For starters, you need to understand that you can purchase products and services with cryptocurrencies, just like using paper money, digital payments, or checks. In addition, you can also trade them for profits, albeit with the chink of high price volatility. Many experts have termed cryptocurrencies as the money of the future, while some have painted them as high-risk financial assets.
The complicated perspectives on cryptocurrencies have been one of the prominent barriers for anyone seeking cryptocurrency investment prospects. Will it be safe to invest in cryptocurrencies? You can find the answer only if you have an in-depth understanding of cryptocurrencies and their working. The following introductory guide offers a detailed account of every aspect of cryptocurrency explained for beginners. Begin your journey in the crypto world with every bit of detail about the basics of cryptocurrencies in this guide.
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What is Cryptocurrency?
The first highlight any beginner looks for in a guide on cryptocurrencies is their definition. What are cryptocurrencies? In the simplest perspective, cryptocurrencies are basically digital assets with the advantage of cryptographic security and decentralization. All cryptocurrency transactions enjoy the benefit of encryption, thereby ensuring highly secure exchanges. The definition of cryptocurrency for beginners also focuses on the decentralized aspect of cryptocurrencies. Decentralization basically implies that cryptocurrencies are not subject to control or management by central authorities.
Another important highlight in the basic answers to “what is cryptocurrency” emphasizes the finite supply of cryptocurrencies. Therefore, they can be equal in value to precious metals in some cases. Interestingly, cryptocurrencies are created through a unique process known as mining, which helps in generating more cryptocurrency. Miners take part in solving complex puzzles by using powerful computing equipment for validating crypto transactions. You can dive deeper into the different defining components of cryptocurrencies later in this discussion.
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Are Bitcoin and Cryptocurrencies the Same?
The question is probably on the mind of every beginner in the world of crypto. Is cryptocurrency different from Bitcoin? In most of the discussions on cryptocurrency, people use Bitcoin and cryptocurrencies interchangeably. You need to clear the confusion and note that Bitcoin is the first known cryptocurrency. Many of the cryptocurrencies you see today have been inspired by Bitcoin, thereby causing confusion regarding Bitcoins and cryptocurrencies.
Simply put, all Bitcoins are cryptocurrencies, while all cryptocurrencies are not Bitcoins. Bitcoin or BTC is the world’s most popular cryptocurrency with a massive market capitalization and value of individual units. It has been programmed for a limited supply of around 21 million Bitcoin. You can differentiate between “what is cryptocurrency” and “what is Bitcoin” by reflecting on the history of cryptocurrencies.
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Background of Cryptocurrencies
Cryptocurrencies are a new variant of digital currency with the facility of decentralization that offers freedom from any government intervention. The popularity of cryptocurrencies started gaining momentum in 2009 with the arrival of Bitcoin. However, any account of cryptocurrency explained properly would focus on the existence of the idea of cryptocurrencies well before the time of Bitcoin. As a matter of fact, the history of cryptocurrencies goes back to the 1980s. Here are some of the notable milestones in the history of cryptocurrencies.
The 1980s served as the first era in the development of digital currencies. The idea of a cryptocurrency emerged for the first time in 1989. The development of ideas for digital cash with the use of cryptography for verification and security of transactions set the foundation for cryptocurrencies.
The anonymous founder of Bitcoin set the wheels of a massive revolution in motion with a whitepaper on Bitcoin in October 2008. Satoshi Nakamoto brought Bitcoin to the world through a whitepaper and subsequently introduced the Bitcoin protocol the next year. Some even consider 2009 as Year One for the crypto world as Bitcoin paved the road for many other cryptocurrencies.
2010 and Crypto Market Growth
In the early years of cryptocurrency, Bitcoin was the only alternative around. Subsequently, many other cryptocurrencies made their way into the crypto landscape while rising and falling in prices alongside Bitcoin. The stark resemblance of many cryptocurrencies to Bitcoin during this time sparked questions like “Is cryptocurrency different from Bitcoin?” and for the right reasons. However, the arrival of players like Ethereum in 2015 changed the perceptions about the functionalities of cryptocurrencies. As a result, the crypto industry started differentiating between the terms cryptocurrencies and Bitcoin quite clearly.
However, the volatility of cryptocurrencies during the initial stage resulted in people losing their faith in cryptocurrency investment as a suitable vehicle. The overall market capitalization for all cryptocurrencies reached a total value of almost $820 billion at the beginning of 2018 before crashing. Subsequently, the market recovered with steady growth levels.
Initial Coin Offerings or ICOs served as the most prominent highlights in the history of cryptocurrencies for the year 2017. During this time, the value of Bitcoin and many other crypto assets increased by radical margins. However, 2017 also brought many scams and schemes focused on targeting unsuspecting crypto investors. For example, phishing attacks and fake Initial Coin Offerings resulted in the theft of millions of dollars in crypto.
Without any specific set of regulations for cryptocurrencies, the world can expect more cryptocurrency scams. Many people wondering about “Is cryptocurrency a good investment?” must also consider the loopholes in cryptocurrencies. However, regulators are gradually drawing cryptocurrencies within the scope of digital asset technology and management regulations.
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Working of Cryptocurrencies
The next important highlight in any introduction to cryptocurrencies would focus on their work. A detailed understanding of answers to “How cryptocurrency works?” can help you find a reliable impression of cryptocurrency features. However, beginners can encounter formidable complexities in understanding the source codes and technical controls supporting cryptocurrencies.
On the contrary, beginners can develop a clear impression of the basic concepts underlying the working of cryptocurrencies. A common highlight in every cryptocurrency guide focuses on the use of different concepts for ensuring the values, integrity, and security of cryptocurrencies. Let us find out the technologies that go behind the working of cryptocurrencies and identify their features.
The foremost aspect which differentiates cryptocurrencies from other forms of digital payments refers to cryptography. As a matter of fact, the term ‘cryptocurrencies’ spells a lot about how they depend on cryptography. If you are wondering about the security of cryptocurrency investment, then you can rely on cryptographic protocols.
The cryptographic protocols support the effective encryption of sensitive data communications alongside safeguarding the different units of cryptocurrency. In addition, cryptographic protocols offer a striking feature of ensuring anonymity for cryptocurrency users in different transactions.
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The cryptocurrency blockchain interplay has been clearly evident from the first Bitcoin whitepaper by Satoshi Nakamoto. Bitcoin and the majority of cryptocurrencies are modeled on the basis of a distributed public ledger for recording and storing all information regarding transactions.
In addition, the blockchain is an important aspect in explaining cryptocurrency for beginners as it serves a crucial role in the verification of the ownership of all units of cryptocurrencies at a specific instance. The blockchain generally has a limited length with a specific number of transactions, which increases as time passes.
Another notable highlight you should take into account about cryptocurrency blockchain refers to the storage of identical replicas of the blockchain in every node of the cryptocurrency network. Every cryptocurrency runs on a network of decentralized server farms operated by miners.
Cryptocurrency transactions have to depend on the blockchain as they won’t be considered valid until they are added to the blockchain. In addition, cryptocurrency transactions are irreversible once they are finalized, as you cannot reverse transactions on a blockchain. On top of it, blockchain also answers “How does cryptocurrency work?” for the resolution of double-spending problems.
Cryptocurrency units are not available for use from the time of initiation to the finalization of a transaction. On the contrary, they remain in escrow, thereby avoiding the double-spending problem. Furthermore, blockchain also ensures safeguards against modifications in cryptocurrency codes for duplication of the same currency units.
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The next crucial highlight which follows up after the cryptocurrency blockchain interplay is decentralization. Interestingly, cryptocurrencies are free from any centralized control, and their supply and demand depend on user activities. In addition, the highly complex protocols in the governing codes take care of governance in cryptocurrencies. Therefore, the community and miners who actively participate in the crypto ecosystem get to decide the future course of action for the cryptocurrency.
Private keys are another important component in the working of cryptocurrencies. The private key helps cryptocurrency owner verify their identity and use their crypto assets accordingly. You can generate your own private keys or use random generators for creating your private key. However, the importance of private keys is more than just an access tool. You can lose access to your cryptocurrency investment if you lose your private key.
Another notable aspect of a cryptocurrency guide would focus on cryptocurrency wallets. The primary functionality of cryptocurrency wallets is to provide storage for cryptocurrencies. However, wallets store the private keys to crypto-assets and reduce the possibility of cryptocurrency thefts. You can find different types of crypto wallets, such as hardware wallets, online wallets, and software wallets.
On the other hand, it is also important to notice the security offered in different types of crypto wallets. As a result, you can choose reliable storage for your valuable crypto assets depending on your requirements. For example, online wallets can be suitable for storing small amounts of crypto you plan on using frequently. On the other hand, hardware wallets are ideal for storing large amounts of crypto for a long duration of time.
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The mention of cryptocurrency exchanges in any account of cryptocurrency explained properly shows their significance in utilizing cryptocurrencies. You need a cryptocurrency wallet to buy cryptocurrency in exchange for fiat currency. However, cryptocurrency exchanges give you the destination to purchase cryptocurrencies.
Crypto exchanges are a vital element in the working of cryptocurrencies as they facilitate the easy conversion of cryptocurrencies to fiat currency. As a matter of fact, crypto exchanges are a significant asset for introducing liquid markets for many renowned cryptocurrencies.
The final and the most prominent highlight in the working of cryptocurrency for beginners would refer to miners. What do miners have to do in the crypto world? Miners work as accountants for crypto communities by using massive computing power to validate crypto transactions. The work of miners often results in the creation of new blockchain copies, with each new addition considered a block.
The Simple Crypto Example
Let us understand the role of miners and how the overall cryptocurrency process works with a simple example.
For example, John wants to send 1 Bitcoin to his friend Annie on a blockchain network with three other users Richard, Tom, and Ben. Let us assume that Ben, Tom, and Richard are the miners running the network by offering computing resources for the network. The transaction starts when John sends the request to the network for sending 1 Bitcoin from his wallet to that of Annie. Now, Richard, Tom, and Ben would review the details of the transaction request and check the wallet balance of John.
If they find that John has 1 Bitcoin in his wallet, they can verify the transaction and add it to the blockchain network. Finally, Annie receives 1 Bitcoin in her wallet, and the transaction is completed. The three miners, Richard, Tom, and Ben, receive a reward in proportion to the computing power they offered to the network and the transaction between John and Annie. Thus, the miners can successfully generate new cryptocurrencies from regular cryptocurrency transactions between users.
The detailed overview of the cryptocurrency guide shows a comprehensive understanding of how cryptocurrencies redefine digital assets. You can notice the unique traits of decentralization, cryptographic security, and the power of blockchain underlying the performance of cryptocurrencies. At the same time, the discussion also clarified the difference between Bitcoin and cryptocurrencies in a subtle manner.
However, a major portion of the introduction to cryptocurrencies focused on the components involved in the working of cryptocurrencies. The tools such as crypto wallets and crypto exchanges provide ease of cryptocurrency adoption among the general public. On top of it, the role of miners in driving the crypto ecosystem forward has been a formidable highlight in crypto history. Start learning more about cryptocurrencies.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!