THE BASICS OF CRYPTO
Cryptocurrency is digital currency traded on a public ledger. A crypto exchange allows buying, selling, and converting, and a crypto wallet holds the keys to access your cryptocurrency.
Cryptocurrency is now relevant to our lives and mainstream businesses are adopting it. A crypto for dummies guide is available to help investors understand the basics. The world of crypto is saturated with jargon, but the foundational principles are not as complex as they seem. You don't need much tech savvy to grasp them, just change the way you think about money.
This guide will be providing a brief explanation of cryptocurrencies, including its various methods of appreciation. I'll also go over exchanges, the different ways you can profit from cryptocurrencies, and the operation of wallets.
A Brief History of Crypto
Cryptocurrency originated from the 2008 financial collapse. Bitcoin was launched in 2009 and is now worth tens of thousands of dollars. Ethereum pioneered the use of blockchain for decentralized services.
- Crypto is a decentralized currency that can be traded for goods or services of equal value
- Transactions with cryptocurrency are verified through a public ledger known as a blockchain, unlike traditional fiat currency
- Crypto has the advantage of being able to be traded between peers without intermediaries, but its value fluctuates wildly due to the lack of an intermediary
What Are Cryptocurrencies?
By now, we know that a cryptocurrency, as opposed to CBDC, is a digital money that may be transferred between individuals without the consent of a central authority. We'll go into detail about how cryptocurrencies function without the backing systems of fiat money in this part.
What Is Blockchain?
- Cryptocurrencies use a blockchain as a central authority, making blockchain inseparable from crypto itself
- A blockchain is a public ledger where every transaction is visible and can only be changed by adding new blocks
A blockchain is a public and distributed account ledger where transactions are visible and verified. Verification gives crypto its value as each coin is unique and cannot be spent without losing it.
Most crypto is not anonymous, but your digital wallet has a pseudonymous identity that's 100% visible. Blockchains require a management structure, often a decentralized autonomous organization (DAO). The bitcoin blockchain grants bitcoin value because every bitcoin transaction is visible to the entire public.
Mining Digital Currency
- Mining digital currency is on the decline due to heavy energy costs and unreliability. Miners are rewarded for adding blocks to the blockchain by verifying transactions.
- Blockchain adds new blocks to the chain with a unique hash generated by applying a math formula to the data. Miners verify the block by generating a hash with zeros.
- Mining bitcoin requires a lot of processing power and rewards miners who add blocks to the chain. It is known as the proof-of-work method and many fear it contributes to climate change. The staking method has recently overtaken mining in popularity.
Staking Digital Currency
- Crypto mining rewards processing power to be a validator, but most rewards are claimed by large consortiums
- Proof-of-stake method chooses validators based on currency ownership and rewards investors with more currency
- Validators vote to legitimize transactions on the blockchain with a simple majority (50%+1) if they vote "yes"
- Staking is now considered the more elegant validation method compared to mining
- Ethereum has more validators than most proof-of-stake cryptocurrencies, making it more decentralized.
- Staking involves lending currency to bigger investors who have a chance to become validators.
- Proof-of-stake cryptocurrencies support minor staking investments.
What Are Stablecoins?
Stablecoins have prices that don't fluctuate like other cryptocurrencies and have the same value as designated fiat currencies. They provide a middle ground between fiat and crypto, but can still collapse depending on how they maintain their price.
Benefits of Using Crypto Coins
- Cryptocurrency allows for transactions to be completed without oversight and bypassing central banks
- It can process transactions quickly without a middleman, often in seconds
- Crypto coins can gain value quickly due to rapid price fluctuations, outpacing inflation and the traditional stock market
- Corruption in cryptocurrency is theoretically impossible due to blockchain technology, but this only applies to tampering with the ledger and not fraud.
Drawbacks of Cryptocurrency
- Cryptocurrency has high price volatility due to its lack of inherent value and is often considered a bubble.
- It is mostly unregulated, leading to crime and corruption, as seen in the collapse of Mt. Gox and FTX.
What Are Exchanges?
- Most people trust middlemen to handle their investments, such as brokers and money managers who know the system better than they do.
- Cryptocurrency is easier to use an exchange to buy as it comes prepackaged with all the tools needed to trade, and most exchanges offer other ways to make money.
- Exchanges make their money by taking a percentage fee from each transaction, and the exact amount you'll pay usually depends on factors such as digital wallet balance, trading volume, and type of trader.
- It's important to understand the fee schedule before putting any funds into an exchange.
Trading on the Cryptocurrency Market
When we refer to "trading crypto," we typically mean one of three main activities: exchanging one cryptocurrency for another, selling cryptocurrency for fiat cash, or purchasing cryptocurrency using fiat money.
Buying, Converting & Selling Crypto
- To buy crypto, you exchange fiat currency for a particular cryptocurrency. There are two ways to buy crypto: as a taker or as a maker; You can either put an order to buy a specific amount of cryptocurrency as soon as it reaches a specified price, making you a maker, or you can buy instantaneously at the current price, making you a taker.
- Converting crypto can often be done instantaneously and without fees
- The last option is to sell cryptocurrency for fiat money, which is referred to as a withdrawal on most exchanges. Exchanges aim to retain as much liquidity as possible, as we've explained, therefore withdrawal costs might be rather expensive in order to entice you to keep your money where it is
Margin & Futures Trading
- Exchanges offer higher-risk, higher-reward investments such as margin trading and futures trading.
- Some exchanges allow users to loan out their cryptocurrency for margin trading, which can be more profitable than staking.
Investing in Cryptocurrencies
- Only 28% of American crypto holders have ever sold a crypto asset for more than they paid for it
- The objective of cryptocurrency investing is to buy low and sell high, with variations including spot trading, margin trading, and futures trading
- Passive income can be made through staking coins or lending them out, while mining is not recommended
- There are ways to earn small amounts of crypto through giveaways or games like Axie Infinity, but be cautious of scams.
Choosing a Crypto Exchange
- Check if the exchange is licensed to trade in your country and supports the digital assets you want to trade.
- Look for low trading fees, an easy-to-use interface, and a strong record of securing users' digital assets against hackers.
What Are Crypto Wallets?
- A crypto wallet is not a place for storing cryptocurrency, but a password manager that stores keys to prove ownership of crypto assets.
- It can work like an online bank account, tracking balances and allowing purchases and transfers, and some act as gateways to exchanges for future trades.
- Cryptocurrency only exists on its associated blockchain technology, and actually locking it away from others would defeat the purpose.
Keeping Crypto Assets Safe
- Crypto wallets are important for storing and protecting cryptocurrency keys
- USB hardware wallets provide greater security than software wallets for tracking assets and preventing physical theft
- Software wallets offer convenience but are vulnerable to hacking, while hardware wallets offer greater security and can track assets online
Final Thoughts: How Crypto Works
- Cryptocurrency is still in its early stages and has untapped potential for the future of money.
- Understanding cryptocurrency can help individuals decide how much to involve it in their lives and make trading profitable and fun.