A Beginner's Guide to Cryptocurrencies


January 18, 2018.
Learn all you need to know about digital currencies — today’s newest form of financing

The creation of the web completely shook up the world. Everything has gone digital, like how we communicate, share media, and even the way we send and receive money. Fiat currency is going away and bills and coins have evolved into what is called cryptocurrency, and the future of financing is now here.

So what are cryptocurrencies and how are they different from fiat money? What are the pros and cons, and how and where can you spend them? Like most of the non-technical majority, you might have a lot of questions. Here we’ll go over all you need to know about cryptocurrencies without the technical jargon.

What are cryptocurrencies?

Cryptocurrencies are virtual money that exist online on blockchains or other platforms. The term is used interchangeably with virtual currency, digital currency, or digital money, although there is a subtle distinction between them. For this post, we’ll use the term cryptocurrency for consistency.

Cryptocurrencies work on an open-source, decentralized peer-to-peer electronic cash system. Like paper money and coins before them, cryptocurrencies allow two or more parties to exchange tokens for goods or services. Cryptocurrencies are basically bits and pieces of computer code that represent monetary units.

How did cryptocurrencies come into existence?

One of the most prominent cryptocurrencies in existence is Bitcoin. In fact, all cryptocurrencies began with Bitcoin which was first introduced to the world in January of 2009. The idea of a cryptocurrency came from a programmer, or a group of programmers, with the pseudonym Satoshi Nakamoto. The programmer(s) created the initial framework of the blockchain database used to create or mine new Bitcoins. As the years progressed, more cryptocurrencies sprung up, and the rest is history.

What are examples of cryptocurrencies?

While Bitcoin remains to be the most popularly used cryptocurrency worldwide, there are also top contenders like Ethereum, Litecoin, Ripple, Dash, and Monero. All of these are based on similar frameworks but have a few subtle differences. Ethereum, in particular, features a unique smart contract functionality that serves as an added protection when you transact business.

How do cryptocurrencies differ from fiat money?

The main difference between cryptocurrencies and fiat money is that the former is decentralized. This means that cryptocurrencies are not controlled by a bank or central government authority.

Another difference is that cryptocurrencies are yet to be recognized as legal tender. There are issues whether cryptocurrencies can be considered as a commodity or whether they have real-world value. Some countries like the US recognize Bitcoin and other cryptocurrencies as a commodity covered by the commodity exchange act.

What are the advantages and disadvantages of cryptocurrencies?

Like everything digital, cryptocurrencies are all about speed and convenience. Cryptocurrencies essentially make it easier for you to make transactions wherever you are across the globe. Since there are no intermediaries, transactions are simplified and are much quicker, with lower transaction fees to handle.

However, since cryptocurrencies are decentralized, the value of cryptocurrencies are vulnerable to wild fluctuations depending on the supply and demand. Cryptocurrencies are also susceptible to manipulation and theft.

How do cryptocurrencies work?

While there are many cryptocurrencies available in the market, the mechanism of how they work are more or less the same.

Mining: The Creation of Cryptocurrencies
The basic framework of most cryptocurrencies begin with mining. Mining is the creation of cryptocurrency, much like how new coins and paper money are minted. Cryptocurrency can be created or mined by using computers that run mining software. The goal of mining is to find a certain sequence of data called a “block” using a series of complex mathematical algorithms. Programmers who manage to find a block are rewarded with cryptocurrency.

Blockchains: A Public Online Ledger
Each transaction is verified and logged in an online network-wide ledger called a “blockchain.” The blockchain serves as the master record of all cryptocurrencies ever produced and all the transactions that have occurred worldwide. The blockchain is open to the public, and it essentially prevents people from spending the same cryptocurrencies more than once.

Although the blockchain is accessible to everyone online, it doesn’t record any personal details such as names or ID numbers — only digital wallet addresses of anonymous users and where and when the transactions occurred.

Digital Wallets: Where Users Securely Store Cryptocurrency
Just like their traditional counterparts, cryptocurrencies are stored in virtual wallets or eWallets. eWallets, such as Bitcoin Wallet or Ethereum Wallet, allow you to store, send, and receive by using an app on your mobile phone or desktop. There are also hardware wallets which look similar to a USB flash drive device. Examples of hardware wallets are Trezor and Ledger Wallet.

How do you use and spend cryptocurrencies?

Once you’ve acquired an eWallet, you can use your cryptocurrency. Cryptocurrencies can be used and spent just the same as you would with fiat money.

To begin a transaction, you need to establish a unique digital currency address. The address functions like a traditional bank account number, which enables you to send and receive cryptocurrencies. Just like its predecessor, you can own more than one digital currency address.

Nowadays, there are several reputable eCommerce sites that accept cryptocurrency as payment, such as WordPress, Etsy, Overstock, and Amazon. Some brick-and-mortar businesses also support cryptocurrency payments, such as CVS, Sears, K-Mart, and Home Depot. You can also use cryptocurrency to transact in file sharing sites like Mega and domain hosting sites like Bit Domain.

To own more cryptocurrencies, you can either buy, share, exchange, or mine. Cryptocurrencies can be bought or sold with fiat money from private sellers, local traders, or exchanges like Binance, GDAX by Coinbase, and Bitfinex. Mining new cryptocurrency can be quite costly considering the amount of energy a computer would need to consume to do so; however, this option is typically reserved for those in countries with lower electricity costs.

Wrapping it up

As cryptocurrencies gain more popularity year by year, several formal entities and a few government authorities have warmed up to the idea of using blockchain technology. In this era of innovation, there’s no saying how far cryptocurrencies will go. It’s an exciting time for the financial sector, and the emergence of cryptocurrencies is just the beginning.

– Article written by Tinny

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Categories: Cryptocurrency