Table of Contents

Cryptocurrency 101: Your Guide to the Digital Money Boom

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Roth Thy

July 12th, 2024 at 8:02 AM
10 minutes read

What is Cryptocurrency?

Cryptocurrencies are digital currencies secured by cryptographic algorithms and distributed among authorized users to verify the transactions. Unlike fiat currencies governed by the government, digital currencies are decentralized, enabling anyone to transfer digital payments securely to anyone, anywhere.

Cryptocurrencies are powered by three technologies primarily — Blockchain, Decentralized Ledger, and Cryptography. All cryptocurrency transactions are recorded in a distributed public ledger accessible to authorized users. Since no central authority governs the cryptocurrency transactions, miners validate the transactions by solving cryptographic algorithms.

Miners record the transactions on a public ledger upon verification. The transactions, once entered, cannot be altered, preventing double-spending while assuring secure transactions. Bitcoin was the first cryptocurrency that successfully leveraged blockchain technology for its decentralized nature. Now, almost all cryptocurrencies are backed by blockchain technology.

How does Cryptocurrency Work?

Cryptocurrencies run on a decentralized distributed ledger backed up by blockchain technology. The cryptocurrency transaction details are stored in chained blocks, linking blocks in chronological order. Thus, the data cannot be changed or tampered with as the change is reflected in all blocks.

Since no single authority governs cryptocurrency transactions, network participants, commonly known as miners, validate the transactions. Let’s break down the cryptocurrency transaction process for better understanding.

  • Cryptocurrencies run on a distributed ledger accessed by a network of nodes globally. The miners on the nodes validate transactions to maintain the integrity and security of crypto transactions.
    • Cryptocurrency transactions are stored in a block. Each block is linked to its previous block, forming a blockchain. In short, a blockchain is a public ledger with all transaction details across the network.
    • The transactional data in the block is encrypted to an alphanumeric string called a hash. Miners should solve complex cryptographic problems to find the hash. Once they figure out the hash, the new block is added to the ledger.
    • Crypto mining is a complex, energy-intensive process. Thus, the miner who solved the hash and added the new block will receive the freshly minted new cryptocurrencies for contributing their computational resources and technical expertise.
    • Users can store their cryptocurrencies in digital wallets. There are several types of cryptocurrency wallets that you can choose from according to your preferences.
    • The distributed ledger records transactions related to any digital assets ranging from cryptocurrencies to intellectual property, etc.

In summary, users can transfer cryptocurrencies to anyone without intermediaries. The crypto transactions are safe, secure, and immutable, saving time and cutting costs.

Key Features of Cryptocurrencies

Key Features of Cryptocurrencies

Cryptocurrencies possess specific prime features that distinguish them from traditional currencies. Here are a few of them.

1. Decentralization

Cryptocurrencies run on a decentralized network of nodes distributed worldwide to verify and validate transactions. Thus, it eliminates the need for a central authority like a government managing them.

2. Anonymity and Privacy

Though all crypto transactions are recorded on the blockchain and are publicly accessible, the identity of users is not revealed anywhere. Users need not provide any personal information as they do with banks. Users are often identified with cryptographic addresses rather than personal details. Thus, no sensitive information is shared on the internet.

3. Immutability and Security

Once the cryptocurrency transactions are added to the blockchain, it cannot be altered or tampered with. The immutability ensures secure and reliable transactions without involving third parties.

4. Low-Cost Transactions

Cryptocurrency transactions are much faster and cheaper than traditional financial systems. For instance, cross-border transactions or international transactions of traditional currencies would cost a lot of money. However, you can transfer cryptocurrencies to anyone, anywhere in the world.

5. Volatility

Cryptocurrencies are notoriously volatile. Almost all cryptocurrencies undergo significant fluctuations in a short period. Though it poses a risk to investments, studying the market carefully and investing in the right assets can give a good Return on Investment(ROI).

6. Limited Supply

Most cryptocurrencies, from Bitcoin to Litecoin, undergo halving to create scarcity and maintain their price. Thus, many investors see cryptocurrency as a potential alternative investment like gold and real estate and use it as a hedge against inflation due to its limited supply.

Cryptocurrency Examples

Cryptocurrency Examples

With so many cryptocurrencies available in 2023, the first-ever cryptocurrency, Bitcoin, is the most popular of all. Let’s see some of the top cryptocurrencies here.

1. Bitcoin (BTC)

Bitcoin, the first cryptocurrency, which was launched in 2009, is the most popular cryptocurrency till today. Bitcoin leveraged blockchain technology and records its transactions on a distributed ledger. That, in turn, led to numerous alternative coins over the years.

2. Ethereum Classic (ETC)

As a potential alternative to Bitcoin, Ethereum was launched in July 2015. Ethereum is no longer mineable; Ethereum Classic is a fork of Ethereum. Ethereum Classic is an open-source platform that anyone can leverage. It supports smart contracts and attracts many DeFi applications.

3. Tether (USDT)

Tether, created in 2014, was one of the first stablecoins, offering the stability and simplicity of fiat currencies while combining the benefits of cryptocurrencies. When the most popular cryptocurrencies like Bitcoin and Litecoin are vulnerable to volatility, Tether managed to be stable without much price fluctuations.

4. Kaspa (KAS)

Kaspa (KAS) is a high-speed cryptocurrency that’s all about quick transactions and scalability. With its innovative blockDAG design, Kaspa offers fast confirmations and low fees. Perfect for everything from payments to smart contracts, Kaspa is here to make crypto faster and more efficient!

5. Dogecoin (DOGE)

Though it started as a meme coin, Dogecoin attracted many investors when its price skyrocketed in 2021. It is an open-source, peer-to-peer cryptocurrency that leverages blockchain technology to store information on a public ledger. Dogecoin stands tall as one of the most used cryptocurrencies.

How to Mine Cryptocurrency?

How to Mine Cryptocurrency

Here are the steps involved in mining cryptocurrencies.

  • Choose the Cryptocurrency

Choosing the right cryptocurrency is the first step. Monitor its price history and past performances and choose the one with a positive trend. Since the cryptocurrency price directly impacts your mining profitability, choosing the right cryptocurrency is crucial.

  • Get the Suitable Mining Hardware

ASIC miners are ideal for crypto mining as they are programmed for a specific cryptocurrency’s mining algorithm. Moreover, since ASICs have higher hash rates and consume less power per hash, they offer excellent energy efficiency. Thus, do your research and choose an ASIC that is programmed for your cryptocurrency’s algorithm and with maximum hash rates. That way, you can enhance your mining success and profitability.

  • Find the Right Mining Software

You can download most mining software for free on the internet. A few of the popular options include CGMiner, BFGMiner, and EasyMiner. Always ensure you select the software that is compatible with your mining hardware and the cryptocurrency you intend to mine.

  • Set Up a Crypto Wallet

You will need a cryptocurrency wallet to store your mined cryptocurrencies. Crypto wallets have a unique address that enables you to send and receive cryptocurrencies securely. There are various types of wallets, including hardware, software, and paper wallets. You can choose the one that fits your mining preferences.

  • Join a Mining Pool

Mining solo can be challenging. Joining a mining pool allows you to pool your computational power with other miners, increasing the chances of earning rewards.

  • Start Mining

Once you set up your hardware, software, and wallet, you can connect with your preferred mining pool and start mining your preferred cryptocurrency immediately.

How to Buy Cryptocurrency?

Buying cryptocurrency is pretty straightforward and involves a few steps. Let’s see them in detail.

1. Picking the Platform

You can buy cryptocurrency from an online broker or cryptocurrency exchange.

  • Online Brokers

These online brokers often buy and sell various financial instruments like stocks, bonds, and cryptocurrencies. It is a much more convenient way for users as these brokers take the complex process of buying cryptocurrencies. However, some brokers may sell your sensitive information to others, so partnering with a reliable broker is crucial.

  • Cryptocurrency Exchanges

Cryptocurrency exchanges serve as a platform where buyers and sellers trade cryptocurrencies. Most exchanges offer relatively low fees but have complex interfaces with advanced performance charts. Since it could be overwhelming for a new investor, choosing a reputed crypto exchange will simplify the process.

Experts recommend users to consider the cryptocurrency they intend to buy, the charges, security features, storage, and withdrawal options before finalizing the platform.

2. Create Your Account

After finalizing the platform, you can sign up and create an account with them. You must verify your identity to prevent fraud and meet regulatory requirements despite the platform. Often, you might need to submit a copy of your passport or license to complete the identity verification process.

3. Fund Your Account

The next step is to fund your account. Most platforms allow users to buy crypto using fiat currencies. You can deposit money into your crypto account directly from your bank account. Purchasing cryptocurrencies via credit cards is risky, and most credit companies don’t allow it as cryptocurrencies are highly volatile.

4. Order Cryptocurrency

You can place your order with money in your crypto account. You can choose any cryptocurrency like Bitcoin, Ethereum Classic, Litecoin, etc., enter the number of cryptocurrencies you want to buy, and confirm the order. The exact process applies to selling cryptocurrencies.

Since cryptocurrencies are highly volatile, some may hesitate to risk their money. Here are a few alternative ways to invest in cryptocurrencies indirectly, like

  • Exchange Traded Funds (ETFs)
  • Invest in companies related to cryptocurrencies
  • Cryptocurrency Mutual Funds

5. Store Your Cryptocurrency

Now that you have purchased cryptocurrency, you must store it safely to prevent fraud or theft. Moreover, you risk losing your crypto if you forget your access code. Hence, keeping your crypto in a reliable crypto wallet is highly recommended.

There are two types of storage wallets to choose from.

  • Hot Wallets

These are wallets that use online software to protect your private keys. You can run them on electronic gadgets like tablets, computers, and mobile phones. It is convenient but poses a threat because it is connected to the internet.

  • Cold Wallets

Cold wallets are hardware wallets and are not connected to the internet. It can be any device, like a USB or hard drive. One possible risk associated with cold wallets is if the device breaks or fails, you may lose your cryptocurrencies.

Are Cryptocurrencies a Safe Investment?

As with any investment, cryptocurrencies carry its fair share of pros and cons. Analyzing the pros and cons will help you make informed decisions regarding crypto investments.

Pros of Cryptocurrencies

  • Cryptocurrencies are decentralized, eliminating the single authority ownership.
  • All transactions are recorded on a distributed public ledger, enabling transparency to all users involved.
  • The transaction, once entered, cannot be altered and is immutable. That, in turn, prevents fraudulent transactions.
  • Cryptocurrency transactions are anonymous, protecting the user’s privacy.
  • Backed up by blockchain technology and encrypted through cryptographic algorithms, cryptocurrencies are more secure.
  • Since cryptocurrencies are limited in supply, they can be used as a hedge against inflation.

Cons of Cryptocurrencies

  • Cryptocurrencies are highly volatile. Since their prices fluctuate drastically, users should be more cautious as they can burn their hands by making uninformed decisions.
  • It is highly unpredictable. The cryptocurrency price depends on supply and demand.
  • Cryptocurrencies are not widely accepted yet. It is still a new concept to the masses.
  • Scalability can be a problem with cryptocurrencies. The network may slow down if more people are involved in crypto transactions, leading to transactional delays.
  • Some countries have banned cryptocurrencies. Thus, users should check the legality of cryptocurrencies in that country before using them.

Short Discription

Cryptocurrency or digital currency is seemingly popular among investors worldwide for its decentralized nature. Backed up by blockchain technology and distributed ledgers, the distinct feature of cryptocurrency is that any centralized authority, such as banks or government, does not control it. Cryptocurrencies are often seen as potential alternatives to fiat currencies, and people use them to diversify their portfolios. The global cryptocurrency market size is expected to grow from $910.3 million in 2021 to $1,902.5 million in 2028 at a CAGR (Compound Annual Growth Rate) of 11.1%. Let’s dive deeper into the world of cryptocurrencies with this comprehensive blog.

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