A cryptocurrency is a form of virtual currency that uses encryption techniques as means of securing the verification of transactions.
It can be centralized or decentralized, depending on the method of issuance of the currency. The cryptography is used to secure and verify transactions, as well as to control the creation of new units of a particular cryptocurrency.
How cryptocurrency works
Cryptocurrency does not need bank, third-party or any other financial institution to be transacted. User can simply transfer or trade cryptocurrencies between each online freely, and even without trusting each other with their financial information.
Cryptocurrencies do this by recording every transaction (like the one above between Peter and Paul) on a shared database called a blockchain.
How to use cryptocurrency
Cryptocurrency adoption levels are increasing across the world at a remarkable rate. Today, more companies accept crypto than ever. It means you can use cryptocurrency to pay for products and services in physical stores and online—something that was unheard of just a few years ago.
Before you can use Bitcoin or any other token, you’ll need to buy some crypto. It’s easy to do; several services exist that make the process painless.
Once you’re up and running, you’ll be able to use crypto credit cards and even send crypto to your friends and family via SMS. It costs a fraction of the cost of sending money via a bank, especially if you’re making an international transfer.
And did you know crypto has even seeped into the entertainment world? There are crypto board and blockchain-based mobile games that you can play.
There are many kinds of cryptocurrency, but all of them has these things in common. Every cryptocurrency must be aimed at these things below:
Cryptocurrencies are digital money (or digital currencies), which means that, it only exists in computers. Cryptocurrencies don’t have physical coins or paper notes just like the popular fiat money.
A cryptocurrency can only be passed from person to person digitally. You don’t need to pass it through any financial institution to get it through to the person you are transferring it to.
A cryptocurrency is the same in every country, and this is to say that, they can be used freely between countries and across borders.
This is where we get the crypto part of the cryptocurrency definition. Crypto is Latin for hidden. So, cryptocurrency translates as hidden money.
In cryptocurrency world, everyone is in charge of their own money, it isn’t kept in a bank. A bank is a centre, where lots of people keep money. Cryptocurrencies are not managed by a central server, that’s why we say they are decentralized.
The way cryptocurrencies are built means that you don’t have to trust anyone in the system in order for it to work.
Status of “money” and virtual currencies
The nature of “money” of decentralized cryptocurrency is to be questioned.
Money is traditionally identified with three functions:
- Money as a means of exchange;
- Money as a unit of account;
- Money as a store of value.
Fiat money vs Digital currency vs Cryptocurrency
Fiat money is a currency that a government has declared to be legal tender, but not backed by a physical commodity.
The value of fiat money is derived from the relationship between supply and demand, rather than from the value of the material that the money is made of.
Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.
Fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value.
In the process of trying to define “virtual currencies,” we run into several problems. The problem becomes all the more evident when considering that a “currency” essentially requires a statutory definition.
Virtual currencies, however, lack a normative definition. From the “synthesis” of this syllogism, we can easily deduce that virtual currencies are not actually “currencies” because of the legal vacuum surrounding them.
This makes them both extremely attractive and dangerous as they’re still in the “legal gray zone”. This absence of clear regulation, however, does not mean that they are not being closely monitored by regulatory agencies around the world.
Virtual currencies have traditionally been classified according to their relationship with “real money” and the “real economy”, taking into account how the money flows between virtual currencies and real currencies works, and they are converted and used to purchase real goods and services.
According to these characteristics, the existing virtual currency schemes have been divided into…
- Closed virtual currency schemes (that have scarce, if any, interaction with the real economy; e.g. currencies used for online games);
- Virtual currency schemes with unidirectional flow (that implies an irreversible conversion at a specific exchange rate from the “real currency” to the “virtual currency” that can then be used both to buy virtual and real goods and services; e.g. “credits”, “vouchers”, “points” or other “bonus” systems);
- Virtual currency schemes with a bidirectional flow (virtual currencies can be bought and sold according to exchange rates with real currencies and can also be used to purchase both virtual and real goods and services; e.g. Bitcoins).
However, the virtual currencies that are most interesting to the watchful eye of the regulators are Bitcoin, Ethereum, Litecoin, Dogecoin (A satirical meme created with the sole intention of trolling the “crypto investors”), and other top-ranking crypto-coins in the market.
Since we (me and you), have fully discussed and learned about blockchain in detail. Let’s go ahead, and learn everything concerning cryptocurrency. There is no way you will talk about blockchain without talking about cryptocurrencies.
In other words, this will be a fully detailed cryptocurrency for dummies guide. After reading this guide, you will have no need to ask about what it really mean, because i am going to let you know everything and what it really mean in detail. Let’s get started!
How to invest in cryptocurrency
If you have decided that now is the right time to invest in crypto, you’ll need to sign up for a crypto exchange.
It’s not always easy to pick the right exchange for your needs. For example, the best crypto exchanges for Americans are not the same as the best crypto exchanges for other users due to government regulation.
The world’s most popular crypto exchange is Binance. It has both a US and worldwide version (but be aware that you’ll need to go through a Binance verification process).
Before you start trading, make sure you understand a bit about what you’re doing. Failure to prepare is a sure-fire way to lose money.
Luckily, there are dozens of greats books about crypto trading, as well as plenty of crypto trading YouTube channels that you can explore. You could even follow some crypto traders on Twitter.
Make sure you also use crypto paper trading apps and trading simulators so you can practice without risking real money.
When you’re ready, you’ll need to open an account with a crypto charting service so you can perform your own technical analysis.
Just be aware of the investment risks before you begin.
With no central authority, it’s difficult to hack, censor, or otherwise stop cryptocurrency – and this is why it’s so brilliant.
The technology behind crypto – the immutable blockchain – is also incredibly secure. It’s almost impossible for accounts and balances to be falsified, and crypto transactions are near-bulletproof.
But crypto does have some security issues that are unique to the sector.
For example, there are thousands of crypto scams that you need to watch out for. They can take the form of ICOs, fundraisers, or too-good-to-be-true trading ideas.
You also need to be wary of exchange hacks. Some of the worst hacks in crypto history have seen billions of dollars stolen, much of which was never returned.
To keep yourself safe, make sure you never leave funds in an exchange wallet unnecessarily; use one of the leading crypto wallets instead.
If you’re worried about your privacy, make sure you use an anonymous crypto wallet. You could also try a non-custodial wallet like Unstoppable.
I’ve written about some ways to store your crypto, if you’d like to learn more, please read crypto wallet beginner guide.
Other crypto security threats include crypto-jacking (when sites use your CPU to mine crypto), trying to use crypto in a country that has banned Bitcoin, or when the token is the subject of a 51 percent attack.