In the 2010s, the cryptocurrency is the talk of the town; it is depicted as a new secret of getting rich overnight, of earning a passive income without any serious effort, of getting altcoins for $1 and selling them in one year for $10,000… But is that all true? What is crypto currency in sober fact, and how has it transformed the world? What does cryptocurrency mean for laypersons and professional miners and traders? This article will share all about cryptocurrency as an innovation, covering the history of cryptocurrency emergence, mechanisms of its work, the range of its practical applications, regulation of the crypto-market, and the future forecasts for this new financial concept.
It is a good point to start the beginner cryptocurrency guide is to answer the fundamental question, “what is cryptocurrency?”Indeed, it’s vital to make sense of the cryptocurrency definition first to continue the discussion, as it is quite a complex technical phenomenon that even professional traders (and some miners) do not capture totally.
So, what do you mean when saying the word “cryptocurrency”? Probably, the digital version of real money. And to a certain extent, you are right.
In simple words, laypersons may look at crypto-currency as a digital version of regular fiat currency, something that the government legally endorsed but did not back it with any physical commodity (apart from real currency supported by the state’s gold reserves). Thus, when you define cryptocurrency, you probably mean a medium of exchange similar to traditional currencies (e.g., USD) designed for exchanging digital information via cryptography-enabled processes.
Another definition of cryptocurrency depicts it as electricity converted into digital value units by means of solving mathematical equations for the sake of using those units for online payment.
Some famous cryptocurrency examples include Bitcoin, Ethereum, Ethereum Classic, Monero, Ripple, and a bunch of other coins that flooded the world after the Bitcoin miracle. The benefits that digital cryptocurrency provides to users include:
However, together with the enumerated benefits that cryptocurrency offers, it also possesses some inherent disadvantages that everyone considering it should know. For instance,
Now that you got an initial idea of what is cryptocurrency, it’s high time to proceed to the cryptocurrency history.
For many people, the answer to the question, “what is a cryptocurrency?” is identical to the question, “what is Bitcoin?” That’s natural, since for a long time, the concept of cryptocurrency has been associated exclusively with it. Thus, the relationship between cryptocurrency and Bitcoin is tight and long-standing. However, in fact, Bitcoin is not the beginning of the digital cash era:
However, the things changed forever with the advent of Bitcoin. Here are some relevant points that help to understand what Bitcoin is and how it works:
So, when you face a question, “Is Bitcoin a cryptocurrency?”, the answer is that it is the purest and most original of all cryptocurrencies existing to date.
To understand what is cryptocurrency for dummies, you need to capture some basic definitions first. After you learn them, you’ll always sound like a crypto-expert! And to a certain degree, you will indeed become one. So, what terminology should any course on cryptocurrency for beginners include?
The block chain represents a growing list of cryptographically linked records containing hashes of the previous blocks, timestamps, and transaction data. This is a primary method of cryptocurrency mining and the basic principle of crypto-world’s operation.
Cryptography refers to the science and practice of ensuring secure communication online. Based on the principles of cryptography, two or more persons sharing a secret key can communicate securely; at present, even public-key techniques let two parties generate shared secret keys.
A cryptographic mathematical technique enables one user to attach a digital signature to a digital file or message; this is done for the sake of the message’s originality and ownership validation by other users of the system. With the help of digital signatures, recipients of the messages can be assured of the evidence of those messages’ origin, as well as the status of the document.
Digital tokens represent securities in the digital form; essentially, they are digital assets with a certain value that traders can invest in. Businesses trade digital tokens as software presale tokens, donations, and crowdsales.
These are two interconnected processes enabled by cryptography. The procedure of encryption lets a user to turn a plaintext, readable human message into a cyphertext, which is looks like a jumble and represents an encrypted message incomprehensible for an outsider. Once the recipient gets that message, he or she involves the process of decryption, which turns the jumbled message back into readable text. Decryption is usually done with the secret key, while efforts to decipher a message without that key presuppose hacking or breaking it.
A cryptocurrency fork is a term used to refer to a fork of a codebase and a fork of a live blockchain. When you fork a database, this means that you create an entirely new ledger. This usually takes place when a new coin is created, but it has a shared history with an already existing coin. Thus, the process means forking the code behind the node software. Forking of a live blockchain is also referred to as “chainsplit”, meaning that new blocks in a blockchain are made accidentally or deliberately incompatible with the rest of the blockchain.
Hashes, or a hash function, is a sequence of mathematical steps or algorithms performed with input data to produce a fingerprint (aka digest, or hash). Blockchain uses cryptographic hash functions; they are deterministic by nature, quick to compute the hash value, irreversible, immune even to slight changes, and unique.
Initial Coin Offerings (ICOs), or token sales, represent an innovative method of fundraising by businesses that don’t wish to dilute company ownership or pay money back to investors. ICOs became popular in 2017, and by now, over $11 billion have been raised on them.
Those thinking of what is cryto currency frequently hear the word “blockchain” together with the cryptocurrency terms. That’s because the entire universe of mining and trading coins is based on cryptography enabled by blockchain. Thus, it is impossible to come to grips with cryptocurrency – understanding what is it and how it works – until the principles of blockchain are understood. After that, the fundamentals of mining may become much clearer and simpler.
Blockchain (initially “block chain”) is a concept inherently connected with cryptocurrency meaning . The blockchain technology represents a set of rules and standards as to how a specific coin’s ledger is created and maintained. This pertains to the rules of participation in the network, specifications on transaction creation, methods of data storage, and a variety of consensus mechanisms. Examples of blockchain technologies include the Bitcoin, Ethereum, NXT, Quorum blockchains.
Here is a simple presentation of the Bitcoin blockchain process for cryptocurrency beginners:
Here you are with a new piece of Bitcoin! Other blockchains work on a similar basis but depending on the type of cryptocurrency you are planning to mine, the blockchain principles and rules may vary.
The technical question worrying most of those interested in cryptocurrency – how to get some of it? – may be answered in a number of ways. A traditional method of earning coins or buying them is suitable, similar to traditional money, but with cryptocurrency, you also receive a unique opportunity: to make your own crypto-money on your own via mining. This is what is unique about cryptocurrency – you may not only get already existing coins, but can also produce your own ones, which is really fascinating!
So, in simple words, the mining process looks as follows:
So, if you consider making mining a source of your income, that’s a really feasible option, as mining is highly similar to any other grid computing project. But anyway, cryptocurrency is more about progress and innovation than becoming rich in the first place, so we recommend involvement in mining mostly for those who wish to build technological experience. This is quite a complex process requiring much powerful equipment, so engaging in mining without specialized technical expertise may be quite problematic, especially in the context of all blockchain operations getting ever more complex and technologically intensive day to day.
No guide on cryptocurrency for dummies may do without a section about the functions and applications thereof. If crypto coins are intangible and cannot be held in your hands, while most shops and financial organizations don’t recognize and accept them, what is the purpose of cryptocurrency after all? In this section, we are responding to the question “what is cryptocurrency used for?” The information will be topical for those already having some amount of crypto-money and for those who only think of getting some.
In the traditional understanding, cryptocurrencies can perform one of the three functions:
A friendly reminder! No matter which option you will choose and how you wish to apply your crypto-belongings, we recommend keeping in mind that the concept is relatively new, thus investing in it conceals many unknown hazards. Thus, it’s advisable to make a thorough research before investing, as over 60% of investors lose their funds in the crypto-market.
Is cryptocurrency here to stay? Definitely, yes! Though many doubts surrounded the recognition of altcoins as a valid payment method alternative to real money, and many influential financial institutions made bold statements about banning cryptocurrency, its entry to the traditional market of exchange is unavoidable. Hence, those who have a weak or medium cryptocurrency interest to date – beware, the momentum to acquire coins at a favorable price is now, as tomorrow may be too late!
Hopefully, this cryptocurrency beginner guide has lifted the veil on the weird, mysterious concept. Keep in mind that to become an expert miner or trader, you need to study the topic in more depth to make informed decisions. Don’t risk your funds and research the area thoroughly before making any investment – the crypto-market is immensely volatile.