The Ultimate Beginner’s Guide to Cryptocurrency
You’ve probably heard a lot recently about Bitcoin and “cryptocurrencies” as there has been a recent surge in price and huge buzz, creating a global phenomenon. But if you’re like many people and simply have no idea what is going on but want to learn more, we are here to help with our Ultimate Beginner’s Guide to Cryptocurrency. We’ve put together a guide that covers all the basics of cryptocurrencies, what they are, why they are important and even how you can make money from them.
What is Cryptocurrency?
Let’s start by breaking down the word cryptocurrency.
Crypto + currency
First things first – What is a Currency?
A currency is simply a system of items that have value to those that hold them. In today’s society we accept that pieces of paper and coins have a value. There is no gold bullion supply backing up the value of any currency since the US left the gold standard in 1971, quickly followed by every other major international currency. Our entire economic system is held up by a universally accepted illusion that the money we use is intrinsically worth something. Luckily this illusion is universal and the system we are using is very stable and mostly works.
Currencies aren’t just made by countries and don’t just exist as paper and coins. Any company that has a voucher scheme or loyalty scheme has created their own currency specific to their company. This is purely based on the fact that consumers and the company both accept that it has value.
Even if we go all the way to the simplest form of currency we’ll see that it follows the same rules. Think of when you were a child at school. It’s highly likely that there were some forms of currency existing that naturally developed within the juvenile ecosystem of the playground. Think Pokemon cards, Tamagotchi or marbles. They are usually rare, generally due to the children’s inability to purchase them themselves. They’re portable. They’re difficult to recreate and yet easy to distinguish. But most importantly, they have value because children think they have value. Exactly the same as the paper and metal that grown ups use to run countries and wage war.
What is Crypto?
Cryptography is the process of turning ordinary text or data into incomprehensible text or data and back again. Today it is mainly based around mathematics and computer science to protect valuable data from theft or alteration.
So from the name alone a cryptocurrency can be seen as a currency that is encrypted to protect the users money. Whilst this is definitely part of what a cryptocurrency is, there is so much more to it than simply an encrypted way of sending money.
It’s important to know that cryptocurrencies exist completely digitally.
But what does this actually mean?
A “crypto” is a currency that exists only in the digital world, on a network. Currencies like the US Dollar or the Euro are partly digital currencies. They exist in a physical form (cash) but also in the digital world, which has allowed people around the world to use their money over the internet. A completely digital currency has the benefit that it can exist inside its own network which gives rise to many benefits. This is how most cryptocurrencies exist and is created by a very important technology called the Blockchain.
In 2008 the world’s first cryptocurrency, Bitcoin, was invented by a person or people that are only known under the pseudonym of Satoshi Nakamoto. It was a revolutionary idea that allows digital transfer of ownership in a completely transparent way. It also solved the infamous Byzantine Generals Problem. The way it does this is through the creation of the blockchain.
For more details on Bitcoin read through our complete beginners guide – What is Bitcoin?
Before we get onto the details of the blockchain. We need to know how monetary transactions work in today’s world.
There is the first party that wants to send the money. The second party that wants to receive the money. Then a third party (usually a bank) that has the control over if and when that money is sent, usually for some kind of fee. Banks can also keep closed records in a form of ledger of every transaction made on their network.
Where the blockchain differs from this is that it acts is like an enormous open ledger that records every single transaction that is made on the network. You can have a look at all the transactions that have ever taken place on the Bitcoin network here.
Imagine a group of people that all send various amounts of money to each other. All these transactions are linked together and are verifiable with an open ledger for everyone to see and agree on whilst giving the ability to dispute any incorrect transaction on the ledger. But not only is the blockchain open, it is also decentralised through distribution. What this means is that the data on the ledger isn’t held in one place. It is kept on the network. It’s kept on everyone’s computer that decides to use the cryptocurrency. This means that data transferred by a blockchain doesn’t require the use of a third party. There is no middle man or central server controlling the system, this is completely peer-to-peer, just like sending an email.
But if no one is in control of the money then how do you verify that the transactions that take place are legitimate?
Without getting too technical, this is done through the use of “miners”.
So instead of a single source verifying every single transaction on the network there are a group of people called miners that verify the transactions through the use of the previously mentioned cryptography. What they basically do is solve some difficult calculations that confirms that the transaction is correct and in doing so it is added to the blockchain. By design the blockchain encrypts the transactions in multiple ways and is one of the most secure systems ever created. This video does a good visual job of explaining how it works and why it’s so secure if you’d like more information.
A miner is just a person or group of people that have a powerful computer that is able to solve the complex calculations. Anyone can become a miner and in exchange for solving the calculations and verifying the transactions, the miner is rewarded with the cryptocurrency of the calculations they are solving. There is also a limit to how many coins can exist at any one time. This helps with the prevention of inflation. But cryptocurrencies can be divided into smaller and smaller sums which means, in theory, they are scalable to fit the needs of the masses.
Why Does this Matter?
All of the above adds up to give you a way of sending data (in this case digital money) openly, securely and without the use of a centralised governing third party which makes this technology potentially world changing.
The invention of the blockchain means that people now have a way to digitally use money without the need of a third party. This means that with Bitcoin and other cryptocurrencies there is no more waiting for a bank to open, there are no more charges from the bank for holding your money, there’s no waiting 3-5 business days for a cheque to clear and there’s no worry that you’ll lose all your money in a banking collapse which has to be fixed by the taxpayer.
These types of currencies are also more secure and therefore more private than any other type of money. The transactions cannot be faked or reversed, you have all the control over the money you own.
Anyone can use cryptocurrencies. You don’t have to wait until you’re 16 or go through stringent checks to open an account and there’s no central system that keeps your personal details. If you’re one of the billions of people whose country doesn’t have the same level of banking systems that the first world countries have it doesn’t matter. If you have access to the internet you have access to this new era of money. You can send money internationally, without huge fees and in an instant. The whole system is more open, more available and doesn’t discriminate.
Cryptocurrencies are a huge deal and here’s what Brian Singer, of William Blair & Co. thinks of it:
“I think Bitcoin… Or really the blockchain encryption that’s behind it has a greater ability to bring more of the world’s population out of poverty than anything we’ve seen.”
He’s not the only one whole believes in cryptos and the blockchain, many of the greatest minds in the world believe that Bitcoin and the blockchain have the potential to change the world.
If you’d like to know more about the technology behind Bitcoin and other cryptocurrencies and what potential impact it could have one the future of money then we’d strongly recommend picking up the books of Andreas Antonopoulos who can explain why it’s so important much better than we ever can.
Or if you’re here for the reason most people are here and have heard the many stories of people investing in and making a lot of money from Bitcoin and other cryptocurrencies then keep reading.
How to Make Money with Cryptocurrencies
Whilst there is a lot of potential money to be made with investing in cryptocurrencies, there is also a lot of risk and a lot of research that should be done before any purchase is made. This guide won’t give you anywhere near enough information on any specific cryptocurrency to act as an investment guide and we aren’t, and don’t claim to be, financial advisors. By doing your own research on Cryptos Decoded and around the web, you will be able to find enough information to potentially successfully invest. But here are the basics to help you out.
There are a couple of ways to make money. The first is long term investing. This is very similar to buying stock in a company and is generally a safer way of getting into cryptos. The second is day trading and is almost certainly far too advanced and comes with too much risk for us to recommend to any beginner so we’re not going to cover it here.
A lot of cryptocurrencies can be thought of like stocks and shares in companies. With Bitcoin you’re investing directly into a currency, whereas with other “altcoins”, such as WaBi Coin, you’re investing in a company and blockchain that also uses its own currency. Sometimes its own coin is almost completely unnecessary and the coin is being used as a fundraising exercise.
We’d recommend heading over to CoinMarketCap and getting a feel of what you’re looking at. Learn the terms like “market cap” and “trading volume” and do your own research. Learn what problem the company and the coin are trying to solve, research their team and take a look into their whitepaper (a whitepaper is like a report summing up the company and its aims). The coins at the top of the crypto market list will be inherently less risky but will also likely grow at a slower rate so are better for longer term investments. The coins lower down the list will generally be riskier investments but also generally have more potential to grow.
Here at Cryptos Decoded we try to reduce the amount of technical analysis that you have to do when researching a new coin by concisely summing up what the coin is trying to accomplish, their team, history and more. Check out our list of altcoins for some examples on what we mean. Whatever you do, make sure you research as much as possible and know what you’re investing in.
One of the classic rules of investing is to only invest what you’re willing to lose. This is even more relevant with the volatile and unpredictable world of cryptos, so don’t go throwing your life savings into any cryptocurrencies.
How to Buy Cryptocurrencies
We’ve written a comprehensive guide on how to buy Bitcoin, which goes over every possible way that you can buy Bitcoin today. The process is incredibly similar for every crypto and some will require you to buy Bitcoin so you can buy the other coin. We’d recommend you start there and read that.
Cryptocurrencies are traded on websites called exchanges. An exchange is a place that allows you to buy and sell your crypto for standard (fiat) currencies, like the US Dollar or Euro. Other exchanges allow you to buy and sell smaller valued cryptos. When using an exchange it is important to know what you’re getting yourself into. Take note of the following:
- The Spread – This is the difference between the buying and selling price on an exchange. For example, lets say a single Bitcoin is currently valued at $10,000. An exchange might charge you $10,100 to buy a Bitcoin and will pay you $9,900 if you want to sell your Bitcoin. This gives you a spread of $200. Keep this in mind when buying and using exchanges.
- Fees – These are simply the costs to you that the exchange will charge you for using their service.
- Security – Security is important with any kind of transaction and especially so with cryptos as there is no recovery system if your money is stolen. Make sure the exchange has a good security rating and history and is insured for any potential hacks.
- Take note of purchase and withdrawal limits, user-friendliness and liquidity. All of these are important and should be researched before you buy.
Having said this, we’ve done a lot of the research for you. If you’re looking to buy some of the larger cryptocurrencies, such as Bitcoin, Ethereum, Bitcoin Cash or Litecoin then we’d strongly suggest using the website Coinbase. If you sign up with our referral link you receive $10 of free Bitcoin when you spend $100.
Read More: Coinbase Review – Is Coinbase Safe?
How to Store Cryptocurrencies
Once you have bought a cryptocurrency, it’s now time to keep it safe.
You store crypto in something called a wallet. A wallet is a piece of software that you download onto your computer or your mobile phone that has a set of public and private keys (long chains of random characters) that make your wallet unique. The public key acts as a kind of address that people can send money to, and your private key acts as a way for you to digitally sign any transactions to allow you to send money. It is very important that you do not ever share your private key with anyone that you wouldn’t want to access your money, because if they had your private key they have complete control over where your money can be sent. For this reason it is highly recommended that you keep your private key on pieces of paper in multiple locations and not on a computer to reduce the possibility of people acquiring your private key to an absolute minimum.
As you can probably tell, a crypto wallet isn’t an actual wallet. The best way to think of a crypto wallet is like a digital keyring with a set of keys. Your money is always on the network of your chosen cryptocurrency. Using your set of keys allows only you to access that specific part of the network where your money is stored.
If keeping your keys on a piece of paper doesn’t sound like your kind of thing, then you can buy something called a hardware wallet. A hardware wallet is essentially a USB stick that will very securely store your keys. This is what we recommend and think that if you’re planning on keeping substantial sums of Bitcoin or any other currency then a hardware wallet is a must! The only way other people can access your money if it is stored on a hardware wallet is if they physically steal the wallet. So, make sure you keep it safe! We recommend picking up a Ledger Nano S if you want a hardware wallet.
Read our Ledger Nano S Review for more information on hardware wallets and what we think of it.
Check out the latest price of the Ledger Nano S on Amazon.
We’d recommend against keeping your crypto on the exchange you bought it on though. An exchange is a centralised system where one company is in control of all the money of their users. If the exchange were to be hacked, for example, there is a high risk that your money could be stolen and lost forever. Whilst most exchanges are relatively safe and use two factor authentication to add another layer of security to your account, it is still recommended that you do not keep your cryptocurrency on an exchange if you can help it.
There have been instances, such as the hacking of an exchange called MtGox where people have lost fortunes in Bitcoin due to the insecurity of the exchange. In the case of MtGox, they lost 850,000 Bitcoins!
What are the Problems with Cryptocurrencies?
Whilst it might seem from the rest of the post that there is a vast majority of positives about cryptocurrencies, that isn’t quite true.
The largest problem that cryptos face at the moment, from a technical standpoint, is that they are struggling to scale to keep up with the growth. For example, Bitcoin is currently working at around 4 transactions per second whereas VISA processes an average of around 1700 a second. With the current infrastructure it requires a lot of energy from the miners’ computers and means transaction fees are relatively high and can take a long time. This shows that whilst there is a lot of potential from many cryptocurrencies, there is still a long way to go before they work as mainstream, worldwide currencies.
There is also a worry about criminals and terrorists being able to use cryptocurrencies and this seems to be a rather big worry for many people. As cryptocurrencies are mostly anonymous you’ll never know who the person is behind the address.
There is also a potential that people’s wallets or crypto exchanges can be victims of hacks. Recently the IOTA wallet was hacked and 4 million dollars worth of IOTA was lost. There was also the infamous hacking of the MtGox exchange that was mentioned earlier. This isn’t an issue with the currencies themselves, but rather the surrounding digital infrastructure which will need to keep up to ensure the currencies succeed.
On the investing front, the fact that the market it so volatile, unregulated and full of subpar coins that are using blockchain buzzwords and unnecessary coins to fund “nothing” companies is something to make yourself aware of.
The huge world of cryptocurrencies is complex and fascinating with a lot of very interesting projects happening and technologies being developed. There is a lot of hype around investing in crypto and the potential returns are huge if you pick the right coin. With appropriate regulations and successful scaling we believe that cryptocurrencies have the potential to make a huge worldwide impact.
We hope this has given you a good introduction and you’re a little more knowledgeable after reading. If you think we’ve missed anything really important or would just like to know more, then connect with us in the comments or on our Facebook page.