increased awareness came an avalanche of innovation, interest and capital inflows which have diversified the options in the bitcoin and crypto space.
As noted, both KYC-compliant and non-KYC compliant online exchanges are available for crypto users nowadays. For those who wish to avoid the red tape with KYC’ed exchanges, or those whose regimes do not allow the free movement of money, then exchanges that require e-mail only signups are useful.
Using such exchanges means trusting a third party, which is effectively the same as a traditional IOU with a bank. As such, you should store your cryptocurrency on a personal hardware wallet to ensure full ownership of your bitcoin and cryptocurrencies.
Crypto 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.
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.
How do you keep ownership of Your Cryptocurrency?
Many purchased their first digital currencies using pioneering exchanges like Coinbase in 2017. Today, a plethora of services and financial products exist in order to provide yield from an ever-growing crypto market.
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.
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.
What is the Future of Cryptocurrency?
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.
The Key Takeaways
Crypto could not have come about without Bitcoin, and the rise and fall in prices comes part and parcel with novelty.
This is particularly exciting for traders who look for volatility and can make a living off trading.
While crypto can be a lucrative business, it pays to learn about the reasons behind why crypto keeps growing.
The innovations in finance, economics and the way we think about value are paramount for building a better global economic monetary system after all. When crypto marks down by 80%, this knowledge will arm you with the fortitude to hold at least a portion of your bitcoin in a private wallet.
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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!