Everyone’s talking about it, everyone wants to get in on it, but what is it really? What is cryptocurrency?
Well, before you have any funny thoughts, no, it’s not what they use as money on Superman’s home planet.
It’s time to answer the million dollar (or million bitcoin?) question -
What is cryptocurrency?
Cryptocurrency is a digital peer-to-peer system that makes it possible for anyone to send and receive payments from anywhere without relying on banks to verify transactions. Rather than carrying and exchanging physical money in the real world, these cryptocurrency payments are stored as digital entries to an online database that describes specific transactions.
Now you’re probably wondering — “Sheesh, if it ain’t the currency Kryptonians use, why’d it called cryptocurrency?”. The answer’s simple — it’s because cryptocurrency uses encryption to verify transactions. There is some mighty advanced coding involved in storing cryptocurrency data and transmitting it across wallets and to public ledgers, that’s all done to increase security and safety.
In its essence, it is decentralized digital money that is designed to be used online. These cryptocurrencies are generally not issued or controlled by governments or central authorities.
How does cryptocurrency work?
As I mentioned earlier, with cryptocurrency, there isn’t a centralized authority that manages and maintains the value of the currency. The first cryptocurrency — Bitcoin — was first explained in principle by the mysterious Satoshi Nakamoto in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System”.
An illustration of a cryptocurrency platform (Source: Unsplash)
Nakamoto stated that online commerce had reached the point where it was almost completely reliant on financial institutions acting as trusted third parties to process electronic payments. But the trust-based model didn’t really allow for completely non-reversible transactions because there wasn’t a way for financial institutions to avoid mediating disputes.
When reversibility is possible merchants need to request more information from customers than they would otherwise need. Some percentage of fraud was also considered unavoidable. While physical currency could be used to avoid this, there was no way to make payments online without involving a trusted party. Nakamoto described the whole bitcoin project as “an electronic payment system based on cryptographic proof instead of trust.”
This cryptographic proof comes through transactions that are verified and recorded on a blockchain. This is one of the most important concepts to understand while learning about crypto.
So, what’s that whole blockchain thingie?
In its essence, blockchain is a set of connected blocks or an online ledger. Every block contains a set of transactions that have been independently verified by independent members of the network. For a new block to be generated, it needs to be individually verified by every single node before it is confirmed, which makes it borderline impossible to forge transaction histories. The contents of the ledger need to be agreed upon by the entire network of an individual node or computer that maintains a copy of the ledger.
An illustration of the Ethereum blockchain network (Source: Unsplash)
Blockchain is attracting a lot of interest these days with potential applications in numerous sectors like supply chain, insurance, healthcare, telecommunications, etc. as well as with processes like crowdfunding.
Even financial institutions like JPMorgan Chase & Co. are experimenting with blockchain to streamline payment processing and reduce transaction costs.
Now, back to our scheduled programming — your cryptocurrency crash course.
Types of cryptocurrency
There are upwards of 8000 cryptocurrencies in existence as of December 2021. Some of the most significant ones are:
This is the first the first cryptocurrency to ever exist and is the most popular & valuable cryptocurrency till now. It was invented by an anonymous person (or group of people) using the pseudonym Satoshi Nakamoto and introduced in the white paper.
Ethereum is a blockchain network with its own cryptocurrency known as Ether (ETH) or Ethereum. It ranks second in popularity among all the cryptocurrencies.
This is similar to bitcoin but enables faster payments and has processes to make more transactions possible.
There are several other altcoins available like Solana, Cardano, Tether, Avalanche, Polkadot, etc.
How do you buy and store cryptocurrency?
There are usually three steps involved in buying cryptocurrencies:
1. Select a platform
You need to figure out what kind of platform you want to buy your cryptocurrencies through. Here are a couple of options that you could choose from:
- Traditional brokersYou can find online brokers who, along with helping you buy and sell other financial assets like stocks, bonds, and ETFs, make it possible for you to buy and sell cryptocurrencies. They generally offer lower trading costs, but do not provide you with a lot of crypto features.
- Cryptocurrency exchangesThere are several crypto exchanges that you can choose from. They offer varying cryptocurrencies, wallet storage, interest-bearing account options, etc. A lot of these crypto exchanges charge asset-based fees.
When you’re comparing platforms, you should check which cryptocurrencies they offer, what fees the platform charges, the security features that they have, the storage and withdrawal options that they have available, as well as any educational resources that they offer.
2. Fund your account
After you pick a platform, you need to fund your account before you can start trading. The majority (but still, not all) cryptocurrency exchanges enable you to buy crypto by making use of fiat currencies (government issued currencies) like the US Dollar through debit or credit cards.
However, buying crypto using your debit card can be risky because of how volatile cryptocurrencies are. On a few platforms, you can even buy crypto using ACH transfers and wire transfers.
Different platforms accept different payment methods. Even the time that it takes to deposit or withdraw varies according to the platform. The amount of time that it takes for deposits to clear also varies by payment method. Your payment method might even cause some changes in the fees, so that’s something you’d want to keep an eye on.
3. Place an order
You can place orders via through your broker or even use your crypto exchange’s web portal or mobile app. If you want to buy cryptos, you just need to select ‘Buy’, pick the order type, enter the number of cryptocurrency units that you want to buy and then confirm the order. If you intend to sell cryptos, the same process applies.
You can also invest in crypto through payment services like PayPal, CashApp, Venmo, etc. that allow users to buy, sell, or hold cryptos.
There also other investment vehicles that you can use like:
- Bitcoin trustsBitcoin trusts offer retail investors exposure to crypto through the stock market. Essentially, you can buy shares of Bitcoin trusts using a regular brokerage account.
- Bitcoin mutual fundsThere are quite a few bitcoin mutual funds available to choose from.
- Blockchain stocks or ETFsYou can take the indirect route by investing in companies that specialize in the blockchain technology behind crypto and crypto transactions. You could also buy ETFs of these companies.
Now, let’s talk about storing crypto. They’re generally stored in crypto wallets — physical devices or online software that securely store the private keys to your cryptocurrencies. There are several wallet providers that you can choose from. You’ll see the terms “hot wallet” and “cold wallet” pop up quite often.
- Hot walletsThese are crypto storage that make use of online software to protect the private keys to your assets.
- Cold walletsThese are also known as hardware wallets. They rely on physical offline devices to securely store your private keys.
Cold wallets generally charge fees, which usually isn’t the case with hot wallets.
Now, that you know what crypto is all about and how you can buy & store it, you’re probably wondering how you can use it. Let’s give you a little taste. You can use it as an alternative currency to normal payments or even hold on to it as an asset, but the more interesting uses of it lie in the metaverse. That’s where you can use it to buy NFTs, digital land (and become neighbors with Snoop Dogg if you have $1.2 million to shell out), or even buy outfits and accessories for your metaverse avatars.
Wanna know more about the metaverse? Check out our guide to the metaverse!
This article about “Crypto for Noobs | What’s cryptocurrency all about?” was originally published in Engati blogs.