What Is Cryptocurrency? A Guide For Beginners

Is the currency of the year 2023 the cryptocurrency? In this article, we will break down the definition of Blockchain, Cryptocurrency, the TOP 10 Cryptocurrencies, and How You Can Buy Crypto.

Introduction

To start, cryptocurrencies have a lot of benefits over conventional fiat money. Being decentralized, or not being under the control of a singular organisation like a government or central bank, is a key advantage. Because of their decentralization, cryptocurrencies are less susceptible to censure, seizure, or manipulation by third parties. Additionally, compared to conventional financial systems, cryptocurrency transactions may be quicker and less expensive.

Furthermore, the use of coins as a form of payment is becoming more widely accepted. More shops and companies are willing to take cryptocurrencies as a valid method of payment, and some nations are even starting to look into the idea of developing their own digital money. Future adoption and mainstreaming of cryptocurrencies may be influenced by their rising approval.

Moreover, the use of cryptocurrencies is becoming more and more acceptable due to the growing adoption of blockchain technology across numerous industries. Blockchain, the cryptocurrencies’ underlying technology, is used for a wide variety of nonfinancial uses as well, including voting processes and supply chain management. The use of cryptocurrencies may become more common and accepted as blockchain technology is implemented and integrated into more sectors of the economy.

It’s important to keep in mind, though, that cryptocurrencies are still a young and volatile asset class, and that using them comes with a lot of difficulties and dangers. It is therefore challenging to predict with certainty whether they will replace fiat money in the near future.

What is Blockchain?

Blockchain is the second part of the puzzle that makes up the cryptocurrency system. Indeed, they are based on blockchain technology. You can call blockchain a publicly distributed (digital) ledger technology. In other words, it is a collection of interconnected records, highly resistant to modification and protected by cryptography.

Thanks to blockchain-like technology, the existence of cryptocurrency as a viable alternative to fiat currency is possible. Each time a crypto transaction is made, a new block is created and the transaction in question is written into it. The newly generated block will be linked to the one before it, which will be linked to the one before it, and so on.

POW and POS

POW, also known as Proof-of-Work, is the first method, in which a number of computers compete to win cryptocurrencies. The creation of cryptocurrencies is called mining, while the computer participating in it is called a miner node. The minor nodes are in competition to become the NONCE or Number Only Used Once. This complex number will be difficult to guess and verify by other miner nodes and the reward for guessing the NONCE is the cryptocurrency token.

A minor node must expend hash energy to solve the riddle or else guess this number. The stronger the hash power, the more likely the miner node is to guess that complex number. However, the network will adjust its difficulty according to the hashing power of the computer to avoid the overperformance of supercomputers. Additionally, individual nodes are allowed to pool their hashing power and divide the rewards playing field so that less fortunate people can participate.

The POS mechanism or Proof-of-stake is the other mechanism where the reward is acquired regardless of the hash power of the nodes. People who use this mechanism are called validators because they validate the blocks and earn the reward. Thus, they do not mine, but mint or forge new blocks. To become a validator, a node must stake a certain amount of coins into the network as security. By betting more, the node can increase its chances of being selected as a validator, even if the selection process is random. If by chance, he is involved in any form of bad practice, he will be punished by the removal of his guarantee, called “slashing”.

Why are cryptocurrencies so popular?

Banking transactions can fail due to any of the following scenarios: technical issues, transfer limits, hacked accounts, or additional charges like transfer fees. This problem does not arise with cryptocurrencies because of the way they work. Also, unlike fiat currency, they are safe from fraud. They also do not need a centralized authority to govern them. They are secured using strong encryption algorithms. The unpredictable nature of its rise in value due to its limited demand and supply is another reason for its popularity.

The history of cryptocurrency

To better understand cryptocurrency, it is necessary to go back to its history. Cryptocurrencies are an umbrella term for cryptography and currency. The word “cryptography” derives from the ancient Greek words “Kryptos”, which means “hidden“, and “graphene“, which means “writing”. The intention behind this word was therefore to imply a hidden message that only the correct addressee can read. Along the same lines, to understand how cryptocurrencies work, one must first look at their history, from their humble beginnings to the present day.

1991-2008: THE CREATION OF BITCOIN

In 1991, Scott Stornetta and Stuart Haber developed a secure cryptographic chain of blocks, allowing anyone to alter the timeline of a document. The following year, the duo incorporated Merkle trees or hash trees into their system to collect more records on a block. It wasn’t until 2008 that the history of the cryptocurrency really began with the genesis of Bitcoin (BTC) by the mysterious Satoshi Nakamoto.

2008-2015: THE CREATION OF ETHEREUM

As bitcoin was starting to make noise on the financial scene, Satoshi Nakamoto in 2011, disappeared from the Web. At the same time, Vitalik Buterin creates Ethereum. He wanted blockchain technology to be more than just a peer-to-peer network. Ethereum became the first blockchain application technology to support the concept of smart contracts.

2018-TODAY: THE FUTURE OF CRYPTO

Between 2015 and 2018, cryptocurrencies steadily increased in value. Besides Bitcoin and Ethereum, many other projects have invaded the market. It was in 2018 that Bitcoin experienced a boom. It is also the first time that cryptocurrencies have received mainstream attention.

The different types of cryptocurrencies

Bitcoin is the most famous cryptocurrency. BTC is transparent, but at the same time secure peer-to-peer transaction cryptocurrency, that is, the transaction can be seen by everyone, but only the owner can decrypt it with his “private key. Ethereum, which has brought a new dynamic to blockchain technology, is a favorite among blockchain investors.

Other must-have names in the cryptocurrency world are:

Top 10 cryptocurrencies on the stock market

CryptocurrencyMarket Cap
1. Bitcoin$517,030,459,072
2. Ethereum$213,849,503,895
3. Tether USDT$75,357,627,172
4. BNB$52,670,538,681
5. USD Coin$36,802,321,522
6. XRP$19,112,720,757
7. Cardano$11,902,717,415
8. Polygon$10,490,256,586
9. Dogecoin$9,941,653,978
10. Binance USD$8,251,849,120
Source: CoinMarketCap / March 17, 2023

Security

Security is one of the fundamental features of cryptocurrencies that appeal to the target audience. It is confirmed that this technology is safer than a transaction made with a bank. The blockchain environment is encrypted, making it almost impossible to hack or crack the codes, even for a highly skilled hacker.

Cryptography is what makes the blockchain work. Even if someone manages to bypass a block’s code successfully, they will have wielded much higher hashing power, to the point that the cost of decoding is greater than the reward. Therefore, such intrusion efforts are less likely to occur.

The legal framework

Governments do not support cryptocurrencies, compared to fiat currency. It is therefore difficult for many countries to accept it as legal tender. Countries like China, Egypt, Bangladesh, Qatar, Morocco, Iraq, Algeria, Tunisia, and Nepal have absolute bans on cryptocurrencies, and others ban them tacitly. In return, countries like Denmark, France, Japan, Germany, Iceland, Mexico, Spain, and the United Kingdom have approved bitcoin transactions and developed regulations to enforce them.

It is important to note that even though cryptocurrencies are considered currencies, the IRS (Internal Revenue Service) treats them as property or assets, which means that any gain realized during a transaction or sale is taxable.

Trading Strategies

Below you can discover the most popular trading strategies:

Day Trading

Day Trading is a fast trading strategy where traders buy and sell digital assets/cryptocurrencies within the same day. This way of doing things comes with the risk of significant loss. Day Trading is therefore not recommended for beginners.

HODLing

Despite the capitalization of the term which looks like a typo, this is how the term is written. But this was a typo in the Bitcoin forum that has gained weight from being repeated by experts. In this trading strategy, traders hold on to crypto without getting distracted.

Hedging

Crypto hedging is an investment strategy by which traders can mitigate the risk of adverse price movement of their assets. Traders typically use financial tools such as bonds for different or futures to hedge cryptocurrencies.

Trend Trading

It is the most popular form of trading, not just in crypto. Traders buy and sell cryptocurrencies depending on the market trend (up or down).

Pros and Cons of cryptocurrencies

Pros:

  • Cryptocurrencies are not affected by inflation like fiat currency. Each cryptocurrency has a fixed value at the time of its launch. The value is written in the source code. Bitcoin, for example, has only 21 million coins. Its value will increase as demand grows.
  • Cryptocurrencies are a safe form of transaction compared to banking, which is one of the fundamentals of crypto.
  • Crypto is self-managed and maintained by miners/developers, with every transaction stored on their equipment. And due to the reward structure for developer maintenance, the integrity of transaction records remains intact.
  • Crypto is decentralized. As a result, any possibility of monopoly by a large entity is eliminated.
  • Crypto is a faster and cheaper transaction mechanism. The transaction cost of transferring funds across borders is negligible or zero.

Cons:

  • Due to the security and privacy offered by crypto, it can be used to transfer money in illegal transactions.
  • Loss of data is sanctioned by financial loss. Due to the involvement of untraceable codes, impenetrable authentication protocols, and defense against hacking, the loss of a private key means the account cannot be recovered.
  • Data mining is not environmentally friendly. The Crypto ASIC miner computer used in mining operations is a heavy consumer of power. These very expensive computers are practically useless and must be replaced when a new version of the computer or hardware is released with various cryptocurrencies.

How can I buy crypto?

Now that you have a better understanding of cryptocurrencies, let’s see how you can buy them. Here are the four stages of purchase:

Step 1

Select a cryptocurrency trading service based on your needs and the type of crypto you are considering. Cryptocurrency exchanges, brokerage firms, and payment services are user favorites. They allow you to buy, sell and manage coins. Cryptocurrency exchanges are recommended for beginners due to their security and user-friendliness.

Step 2

Present a series of supporting documents such as your passport, driver’s license, etc. to verify your exchange. The evidence required depends on the legal system of the country of residence. After verification, a payment option should be linked, whether a bank account, credit card, or debit card.

Step 3

After verifying and linking the payment plan, you can start buying cryptocurrencies from the different order types and investment options available. Exchanges also offer investment programs for users.

Step 4

Use crypto and bitcoin wallets outside of your exchange to ensure greater security for your digital assets. These wallets ensure that only you have control of the personal key to the account.

To sum up

While Investors might witness another all-time low, or it could also collapse once more. Some specialists say that in 2023, cryptocurrency might make a respectable comeback. In the end, it’s risky to engage in cryptocurrencies.

Investing money in cryptocurrencies that you can’t afford to lose seems a very bad idea, even though it might be lucrative for some. However, if you have additional cash, and you are willing to take a chance, while firmly believing in the technology, you might consider investing in this innovative product.

Do you want to know more about cryptocurrencies? Check out our latest Crypto articles!

Shall you want to explore your banking options related to cryptocurrency and start your Crypto journey, do not hesitate to book a free consultation with our friendly team.

Disclaimer

Widelia and its affiliates do not provide tax, investment, legal or accounting advice.  Material on this page has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, investment, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Please consult https://widelia.com/disclaimer/ for more information.

Author

Jason Curtis

Nomad Crypto Expert – News Staff
Jason is a content editor at Widelia and writes about relocation, investments, and Crypto. He is a graduate of Michigan State University's journalism school, and his bylines include Issue Media Group, Michigan History Magazine, MLive.com. When he's not writing, he's investing into crypto, watching Tottenham Hotspur FC, or reading a book at the beach.

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