Beginner’s Guide To Cryptocurrency

In 2022, there is a good chance that you have heard about Bitcoin. You may not know its use or why there is a need for it, but you have heard of it. Not unless you live under a rock. Cryptocurrencies and blockchain technology have been around since 2008. The bull run of 2021 brought cryptocurrencies and the services blockchain technology offers to the mainstream. So what exactly are cryptocurrencies and why should you care?  

What is a cryptocurrency?

A beginner’s guide to cryptocurrency starts with understanding what they are and how they work. A Cryptocurrency is a digital asset, secured through cryptography and is built on a blockchain. They can be stored, sent and traded electronically. A blockchain is a peer-to-peer network that doubles as a secure ledger for crypto transactions. Blockchain which is the foundation of cryptocurrency is run by disparate computers or specialised hardwares. These computers are responsible for the smooth running of cryptocurrencies. A blockchain is the reason person A in India can receive Bitcoin from person B in Brazil in under 3 minutes. 

Bitcoin, launched in 2008, remains the most popular cryptocurrency and there is a good chance you have heard that name on TV or online. 

Okay cool? But why do you need a ‘digital asset’ if your fiat works just fine? Well, the answer somewhat lies in the 2007-2008 financial crash. Millions of people lost their life savings. The hunger for a currency that was impervious to government overreach and policy was high. Bitcoin was born. 

Satoshi Nakamoto, a faceless pseudonym for the developers of Bitcoin, launched the first cryptocurrency in 2008. Satoshi described Bitcoin as an ‘electronic payment system based on cryptographic proof instead of trust.’ This means that in contrast with traditional financial institutions whom you expect to execute your transactions based on trust, Bitcoin shows proof. 

The decentralised nature also made them appealing to users who craved anonymity and privacy. 

What can cryptocurrencies be used for?

In the early 2010s, you would be hard-pressed to find businesses or individuals who accept cryptocurrencies. In 2010, a man in Florida spent 10,000 bitcoins on two pizzas that were worth around $40. Today, those two pizzas would cost $4.2B with a B! 

Cryptocurrencies have come a long way since then. Today, cryptocurrencies are used to trade online, pay for services and even buy art. Complete mainstream adoption is still years away but you definitely will not be spending 10,000 bitcoins on a Pizza. 

Besides being a medium of exchange, cryptocurrencies are also a store of value. For some investors wary of inflation, cryptocurrencies are seen as a hedge against inflation. 

Where to buy Cryptocurrency

Now that you know what cryptocurrencies are and what they can be used for, the next question in your crypto guide is where you can buy them. Cryptocurrencies are traded on exchanges. There are two main types, centralised exchanges (CEX) and decentralised exchanges (DEX). 

Centralised exchanges are run by known institutions or entities. Centralised exchanges require users to register on their platforms. Users also undergo Know Your Customer (KYC) procedures. It is basically like an online bank. If you have no stomach for such invasive registration procedures you may want to trade on decentralised exchanges instead. You need only a wallet to access decentralised applications (Dapps).

Centralised exchanges are easier to navigate and trade on especially for crypto beginners. Fiat deposit features are also present on many CEX. Decentralised exchanges have no fiat deposit feature so you would still need a primary CEX account to transfer cryptocurrencies to your wallet. Binance, Coinbase and FTX are some of the most popular centralised crypto exchanges in the world. Uniswap and Pancakeswap are two popular DEX. 

There are currently over 16,000 cryptocurrencies in circulation. The most valuable is Bitcoin with a market capitalization of over $800B. There are over 400 exchanges both CEX and DEX available to traders. 

Cryptocurrency Mining

Mining is one of two ways transactions are validated on a blockchain. The other technique is staking. Whenever a transaction is issued on a blockchain such as bitcoin, such transactions are encrypted by default and need to be verified before a new block can be added. To verify a transaction, a set of mathematical equations must be solved. This is when miners come in and mining happens. 

Using a set of powerful computers, miners attempt to solve the puzzle and thus create the new block. The first miner to solve this puzzle and solve all the transactions in that block gets rewarded with more of that cryptocurrency. Cryptocurrencies that use this technique of verification are known as Proof-Of-Work (PoW) cryptocurrencies. Bitcoin is the most popular example. 

The computers needed to mine Bitcoin cost tens of thousands of dollars. This makes mining very capital intensive and most likely out of your reach. 

Types of Cryptocurrencies

Congratulations you made it this far. Now that you know what cryptocurrencies and where to buy them, it's a good time to know the different types. There are four cryptocurrency types and they differ according to their utility. 

Stablecoins

They are the most popular type of cryptocurrencies. Their value is pegged to the real-life value of a fiat currency such as the USD. Examples of stablecoins are USDT, USDC, GBP. 

Utility Tokens  

Utility tokens are cryptocurrencies that are traded for their utility. Filecoin (FIL) is a storage cryptocurrency used to store files. BitTorrent (BTT) allows users to share files such as music and movies in a decentralised peer-to-peer (P2P) manner. 

Non-Fungible Tokens 

NFTs had a breakout moment in mid-2021 and have not looked back ever since. Unlike other cryptocurrency types, NFTs are non-fungible digital assets. This means you cannot interchange them. NFTs are unique to the address they are saved on. This means only one person can own a particular item at any time. Crypto punks and Crypto kitties are examples. 

Store of Value

These are cryptocurrencies whose value appreciates over time. Investors usually buy such cryptocurrencies as a hedge against fiat inflation. Bitcoin is one cryptocurrency that best fits this definition. Other coins include Litecoin, Bitcoin Cash and Terra Luna. 

How to choose what cryptocurrency to buy

The crypto market is broad and is very volatile. Asset prices can swing in any direction pretty fast. It is vital to do your due diligence before investing in any asset. Part of your beginner’s guide should be to learn how to do your own research (DYOR).

Some fundamental data to look out for in a prospective cryptocurrency is how useful the coin is to the crypto ecosystem. The developers behind a project also affect its chances in the market. Developers who have built a reputation for themselves in the tech industry are more likely to build projects that will last. A cryptocurrency with a large, active and engaging community is also one worth looking at. This is not financial advice.  

Cryptocurrencies are here to stay. In November 2021 the market climbed to a market cap of over 3 trillion dollars. It is a very volatile market but one that keeps attracting investors. We hope we have been able to give you guides on how to get started. 

Looking for more information on cryptocurrency? Join our meetup community where we host exciting in-person events aimed at providing fascinating talks by and for blockchain professionals, so you can gain key insights from the people leading the cryptocurrency revolution. 

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