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What Is Cryptocurrency? A Beginner’s Guide
Cryptocurrency Introduction
Blockchain technology has been on the scene since 1991. However, cryptocurrency came along in 2009. Yet, the concept has become so popular and is even going mainstream. Gradually, it is replacing traditional methods of finance and payment. Today, it is not uncommon to see online ads showing online stores that accept cryptocurrency payments.
So, the big question is, “do you want to stay updated with this new digital revolution?” If your answer is YES, then this article is for you. In this article, we will explore all that you need to know about cryptocurrencies. Primarily, we will talk about what they are, how you can buy them, their various types and classes, their relationship with the metaverse, etc.
So, let’s get straight into business.
Note: For the purpose of understanding this article, we will be using digital currencies to refer to cryptocurrencies.
What Is Cryptocurrency?
A cryptocurrency is new digital money. Primarily, the name is gotten from the term cryptography, and cryptography (mathematics) is how digital money came about. You know how they print money in your country and send it to banks and ATMs so you can withdraw it, right? Yes! That is the way cryptocurrency is. However, you will not need banks to get this digital money this time.
So, this form of currency removes the relevance of banks from how you get or spend your money. In technical terms, they are digital currencies built on the blockchain. Also, they are not issued by central banks, and governments cannot manipulate them. In addition, the first cryptocurrency that a person produced was Bitcoin.
How Does Cryptocurrency work?
Cryptocurrency works like your school attendance booklet. However, your teacher is not the only one with the booklet this time. In cryptocurrency operation, everyone in your class has this booklet. So, everyone knows who came to class and who did not. In this way, no one can tick present for an absent friend. Ideally, everyone must have similar copies with similar information.
That said, cryptocurrency operates on a shared ledger. In other words, everyone using cryptocurrency has this register to see who is making transactions. So, to produce new cryptocurrencies, people mine them. Primarily, mining refers to using computers (like your ATM for dollar bills) to solve difficult math problems. When someone answers the puzzle, the computer gives the person this digital money.
Similarly, it is like typing in your pin in an ATM to give you money. Your card PIN is like the answer you need to get cryptocurrency. So, if your pin is wrong, you will not get money. The same applies to the math answer. Also, you can buy this digital money from other people using your physical money. Lastly, you cannot touch it like your physical money. They will only appear as numbers like the money in your bank app.
How Cryptocurrencies Are Differentiated
The term cryptocurrency is a parent name for digital currencies. Although, all digital currencies do not have the same purpose. There are two types of cryptocurrencies.
Bitcoin
Bitcoin is the first digital currency.
Altcoin
Altcoin refers to other cryptocurrencies after bitcoin.
Other Classifications
Coins
Coins are for transaction fees. Transaction fees are like your normal bank charges. These are monies of blockchains, such as bitcoin and Ethereum blockchain.
Altcoins
Altcoins are coins that are not Bitcoin. Some coins in this class can have their blockchain, for example, Ethereum and NEO. Some do not have their blockchain. They run on existing blockchains.
Tokens
Tokens are cryptocurrency forms of physical assets. They run on existing blockchains. Also, tokens work via smart contracts. And users can transfer them from one blockchain to another.
Different Types of Cryptocurrency
Now, let’s look at various coins in the classes we discussed in the last section.
- Utility Tokens – They are digital twins of assets on the blockchain. They are like coupons or vouchers, but they are on the blockchain now. For Example, the Basic Attention Token.
- Security Token – Security tokens are stocks, real estate, bonds, properties, or fiat money tokens. For example, Science Blockchain.
- Payment Tokens – These tokens are used to buy and sell digital markets products and services. For example, Bitcoin and Ethereum.
- Exchange Tokens – They are tokens of crypto brokers. They are used to pay for transactions. For example, Binance.
- Non-Fungible Tokens (NFT) – These tokens show that you are the owner of a unique item. Such items are one of a kind. So, Non-Fungible Tokens are one-of-a-kind tokens on the blockchain. For example, tweets, digital works, arts, music, pictures, etc.
- DeFi Tokens – These tokens power decentralized apps and are Ethereum-based tokens. A good example is IOTA.
- StableCoins – They are not volatile. They have ratio backing of real money and other things like gold, oil, etc. A good example is the USD Coin.
- Privacy Token – Privacy tokens are for privacy apps on the blockchain. For example, Dash.
The Role of Blockchain in Cryptocurrency
Blockchain technology powers this digital money. So, everyone on the network gets updated whenever there is a transaction.
Also, the blockchain looks like your wrist beads. They are blocks of transactions joined by a chain. So, the blocks contain transaction details. The shared nature of the blockchain makes transactions secure.
Are Blockchain and Cryptocurrency the Same?
Cryptocurrencies and blockchains are different. However, they are linked. Primarily, Blockchains power a lot of apps and functions on the internet. On the other hand, digital currency is just one aspect of blockchain’s use case. The blockchain is like a house, and digital currency is just one set of stuff in the house. Lastly, they are both intangible and transparent.
Most Popular Cryptocurrencies
The popularity of digital currencies is tied to seasons. So, their popularity is based on their actions in the market. Therefore, with the actions now, here are the most popular digital currencies in the market.
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- USD Coin (USDC)
- Binance Coin (BNB)
- Binance USD (BUSD)
- XRP
- Cardano (ADA)
- Solana (SOL)
- Dogecoin (DOGE)
- Polkadot
Are Cryptocurrencies Legal?
The case of legality is tied to many issues. While some governments see it as illegal, others see it as something that could pass as legal tender. So, the case of its legality is dependent on the place of use. For example, these digital currencies are legal tenders in El Salvador and the Central African Republic.
However, they are not legal tenders in some places where people use them more. So, the top places where they are illegal are:
- Algeria
- Bolivia
- China
- Cuba
- Egypt
- European Union
- Indonesia
- Iran
- India
- Russia
- Turkey
- The United States
How to Buy Cryptocurrency
Buying digital currencies as a first-timer might confuse you. However, we will list easy steps to make the process easy. As long as you follow these five easy steps, you will start buying them seamlessly.
- Select an exchange or broker that you like. There are many of them online. So, select the one that suits your style and needs.
- Open an account with your preferred broker or exchange. Also, ensure you verify your account with them.
- Fund your broker account with fiat currency. However, you must make sure that the broker supports your local currency.
- When the deposit is complete, place your order for your preferred digital currency.
- After purchase, you can choose to store your cryptocurrencies in a cold or hot wallet. Primarily, cold wallets are offline digital wallets. Alternatively, hot wallets are online digital wallets.
Is Cryptocurrency Taxable?
In some places, crypto buying and selling are like other regular businesses. So, these digital currency traders pay taxes on their gains. The tax is based on the taxpayer’s reception date.
How to Make a Payment with Cryptocurrency
Making payments with cryptocurrencies is not too different from the way you pay from your bank apps. However, because you are new in the space, I will break the steps down for ease.
To make payments using cryptocurrencies, follow the steps below:
- Purchase the cryptocurrency you want to use for payment from an exchange or a person.
- Store your cryptocurrency in either your hot or cold wallet.
- Open the cryptocurrency wallet or your exchange account.
- Locate the particular cryptocurrency that you bought on your list of assets.
- Click the send or transfer button.
- Scan the receiver’s QR code. Alternatively, you can input the wallet address of the receiver.
- Input the cryptocurrency worth you want to send. Also, include the gas fee in the amount.
- Click on send or transfer.
- Wait for messages to complete the procedure. If you complete the process, the system will notify you that your transaction was successful.
Furthermore, to receive payment, the process is reversed. Although, the process is not as long as sending. You will primarily need to copy your wallet address or allow the sender to scan your QR code.
Specifically, you will find your wallet address when you click the “receive” button of the cryptocurrency you want to receive. FINALLY, ONLY USE THE ADDRESS OF THE CRYPTOCURRENCY YOU WANT TO RECEIVE. IF YOU USE THE WRONG ADDRESS, THE CRYPTOCURRENCY WILL BE LOST FOREVER.
Bitcoin Mining and How it Works
Mining means producing new tokens or coins. So, it is like adding more to the number in existence.
Primarily, the process is through using your computer (miner) to solve difficult mathematical problems. Once you solve the question, the blockchain rewards you with a new coin.
Advantages and Disadvantages of Cryptocurrency
Cryptocurrencies are changing our normal payment methods. Also, many people are now using them. However, this digital currency has disadvantages as well as advantages. In this section, we will look at them.
Advantages of Cryptocurrency
- They reduce the corruption rate among our banks. Primarily. These digital currencies remove the banks’ use for sending and receiving money.
- It will reduce inflation. These digital currencies have a limited supply. For example, there are just 21,000,000 bitcoins in existence.
- People will be in charge of their money.
- People without bank accounts can still pay for products.
- Transactions are fast, secure, and transparent.
- There will be no need for transaction mediators anymore.
Disadvantages of Cryptocurrency
- People can use it for illegal transactions because the blockchain does not reveal the identity of the users.
- If you lose access to your wallet, you have lost all your money.
- Some firms still have control of some parts of the blockchain.
- You cannot have these digital currencies as real money.
- Mining these digital currencies is harmful.
- Once you lose them, you cannot get them back.
- Thieves hack people’s wallets and exchanges often.
- You cannot reverse their transactions.
The Relationship Between Cryptocurrencies and Metaverse
The metaverse is a digital world where we can go to use the digital representations we create. These digital representations will be us in the digital world. The digital world will be like the real world. You will see your friend, buy stuff, play games, and win prizes like you do here.
So, in that world, activities will be like you are in the real world. Particularly, you will buy stuff the way you buy stuff in the real world. Primarily, you use your local currency to buy stuff here. Similarly, you will need digital currencies (cryptocurrencies) to buy stuff in the digital world. So, cryptocurrencies in the metaverse are modes of payment when buying stuff.
In case you are wondering, “what will I possibly buy there?” Think of anything you buy here. For example, clothes, pictures, new haircuts, shoes, land, houses, etc.
Is Cryptocurrency a Good Investment?
Investing in cryptocurrency is good, but it is a high-risk investment. It is like gambling, which could bring you a fortune or ruin your finances. Most importantly, if you want to invest in cryptocurrencies, use facts, no hypes. Also, know the level of risk involved and if it will be good for your finances. Moreover, ensure you have done adequate research before investing your money here. Lastly, make sure you invest what you can afford to lose.
Why Is Cryptocurrency so Volatile?
Volatility refers to how stable a market is and how many options are in it. Primarily, highly volatile markets are high-risk markets. They have high gains and losses. Also, you will not wait for so long to get your gains.
On the other hand, low-volatile markets are the opposite of high-risk ones. Also, they are more stable.
So, digital currencies are highly volatile because of unequal ownership. Many of these digital currencies are controlled by the rich few. For example, bitcoin. Therefore, the market moves with their actions. When they sell, the market drops. When they buy, the price increases. So, their actions make these digital currencies very volatile.
What Is DeFi?
Defi is the middleman that takes the place of your bank when you want to transact with digital currencies. In full, DeFi is Decentralized Finance. They are ‘smart contracts on the blockchain. Primarily, the software takes care of the buying and selling process with these digital currencies.
The Future of Cryptocurrency
The cryptocurrency industry is still in its early stages. There is more for us in the future, as we have only seen the tip of the iceberg. Constant growth will solve most of the major issues around these digital currencies with time. Also, these solutions will make more people and governments accept them.
More people and businesses will use these digital currencies in a few years. Also, more people and businesses are beginning to learn how it works and how to be part of it. Truly, the number keeps growing every day. Finally, we believe the future of payment is digital money, seeing its many advantages.
Conclusion
In conclusion, people and firms who want to be part of this change will position themselves by learning about it. You have seen almost all the major aspects you should know about cryptocurrencies. What they are, their types, advantages and disadvantages, the metaverse and crypto, how they work, and so on.
We believe that the information in this article has given you the basic knowledge you will need to start exploring. Finally, the cryptocurrency world is growing fast. So, the earlier you start learning and practicing, the better the journey will be.
References
Different Types Of Cryptocurrency:
10 Important Cryptocurrencies Other Than Bitcoin
Cryptocurrency bill: All top countries where crypto is legal, illegal or restricted
