What is Cryptocurrency? A Beginners Guide (2022)

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Today’s world is one of the most advanced digitized worlds. Technology has penetrated every sector and facet of life. Most of our daily activities are being carried out through the internet, either to browse or work, and it is being used in almost all aspects of life.

You can see that many commercial sites have sprung up that are based on a digital currency. This is an innovation of its kind, and it has been developed using modern technology.

The use of this currency online has reached a zenith, be it for individual or commercial purposes. The demand for this currency has increased exponentially in the last few years.

You must have come across several sites that accept payment through digital currency, and there will be many more in the future. Everyone likes using this new concept of money as it is safe, secure, and easy to use. 

The best part about using digital currencies like Bitcoin is decentralized and not regulated by any central authority. There is no bank involvement or government control on them, which makes them very attractive to people looking for anonymity.

Table of Contents

    What is CryptoCurrency?

    Cryptocurrency is a digital payment system created to allow people to instantly send money over the internet. It works via P2P technology, which means that all transactions are direct, without any central authority or bank acting as an intermediary. 

    Cryptocurrency uses cryptography to protect and verify transactions and control the creation of new units (similar to how central banks print new money). The transactions of cryptocurrencies are confirmed by network nodes and recorded in a public distributed ledger called a blockchain.

    Cryptocurrency is an open-source protocol, which means that no person, company, or country owns it. By being open-source, no one has a monopoly of the currency.

    One thing to understand is that cryptocurrencies are not physical objects. You cannot hold a Bitcoin in your hand or keep Ethereum in your safe. These currencies exist only as a balance on a public ledger, called a blockchain.

    What is Blockchain? 

    Source: iadb.org

    The blockchain is a continuously growing list of records called blocks, linked and secured through cryptography. Each block typically carries a cryptographic hash of the previous blocks, a timestamp & transactions data. Blockchains are highly resistant to modification of the data.

    The Blockchain network in cryptocurrencies is a decentralized peer-to-peer network where peers broadcast and share messages. This allows all participants to have access to an updated ledger containing transactions since the beginning of time.

    Blockchain networks are dynamical systems consisting of two main components: participants (people, organizations) that exchange messages over time and protocols that define the rules of these exchanges. By following the rules, participants converge toward a consensus about what happened in the network.

    There is no central authority that monitors the system and ensures its smooth running. The control over the network does not lie with a single entity but with all participants acting in coordination. This decentralized model makes the Blockchain network in cryptocurrencies resistant to data loss, malicious updates, or censorship.

    What Are Types of Cryptocurrencies

    1. Bitcoin 

    Many people are now aware of the existence of cryptocurrencies, but there are still some who do not have information about it. One cryptocurrency that has been gaining high popularity is Bitcoin.

    Following are the features that make Bitcoin a distinctive cryptocurrency:

    No central authority.

    Being a digital currency, Bitcoin does not have a central bank to control it, and the transactions can be carried out between people easily. Such a feature helps the users to make their financial activities smoother and hassle-free. 

    Easy to set up.

    Unlike other kinds of currencies, setting up an account for Bitcoin is relatively easy. All you need is to provide your email address, and you will get yourself enrolled in the financial activities of Bitcoin with the top features. 

    Transparent.

    All the recorded transactions are available in an open ledger. This makes it easier for other people who want to check the transactions. Such transparency is not majorly found in another cryptocurrency. 

    Low transaction fee.

    To convert money from Bitcoin, one needs to pay a small fee compared to other payment services. Other cryptocurrencies barely facilitate such features. Moreover, even if they do, they are pretty high in price. 

    Security.

    The security level of Bitcoin is high-enforced, making it difficult for other people who want to hack or steal bitcoins from users. Cryptocurrencies demand security to be primarily focused, and Bitcoin holds the maximum amount of protection which gives it a distinctive position among other cryptocurrencies. 

    No Registration.

    In most cases, people need to register and provide their personal information when using other cryptocurrencies. However, this is not necessary with Bitcoin as Bitcoin itself is incorporated with Ultra security which only demands the user’s identification email to verify the authenticity. 

    No hidden transaction fee.

    Unlike other payment services, the transaction fees are not hidden. This makes the users aware of how much they are paying. Although other cryptocurrencies facilitate this feature, they charge a small percentage on each transaction. 

    Wide acceptance.

    Over the period, Bitcoin has been considered the mode of payment, and most users regarded Bitcoin to be the presidential face for cryptocurrency. This makes the criteria of acceptance more significant among the financers. In addition, many retailers accept Bitcoin as one form of payment.

    Flexibility.

    You can do transactions with people quickly regardless of their location, especially if both have access to Internet service. In addition, Bitcoin allows you maximum flexibility contrary to other bitcoins, which makes your cryptocurrency experience far better and smooth. 

    In a nutshell, the security level of Bitcoin is high-enforced, which makes it difficult for other people who want to hack or steal bitcoins from users. Also, many retailers accept Bitcoin as one form of payment. The latter makes the users aware of how much they are paying for. All these features make Bitcoin distinctive from the other cryptocurrencies.

    2. Altcoins 

    Altcoins are the new form of digital currencies that have emerged as an alternative to Bitcoin. It is open-source and decentralized, just like Bitcoins. The altcoin architecture provides several alternatives to some specific functionalities of bitcoins.

    Altcoins have the following features that make them exceptional in cryptocurrencies and variational from Bitcoin. Some of the features might be contradicting but hold some specifications that function differently. 

    Different ways of mining.

    They are all created using blockchain technology which involves mining. The altcoins use different algorithms; hence, miners employ different mining strategies to get the crypto coins. Some examples of these include proof of work, proof of stake, and proof of burn.

    No Limitations to Distribution Model.

    Most do not follow the same distribution model as that used by bitcoin, and wherein there will only ever be 21 million bitcoins mined therefore limiting the number of people who can own it. Instead, some altcoin developers opt to issue more currency units via initial coin offerings.

    Generated with specific Communication.

    They have a community of developers, users, and miners who support them. These communities created altcoins to support their vision for an improved digital currency over that of Bitcoin or other mainstream crypto coins.

    Supports low Power Computation.

    They do not need the heavy computing power employed by bitcoins and hence use other more energy-efficient algorithms such as proof of stake, which can be run on home computers. This feature makes some altcoins convenient and price-friendly for micro-transactions like buying a coffee cup or paying parking fees.

    Anonymity.

    This is the level of identity protection provided by a cryptocurrency. Mainstream crypto coins such as bitcoin and Ether do not offer anonymity as they are fully transparent. This means that they can be traced back to an individual or entity if there is a need for this.

    Algorithms.

    Some altcoins use algorithms that cannot be solved by ASIC miners and can only be mined using normal computers. This allows common users to mine these coins without too much expense and reduces the network’s security.

    Decentralized control/governance.

    Control over cryptocurrencies is decentralized, meaning no central authority controls them. Instead, the network uses consensus among members to make decisions on major changes in its ecosystem, like altering the number of new currencies to be issued.

    Definite Supply.

    Some altcoins have a finite supply of coins mined, unlike bitcoin, which has an infinite supply. This encourages spending as opposed to hoarding among the members of that cryptocurrency community. An example of such a cryptocoin is Ripple that mostly deals with banks and bank transactions.

    Blockchain supportive.

    A shared public ledger on which all transactions are confirmed is included in the blocks. The block time is the average time for the network to generate one extra block in the blockchain.

    Proof-of-stake.

    Some altcoins use this model to guarantee fair distribution where users’ mine’ or validate transactions based on their coin holdings. In addition, this model encourages users to hold coins for a long time to build trust and reputation.

    Proof of Work vs. Proof of Stake:

    Proof of Work 

    Source: Cointelegraph.com

    Proof of work (PoW) is a system that ties mining capability to computational power. The rig with the most powerful GPUs that consume the most electricity and produce the most heat is likely to solve the cryptographic puzzle and earn the reward. 

    Proof of Work is a competition to see who can do the most work. The more work you do or, the faster you do, the more likely you will win this computational race and earn the reward for mining the next block.

    The more blocks mined in a row increase the number of times an amount must be hashed to produce the same output. This is known as a hash collision.

    Proof of Stake 

    Proof of stake means a person can mine or validate block transactions according to how many coins he or she holds. In an environment with high rewards, such as Bitcoin, mining often becomes very competitive, and the only way to earn anything is to have a very powerful system. 

    Underproof of stake, anyone who holds any coin at all can participate by simply leaving their software running. Proof of Stake is meant to ultimately replace proof of work. So, in theory, the more bitcoin you have, the more mining power you can contribute. 

    This is because mining today comes from a combination of hardware and operating costs and a block reward subsidy that miners earn for doing their job of validating transactions. When the block reward subsidy goes to zero, which will eventually happen according to the Bitcoin growth curve, mining will be funded by transaction fees.

    1. Consensus Reached Through Different Methods

    Proof of Work is based on finding an answer to a cryptographic puzzle. Solving this puzzle is also referred to as “mining.” There is no way for an individual miner to influence the probability of mining a block. Thus, the way to achieve consensus with PoW is purely through economic incentives.

    PoS distributes rewards proportionally to coinage, which means that the holder will get an increasingly bigger share of all future coins generated as their balance becomes older. So unlike PoW, consensus with PoS is reached through economic incentives as well as token weight.

    1. Mining Transactions are Non-Reversible

    With Proof of Work, a miner can replace transactions in the block they have solved. Unfortunately, this means that if one has coins in their wallet, they can’t be certain that the transaction history will remain the same. 

    This is not possible using PoS since people who participate in the consensus process are selected specifically based on their known wealth. Also, if a person who validates the block is somehow hacked, their coins will be in jeopardy.

    1. Mining Rewards Increase Linear with Difficulty

    The rewards for mining a block in PoW entirely depend on the number of transactions that go into it. This means that when more people want to make transactions, the difficulty of solving a block will increase proportionately, which means that more computational power and thus energy will be required.

    This is not the case with PoS, those who simply hold coins receive a flow of income proportional to their balance. So if transaction volume increases (as measured by bytes per block), the number of coins one has to hold will increase.

    1. Required Computational Power is Directly Correlated with Coin Price

    The more computational power, the more energy it takes to mine a block. As a result, one can look at how much computational power was needed to mine a block and how much was spent and use that information to estimate the price of bitcoin. 

    Since PoS doesn’t require any computational power, this correlation is broken. Also, the transaction fees in a block will be used to pay part of the block creator’s reward instead, so compared to PoW, where they are paid entirely by coin owners, a lower coin price means fewer fees from transactions, which in turn means less reward for the miner.

    1. Centralization of Mining Increases with Time

    In PoW, big mining companies get bigger and bigger, while independents eventually get pushed out since the initial costs are so high. This leaves a very small number of people in control of the network.

    Since PoS does not require computational power, its initial cost is much lower even though they may have only trivial stakes compared to latecomers. However, it’s important to note that this doesn’t mean centralizing coin ownership – a single person cannot own more than 50% of all coins.

    1. Coins are Never 100% “Spendable.”

    With PoW, there is no set time at which coins become spendable. They can be spent at any time after they are mined.

    On the other hand, with PoS, the only way to spend coins is by validating a block, which takes place once every x amount of time (e.g., once every day), and this process consumes coinage.

    1. Full Nodes are Incredibly Cheap Compared to Mining Rigs

    Since it doesn’t require much computational power, running a full node costs next to nothing, this means that anyone can do it since they wouldn’t have to pay high electricity bills the way miners do.

    Also, even if everyone stopped mining tomorrow, their coins would still be protected by people who are running full nodes. Miners are only there to process transactions and validate blocks. If there were no miners, these functionalities would still be available as long as at least one person was running a full node. 

    To sum things up: with PoW, coins are validated by solving complex computational problems. With PoS, they are validated by holding coins and thus becoming part of the validator pool. In both cases, we have an additional variable: how many coins a certain participant owns.

    Pros and Cons of Cryptocurrency

    Cryptocurrency is evolving every passing minute. With such an evolvement, it carries numerous advantages and disadvantages within itself, which makes it quite a challenge for the user to opt for the cryptocurrencies, So it’s better to go through the pros and cons of the cryptocurrencies and decide whether its beneficial to your business or personal need or not. 

    Pros of Crypto

    For a clear overview of cryptocurrencies, let’s go through the advantages that it provides to its user in such a way you can evaluate the need to opt for digital currency for your daily financial operations.

    • Decentralized Authority 

    This means there is no one singular authority that can control or manipulate it. Each cryptocurrency has a team of developers who maintain and update it on an ongoing basis to keep it working smoothly.

    • Security

    This is one notable benefit, mainly because it’s not something you can easily do with traditional currencies. Cryptocurrencies use cryptographic technology that allows them to be secured and kept safe from hackers or any other would-be security threats.

    • Affordability 

    While this isn’t necessarily true everywhere, cryptocurrencies are generally cheaper than other forms of payment. This is mainly because the less money you have to spend, the faster it can be sent to anyone else in the world with a cryptocurrency wallet address.

    • Accessibility 

    Anyone from anywhere in the world can receive or send cryptocurrencies as long as they have WiFi or data on their mobile device and a cryptocurrency wallet address.

    • Transparency 

    While this might not be true of every single cryptocurrency, each one that has been created is made fully available for others to view on an open-source platform. This means that you can do a quick Google search and find out just about anything you need to know about any given cryptocurrency.

    • Fungible 

    This means that one unit of the currency is like every other unit of the same currency. For example, you can exchange or trade a unit of Bitcoin for another unit of Altcoin if both are equally valued or hold a similar cost. Other factors fall as per the specific cryptocurrency criteria. 

    • Divisible 

    Cryptocurrencies can be divided into smaller units, which makes it easier for transactions to be made with a small amount of money. Usually, having a complete Bitcoin as your asset is next to impossible. With such an advantage, one could get the ownership of certain units of Bitcoin. 

    Cons of Crypto

    Despite the fact that the Crypto Economy is rapidly increasing and has been flowing under the consideration of the majority audience, It might cover a great percentage of the economy to utilize cryptocurrency as the presidential medium of financing in the near future. 

    • Highly Volatile 

    One thing that could easily be considered a disadvantage is price volatility. Cryptocurrencies are famous for their huge values, and because of this, they can rapidly increase and decrease in value. Fluctuating pricing could be beneficial or risky both at a time.

    • Speed due to Decentralization 

    Another disadvantage of cryptocurrency is the relatively slow transaction times due to being decentralized. The goal of cryptocurrency was to create an efficient form of currency, and while the transactions are becoming more efficient, they still take 10 minutes on average.

    • Lack of Resources

    There isn’t much to spend cryptocurrencies on. While some places do accept cryptocurrencies, it can still be difficult finding stores and products that accept them. Even if they do, the prices might be different than what you would get in a place like Amazon or eBay.

    • Transparency of Financial Operations

    It’s hard to control and track cryptocurrencies transactions. The transaction list of each person in public, so there isn’t a way to keep it anonymous when transferring funds between users. 

     Additionally, government agencies such as the IRS and FBI keep a close eye on cryptocurrencies. This could be because of how easy it is to hide transactions, which can make tracing funds difficult.

    • Threats and Viruses 

    Cryptocurrencies would be the possibility of security breaches. Hackers are constantly breaking into servers or databases with personal information in order to get access to cryptocurrency wallets. If your online wallet is hacked, you might have free reign over your cryptocurrencies.

    • Not bound to Government regulation. 

    The lack of legal status and protection for cryptocurrencies. There isn’t an official legal status for cryptocurrency, which means that it’s up to each country’s protocols whether or not they want to take action towards it. This can be risky because the lack of legality means that cryptocurrencies aren’t easily regulated, which can lead to breaches in security.

    • Less Awareness 

    The currently limited support for cryptocurrencies. For example, cryptocurrency exchanges are still a relatively new concept, and it might make it difficult to exchange currencies. Even if you do manage to find stores that accept cryptocurrencies, it’s still not as efficient as using your bank.

    How Can You Mine Cryptocurrency?

    It is possible to mine cryptocurrency, but it requires having several sets of equipment running for hours. Cryptocurrencies are mined through solving complex algorithms with computers. The more powerful the computer’s CPU or GPU is, the better chance it has in mining cryptocurrency successfully. There are actually two ways to actually mine cryptocurrencies:

    1. Solo mining 

    This involves mining on your own. It can be profitable because you have full control over the coin you are mining.

    However, it is usually difficult to mine by yourself as this requires a great deal of time and effort because you will need to build or buy an expensive computer.

    2. Pool Mining

    This is a more effective way of mining because small miners can get together and form large groups that have the power to compete with established mining companies. When you pool your resources, you get access to better computational power that has a chance of successfully mining the coin more quickly.

    The first step is actually deciding what type of mining equipment you want to buy or build. You can buy a pre-built PC with dedicated graphics cards, or you can build your own computer using an Intel CPU and AMD GPUs. 

    The next step is selecting the cryptocurrency that you want to mine. There are several coins available like Bitcoin (BTC), Litecoin (LTC), and Ethereum (ETC). Onceion (LTC) and Dogecoin (DOGE). Check the values of these coins online in order to determine which one has a higher value per unit. 

    How Can You Use Cryptocurrency?

    With cryptocurrencies becoming more popular, companies are looking for ways to adapt them to their business. Cryptocurrencies are already used by some companies in place of traditional currency due to the convenience they offer. However, there are five other unique ways that businesses can make use of this digital currency.

    • Allow customers to buy products using it:  

    Some companies already offer this option. Earlier this year, Tesla Motors regarded Bitcoin to be the mode of payment for purchasing Electric cars. Other than that, Amazon and Other Ecommerce sites are looking forward to it. 

    • Exchanging goods for it: 

    People can buy, sell or trade their products with cryptocurrencies as well to avoid converting into cash or another currency first. For example, a car wash company accepts Bitcoin as payment for washed cars.

    • Act as an investment alternative to fiat currency:

    Cryptocurrencies like Bitcoin and other altcoins are traded as a form of investment as well. Cryptocurrencies can be purchased and sold just like any other currency to use as an asset that may have the potential to grow in value over time.

    • For payment between third parties: 

    The same way sending money through PayPal or Western Union works, cryptocurrencies could become a new form of transferring money from one party to another.

    • Accept them in exchange for products or services: 

    This is how some companies use cryptocurrencies as a form of payment. Some examples of this are web hosting services, computer parts, and other related items that can be paid for using cryptocurrency.

    Should You Invest in Crypto?

    Cryptocurrency is a new and quickly-growing investment option for those looking to make money off the rise in prices. But, like anything else worth investing your time or money into–you need to do some research first! 

    One should find the answers to these questions before making a decision 

    1) What am I trying to achieve?

    2) How much risk can I handle?

    3) What type of return would meet my goals with that level? 

    Once you get the answers to these basic questions about crypto trading, things will become clearer, as well as give insight into how long-term success could potentially occur over short spans.

    The evolution of Crypto currency is expanding but recently exploded onto global prominence because people finally realized its potential. 

    How to Invest in Cryptocurrency?

    Investing in cryptocurrencies is not only an exciting experience but also a profitable one. With the cryptocurrency market experiencing significant ups and downs, it becomes important for us to protect our investment while making sure to capture big profits.

     But cryptocurrencies are so new that there are no clear guidelines to follow for investing. We are constantly bombarded with information about where we should invest, what should be the amount when to sell etc., which often leads to confusion.

    1. Open your digital wallet.

    You are required to have a digital wallet that will store your cryptocurrencies. There are multiple wallets available for different operating systems. Pick the one that you feel comfortable with, but before doing so, make sure it is capable of storing the currencies you wish to invest in.

    2. Fund your wallet with relevant Cryptocurrencies

    Funding your digital wallet can be done by means of exchange or even locally by meeting someone and trading cash directly. An easier and safer way is to fund your wallet using an online service. 

    3. Keep some amount as ‘HODL.’

    This will save you from any kind of panic or sudden price crashes as you move forward with your investment process & avoid trading at such critical moments. You should ideally remove these funds from exchanges and keep them safe in your own digital wallet.

    4. Choose which cryptocurrencies to buy.

    It becomes difficult for new investors to decide which cryptocurrencies they should invest in because there are over 1500 digital currencies available today, with each promising great return. The best way would be to stick only to the top 5-10 cryptocurrencies by market capitalization.

    5. How much to invest and when to sell

    These factors need high consideration as Cryptocurrencies are new to the world and their awareness has not yet reached a certain level, which restricts the audience from investing in Coins, and they end up making their financial operations through traditional cash. 

    Investing your money is the most difficult part as there will always be a voice inside you saying, “what if it crashes” or “is this a good time to invest?” etc. Nobody knows what’s going to happen next, and cryptocurrency prices are extremely volatile.

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