What is Cryptocurrency? A Simple Guide for Beginners

Are you wondering – what is cryptocurrency? You’ve probably heard crypto mentioned a lot lately. But what is cryptocurrency exactly? Complicated jargon and technical explanations are common on the internet. Those explanations can be hard to digest – so, we’re here to make it simple. This crypto guide for beginners will help you understand what is cryptocurrency, how crypto works, and what you can expect from cryptocurrency in the future.

What is cryptocurrency?

Cryptocurrency is a form of digital currency. Crypto holders can transfer funds between one another, buy goods and services, and even trade their crypto without the need for a middleman (e.g. banks, governments, credit unions).

Keep in mind, different cryptocurrencies have different purposes. For instance, Bitcoin is a decentralized digital currency that is intended for digital payments. Ether, on the other hand, is a cryptocurrency that is used to execute transactions on the Ethereum network.

Learn more about Ethereum here – What is Ethereum?

Many people also use cryptocurrencies as investment tools. For example, Bitcoin is considered “digital gold”. In other words, institutions and investors worldwide invest in Bitcoin as a store of value.

There are many different cryptocurrencies. Each crypto is slightly different, with a different use case and fundamentals.

How many cryptocurrencies are there? Learn more here – COMING SOON.

Is crypto real money?

Crypto is digital cash. Unlike traditional money (e.g. the US dollar, Euro, or Yen), cryptocurrencies are not physical. Instead, they are digital currencies that typically only exist virtually. Like real money, crypto can be used to purchase goods and services, and even to earn interest.

However, many people wonder – if I own cryptocurrency, what do I really own?

When you buy crypto, you’re not buying anything tangible. The best way to think about this is to compare crypto to streaming platforms, like Amazon Prime and Apple TV. If you purchase a movie or show on one of these platforms, you won’t receive a physical copy in the mail. Instead, the version you buy is a digital copy. You can watch it when you want, where you want, and as many times you want.

In addition to offering the same benefits as a physical copy, digital copies of television shows and movies provide added benefits. For example, you don’t have to leave your house to buy or rent anything. Plus, copies of the show or movie never run out – no matter how many people want to watch it. (Remember choosing a movie at Blockbuster only to find out there were no copies left? No thank you!)

Digital content is similar to cryptocurrency in many ways. Crypto functions just like real money but with many additional benefits.

However, unlike this example of digital content, many cryptocurrencies have a maximum supply. This means that only a certain number of coins will ever exist. Bitcoin, for example, has a maximum supply of 21 million. After 21 million Bitcoins are mined, no more will be created. This creates scarcity in the market and helps to increase the price of cryptocurrencies.

How does cryptocurrency work?

Now that you know what is cryptocurrency, let’s take a look at how crypto works.

First thing’s first – how is crypto created?

How Crypto is Created

New units of cryptocurrency are minted using different processes. The two most common ways to create crypto include:

1. Mining
2. Staking

How a cryptocurrency is created depends on whether the crypto uses a proof-of-work or proof-of-stake model.

Cryptocurrencies that use a proof-of-work model, like Bitcoin, require miners to create new coins. Crypto mining involves the use of powerful mining devices (computers) that solve complex mathematical equations to validate transactions. When these complex equations are solved, new crypto units are also created.

On the other hand, cryptos that use a proof-of-stake model, like Cardano (ADA), verify transactions and create new coins via staking. Staking crypto is much more energy-efficient than mining.

Now, let’s take a look at how cryptocurrency transactions work.

Crypto Transactions

Each time a transaction takes place (e.g. you buy, sell, send, or receive crypto), it is published to an online database. This database is known as a ledger, or blockchain. The ledger is both public and immutable. In other words, once a transaction is posted to the ledger (i.e. the blockchain) anyone can view it and it cannot be overwritten or changed. This allows for secure and transparent transactions.

Learn more about blockchain here – What is blockchain?

What is the main purpose of cryptocurrency?

Now that you have a better idea of what is cryptocurrency and how it works, we’ll take a look at the common question – what is the main purpose of cryptocurrency?

As we’ve discussed, many cryptocurrencies are designed to be used for digital payments. However, the main purpose of cryptocurrency is to minimize (or eliminate) the need for centralized financial institutions, like banks.

Many issues arise from the centralized control of money. Several large organizations completely control the flow and creation of money. As a result, they have the power to do nearly whatever they want – even with your hard-earned money! This also often creates unfair advantages and preferential treatment for the wealthy and the centralized controllers. Therefore, many people look to cryptocurrency to provide a more fair financial system for all.

For example, when you hold your fiat money (e.g. the US dollar, Canadian dollar, Euro, Yen, etc.) in a savings account, you might receive (at most) 0.5% to 1.0% APY. However, by staking cryptocurrency (e.g. stable coins like Tether), you can earn up to 20% APY!

Overall, the use of cryptocurrency puts the power back in the hands of the users. If you own cryptocurrency, you will play a role in this new financial system.

Is cryptocurrency legal?

Whether cryptocurrency is legal depends on which country you are in.

Crypto in the United States and Canada

Cryptocurrency is legal in countries like Canada and the United States. Here, residents can buy, sell, and make purchases using cryptocurrency. That said, the US and Canadian governments are continually working on crypto regulations. Therefore, it’s important to stay up to date on current events.

El Salvador Crypto

El Salvador has taken its involvement with crypto a step further. On Sept. 7, 2021, El Salvador became the first country in the world to make Bitcoin legal tender!

China Crypto

Unfortunately, China has banned cryptocurrency.

However, as cryptocurrency continues to evolve, and more people around the world get involved, rules will undoubtedly change. Before buying cryptocurrency, always be sure to check the local laws and regulations in your area.

Is cryptocurrency safe?

Overall, cryptocurrency transactions are safe, fast, and secure. In fact, sending and receiving crypto can be safer than sending and receiving traditional money. This is because cryptocurrency uses cryptography to secure transactions (hence the name crypto-currency).

Cryptography involves the use of two types of keys – a public key and a private key. When someone sends crypto, they use the receiver’s public key to direct an encrypted message. When this message is received, the receiver’s private key is the only thing that can decode it. Therefore, without a private key, no one can steal the incoming crypto.

Of course, this is a simplified explanation. To learn more, check out our article on Cryptography.

In addition, blockchain technology is quite secure. As we mentioned above, the blockchain is immutable. This means that no single stakeholder can make changes to data posted to the ledger. As a result, it is very difficult (if not impossible) for hackers to tamper with a blockchain.

Cryptocurrencies typically use blockchain technology to record transactions. It’s a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that’s hard for hackers to tamper with.

Although crypto transactions are safe, many other dangers accompany cryptocurrency. What are these dangers? Let’s take a look.

Lost Crypto Wallet and Seed Phrase

If you have your crypto stored on a hardware wallet, make sure your seed phrase is in a safe place. If you lose your hardware wallet, you can recover your crypto. All you need to do is purchase a new wallet and enter your original seed phrase. However, if you lose or forget your seed phrase, there’s no way to recover your cryptocurrency.

Theft

Hackers and con artists are always trying to steal crypto. Therefore, you must never share your private key or accept a transaction you aren’t expecting.

Crypto exchanges are also vulnerable to hackers. This is why many crypto holders keep their digital assets on a hardware wallet. That being said, crypto exchanges are constantly improving their security features. For example, many exchanges require two-factor authentication, KYC, and other security measures to help protect users.

Learn more about hardware wallets here – What is a hardware wallet?

Volatility

Cryptocurrencies are very volatile. In fact, many altcoins can go to zero! Therefore, it’s important only to invest what you can afford to lose. Keep in mind, that although the price of Bitcoin is volatile, it is a pretty safe investment and is unlikely to go to zero (unlike altcoins).

Should I buy cryptocurrency?

If you’ve made it this far, you’re probably thinking about buying crypto. So, is it good to invest in cryptocurrency?

Before you jump into the crypto markets, there are a few things to consider.

1. What is your tolerance for risk?

Unlike traditional money, the value of cryptocurrencies is extremely volatile. Prices can change drastically day to day and even hour to hour. In most cases, long-term holders who believe in the vision of cryptocurrency are those that will succeed. However, these individuals are comfortable with the wild fluctuations in the market.

2. Are you willing to take the time to learn how crypto works?

Before you buy cryptocurrency, it’s essential that you do some research. Take a look at the creators, what makes the project unique, and the value it offers. Many people dedicate their entire lives to examining cryptos and understanding crypto charts – there’s a lot to learn. If you’re willing to do some research on your own and to keep up with the trends, crypto might just be for you!

Keep in mind, not all crypto investments require such a time commitment. Bitcoin and Ethereum are pretty safe bets. Therefore, you could just stick to these big players and HODL.

3. Do you believe that crypto is the future?

If you believe cryptocurrency will provide the framework for a new (and better) financial system, then getting involved is a no-brainer!

Bitcoin has been around for more than a decade. Regardless, cryptocurrencies and blockchain technology are evolving and improving every day. Innovative ideas and technologies will continue to flood the crypto space. So, if you want to get involved, now is the time!

*Please always do your own research before buying crypto. If you’re here, you’ve already started – great job! Most importantly, never spend more than you’re willing to lose.