Essential Knowledge About Cryptocurrency for Beginners
15 Apr, 2022
The crypto industry has become familiar to millions of people, retailers, and corporations worldwide. The news is full of facts about quotes and amazing investments. We aim to provide the ultimate explanation of cryptocurrency for beginners. In our cryptocurrency guide, you are going to gain a basic understanding of cryptocurrency, as well as learn about its history, use, and trading. You will also explore present trends like safety and reliability in the decentralized finance sector and learn how to invest in cryptocurrency for beginners.
What Is Blockchain?
Gradually plunging into the topic of cryptocurrencies, you need to have the term blockchain explained and fully understood. Basically, it’s a chain of blocks filled with information. Initially, it was a technology for ensuring trust, so it is very effective in finance.
Each blockchain is a chain that is built according to certain rules that ensure the connection of blocks with each other. It works because copies of blockchains are stored on many different computers independently, and it is almost impossible to forge a block without breaking the connection. There are public, private, and exclusive blockchains, each of which performs its own function.
What Is Blockchain Technology?
Blockchain technology helps users perform transactions that are authorized by their digital signatures. It authenticates the swap or money transfer and protects it from fraud. Thus, the information contained in the digital registry is protected.
Understanding blockchain as a new decentralized database or a so-called ledger of millions of instant transactions is exciting. Investors feel like they are a part of the skyrocketing sector of “finances of our future.” The new sophisticated system guarantees reliable storage of the blockchain wallet, allowing you to secure your finances. There are a few ways you could get involved in the system, which we are going to talk about later in the article.
Moving on, there are several ways how to invest in blockchain in order to support the system — for instance, a direct purchase of cryptocurrencies, taking part in an initial coin offering, or buying ETFs (exchange-traded funds).
What Is Cryptocurrency?
Let’s begin with the cryptocurrency definition. The concept of digital currency is very broad — it could be defined as any monetary unit that exists in electronic form. Such assets are divided into regulated and unregulated. For example, a regulated one is a digital yuan, which is currently being tested in China. But there is no government behind cryptocurrencies.
How Cryptocurrency Works
The decentralized system’s uniqueness lies in the fact that banks do not intervene in the verification of transactions — instead, the payment system itself manages them automatically. We can hardly underestimate the cryptocurrency meaning and its impact on the financial sector. In brief, this is a new method that helps users send and receive payments regardless of their location, local currency, or banking system.
Currently, the top financial organizations are already solving the problem of how to pay with cryptocurrency. The most common way to make purchases using crypto (for example, Bitcoin) is to use a debit card. Such cards can be obtained when registering on famous crypto exchanges. All you need is to know how do you buy cryptocurrency on the exchange using your fiat money.
Furthermore, crypto developers have figured out how to earn cryptocurrency without investment in play-to-earn games. In such entertainment apps, players receive rewards for completing levels and achievements, and cryptocurrencies or NFT tokens become the most wanted trophy.
History of Cryptocurrency
You are certainly aware of this, but Bitcoin is the most popular cryptocurrency. The token was launched in 2009, during the financial crisis. Due to a high degree of bias towards banks at that time, the economic situation boosted Bitcoin’s popularity.
The growth of cryptocurrency usage was supported and accelerated by publications in well-known magazines like Forbes. Economists argued about the usefulness of blockchain, Bitcoin, and other digital protocols, which attracted the interest of the general public.
Consequently, new systems like Litecoin (launched in 2011) and PPCoin (in August 2012) began to appear. Along with them, starting from 2012, emerged the new blockchain-based payment network Ripple, which introduced its own XRP cryptocurrency. This was followed by the launch of the Ethereum blockchain, operating with smart contracts, in 2015. Since then, there have been many other systems and cryptocurrency exchanges.
As of February 2022, we witnessed the rise of more than 17.5 thousand cryptocurrencies, which CoinMarketCap takes into account in its database. However, not all of them have hard and reliable capital. So, when exploring how to invest in cryptocurrency for beginners, it is best to pay attention to the most popular ones. But everyone should thoughtfully and carefully dive into the topic, as it also includes some risks.
How Does Cryptocurrency Gain Value?
Both cryptocurrency and fiat, that is, government-approved and issued money, have value based on trust and usability. The decentralized structure allows people to see the value in investing, knowing that others also trust it, accept crypto in payments and use it as a means of exchange.
Why is cryptocurrency valuable? Let’s explore some evident reasons:
- Blockchain technology offers many advantages in terms of security and usefulness.
- The ability to make cross-border transactions cheaply and quickly is crucial.
- Because it excludes central authorities, blockchain gives more power and freedom to users.
- Bitcoin decentralization provides a highly reliable and anonymous system.
- Significant value is provided by the community, investors, and traders who invest in the development of blockchains and cryptocurrencies.
According to the 2022 BitMEX report, which aimed to predict the future of cryptocurrency, the use of crypto will likely rise worldwide, more women will grasp how cryptocurrency works, and the gaming sphere will skyrocket. So, is cryptocurrency the future? We’ll see.
Pros and Cons of Cryptocurrency
Let’s consider the benefits and drawbacks of crypto.
Advantages of Cryptocurrency
- No personal information is needed for transactions
- Low price of transfers around the world
- Non-exposure to inflation in contrast to fiat currencies
- Crypto can be a tool for trading on the exchange
- Great means for investment and capital savings
- A tool for earning money by mining
Disadvantages of Cryptocurrency
- Volatility: cryptocurrencies are vulnerable to external influences, news, the level of recognition, and trust.
- High commissions: in some networks, fees are calculated in proportion to the number of funds in the transaction. Thus, transfers can be expensive.
- The risk associated with investing and trading CFDs: an inexperienced trader risks losing more than their initial investment.
- The difficulty of perception by society may be the reason that some people distrust cryptocurrency.
- The irreversibility of operations: a transaction cannot be canceled or adjusted, so no one will return the coins if they are manipulated or sent to the wrong person.
- With increasing complexity, cryptocurrency mining may become unprofitable.
Types of Cryptocurrency
Altcoins or alternative coins are all the cryptocurrencies that are not Bitcoin. Most of them appeared after Bitcoin’s launch. Currently, there are many virtual currencies, but only a few have achieved popularity.
Token vs. Coin
Cryptocurrencies can be divided into two large groups: those that have their own blockchain, and those that use blockchains created earlier. Let’s compare coin vs. token.
Cryptocurrencies that have their own blockchain are Bitcoin, Litecoin, Ethereum, XRP, EOS, Cardano, etc. Such cryptocurrencies are called coins or altcoins. But many popular cryptocurrencies do not have their own blockchain yet have a market capitalization of over $1 billion: USDT, LINK, USDC, UNI, etc. These are called tokens. Tokens work on existing platforms. Many of them are based on the Ethereum blockchain, and in some cases, they serve as an analog of the dollar — stablecoins.
How to Trade Cryptocurrency?
One of the most common queries is how to start trading cryptocurrency. Not surprisingly, the most important thing we would like to emphasize in this cryptocurrency guide is learning. Researching by reading news and articles will help you understand the growing digital world. It's valuable because making money with cryptocurrency is possible today.
Answering the questions of where to buy cryptocurrency, we advise easy-to-use P2P exchangers, followed by numerous multifunctional cryptocurrency exchanges and crypto wallet applications.
Trading cryptocurrency involves several simple steps:
Step 1: Open an Account
To start trading digital assets, you need to open an account on the trading platform. The registration process will require the identity document, especially if you plan on trading large sums. The verification system called "Know Your Customer" (KYC) was created to avoid fake and illegal registration.
Step 2: Fund Your Account
There is no fixed amount needed for your account, although different exchanges have different requirements. Depositing money into an account is a personal matter for everyone, and you can start with a fairly small investment amount.
Step 3: Placing an Order
Orders can be placed through the website or mobile application. To buy cryptocurrency, you need to select the "Buy" option, specify the amount of the purchased cryptocurrency, and confirm the order. Similarly, a “Sell” order is placed. A nice tip for you is to check the best time of day to buy cryptocurrency. According to some experts on the web, it is Thursday mornings.
What Can I Buy With Cryptocurrency?
As we have mentioned above, large world companies like Microsoft, PayPal, and Starbucks accept payments in BTC. The list of available goods and services that can be purchased grows daily. You may buy software, apps, game items, real-world items, premium goods, and even coffee.
But if your chosen store does not accept crypto payments, you need to know how to cash out cryptocurrency. In any case, it seems that in the near future the financial system will be altered and this knowledge will not be necessary.
How to Mine Cryptocurrency?
The most important cryptocurrency in the world, Bitcoin, has a limited number of coins that can exist on the network, and it’s still possible to mine them yourself.
So, what is mining cryptocurrency?
Mining cryptocurrency is the extraction of digital currency. Anyone who has the necessary computer equipment and special software can mine cryptocurrencies. Mining involves using computer power to solve tasks; this, in turn, forms new blocks on the cryptocurrency’s network.
How do you mine cryptocurrency?
In the process of mining, solving algorithms produce a coin — a set of encrypted information. The decentralized currency is stored in a blockchain and distributed over the digital crypto wallets of users.
Eventually, calculations become more complex, which results in an increased need for specialized equipment. Moreover, with the growing complexity of the formation of blocks, the mining of cryptocurrency becomes less profitable.
How to Invest in Cryptocurrency Intelligently?
Investing in cryptocurrency and other digital assets is considered high-risk because of their volatility.
Here are some things you might consider:
- People tend to monitor the cryptocurrency market regularly and keep a diverse portfolio.
- For beginners, it is advisable to make a cryptocurrency investment with relatively small capital. A more general rule is: don't invest more than you can afford to lose.
- You might need a proper risk assessment, so many believe that it is useful to study fundamental and technical analysis, explore the assets, and consider experts’ opinions.
How to Create a Cryptocurrency
Creating a cryptocurrency is not as hard as it may look at first glance. To make your own cryptocurrency, you need to act according to a certain algorithm.
- Firstly, to create cryptocurrency, it is necessary to select a crypto code on which the currency will be based. You may download the code on specialized websites like Github.com.
- After the code is copied, you need to make sure that there are all the necessary libraries on the PC to work with the code correctly.
- At the next stage, you need to come up with a cryptocurrency name.
- Since all operations are carried out on the Internet, the program needs to configure network ports through which all data will pass. This is followed by setting up currency generation.
- The final stage is the installation of icons and pictures.
That’s it, but we advise you to explore how to make a cryptocurrency further and perhaps join a developer community.
Is Cryptocurrency Safe?
Decentralization and blockchain encryption protect cryptocurrencies from hacking. To complete transactions, you need two-factor authentication. To start a transaction, you need to enter a username and password; then, you may have to enter the authentication code sent to your mobile phone. Blockchain technology helps users complete transactions. Because each transaction is approved by the parties’ signatures, they are defended from fraud.
But the security measures do not exclude the possibility of hacking cryptocurrencies. The largest cryptocurrency attacks were the hacking of the Coincheck exchange (valued at $534 million) and the BitGrail crypto exchange ($195 million) in 2018.
Like the common banknotes and metal coins, crypto coins and tokens are the modern means of performing payments, money transactions, and trading. These virtual assets are gaining interest because of their level of capitalization, utility, speed, and price of transactions. As long as cryptocurrency users meet safety requirements, transactions in cryptocurrency networks are reliable.
The world of cryptocurrencies and instant money transfers over long distances is growing. It is rightly considered an innovative and thriving sector, as well as a hotspot for investors. Having carefully studied the pitfalls and determined an acceptable level of risk, you can enter this promising area.