What is Cryptocurrency?

profile pic
gingerbreadfork
·
10 min read

Understanding the basics of cryptocurrency is one of the best ways to start exploring this new age technology yourself.

···

The basics of cryptocurrency can seem scary at first. Still, once you start grasping some of the basic concepts, you'll find it easy to expand and grow your knowledge of more advanced topics in the cryptocurrency ecosystem.

Let's spend a little time exploring virtual currencies and find out why they are so incredibly important.

What Is Cryptocurrency in Simple Words?

If you were to look at cryptocurrency from a broad and simplistic standpoint, the best way to think of it is as a form of digital money. However, a slightly better way to think about it that is still easy to understand is to look at cryptocurrency as a way to exchange value securely without third parties needing to be involved. Using a cryptocurrency like Bitcoin, Ethereum, Dash, or even Monero, you can transfer value to anyone in minutes and often extremely cheaply, especially when compared to traditional remittance options.

While the best known and most established modern cryptocurrency is Bitcoin, thousands more cryptocurrency projects take the concept their own way and prioritize different things. For example, while Ethereum can be used merely to exchange value, it can also be used to develop smart contracts, which can be used to create advanced financial protocols, and as a result, a vast ecosystem of other creative things that leverage the technology has sprung up.

Is Cryptocurrency Legal?

While some countries are taking a relatively restrictive or hard-line approach to cryptocurrencies, in most cases, those taking a publicly negative stance are doing so merely by discouraging use among residents. In other words, legality depends on different countries. However, even though most countries aren't looking at banning cryptocurrency wherever you happen to live or plan to travel, it can have significantly different rules to another region, so it's always important to check the local cryptocurrency rules and regulations.

What is Cryptocurrency Used For?

Most commonly, cryptocurrency is used to exchange value, with the most common thing being to pay for goods or services. However, in the modern cryptocurrency space, far more use cases are beginning to become apparent. Everything from decentralized lending to NFTs are now part of the growing cryptocurrency space.

Many use cases that blend with real-world problems are being explored as well. Everything from insurance, supply chain management, authentication, and even verification of genuine goods can be enhanced through cryptocurrencies and, more broadly, blockchain technology. The best use cases for cryptocurrency are those that help make your life more efficient or provide some specific value to you.

Can Cryptocurrency be Converted to Cash?

Even though cryptocurrency has no direct connection to the traditional financial system, or cash for that matter, like all goods and services that have value, they can be traded for cash, other payment methods, or even bartered under the right conditions. While a common fear of newcomers to cryptocurrency is you can't convert it to cash. If you choose a well-established cryptocurrency with high demand and a reasonable degree of liquidity, there should be little to no issue cashing out at any time using a cryptocurrency exchange or, better yet, a peer-to-peer marketplace like LocalCoinSwap, where you can trade cryptocurrency directly for cash.

Why are Cryptocurrencies so Popular?

There's a growing number of reasons people are becoming excited and even at times passionate about cryptocurrencies. However, one of the biggest things that have resulted in them becoming so popular is that they approach the age-old problem of how to exchange value in a way that is incredibly different from other approaches that have existed since humans have existed.

Even since bartering in the early days of humanity, trading has rarely been an efficient thing at scale. If you are a goat farmer who wants to trade your goats for various items to get by, what do you do if you want something worth less than one goat? As you can see, this starts to become a problem, especially if you can't find a person offering the good or service that you are seeking that even wants a goat.

While traditional currency jumped in to solve a lot of the kinds of problems you can face while trying to exchange some form of value, and even to a relatively high degree, it's not perfect in many cases. While cryptocurrency is arguably imperfect as well, for the time being, it does do some things exceptionally well. For just one great example, remittances with cryptocurrency can be incredibly cheap and efficient. Conversely, sending cash or coins overseas is the total opposite of what you could consider efficient remittance and is one example of where traditional fiat currency doesn't perfectly solve the problems associated with value exchange, especially in the modern hyper-connected world.

What To Know About Cryptocurrency and Scams

The first thing to know about scams and cryptocurrency is that cryptocurrency isn't an exclusive target of scammers by any means. Like all forms of assets, even things like gold, there is always someone out there that is looking to do the wrong thing from time to time. However, most common scams are quite simplistic and don't exploit any fault with cryptocurrencies so that they can largely be avoided with a bit of common sense.

Some scams come in the form of new cryptocurrencies that often promise outlandish profits to anyone that purchases them. Others can come in the form of traditional fraud, where a scammer may try and trick you into handing over control of your cryptocurrency, often again with relatively amateur approaches like promising unrealistic profit potential from some trading platform or other investment scam.

Even though your first mention of bitcoin or cryptocurrencies to a friend or family member may evoke concerned responses about a scam they heard about, this tends to primarily be confusion about how someone was scammed, incorrect assumptions, or the simple reality that those that get scammed tend to be louder and looking for someone to blame than those that don't.

Never hand over access to your cryptocurrency, private keys, hardware wallet, or anything else to anyone ever. There is never a good reason to do this, and especially not when the person requesting them is someone you met online, that likely solicited you without you initiating the conversation.

If you spend a little time learning how to keep your cryptocurrency secure and ensure you only ever use reputable cryptocurrencies (like bitcoin), you'll find that cryptocurrencies can be incredibly secure and valuable tools; you just have to use them correctly like any good tool.

Are cryptocurrencies a Good Investment?

While this isn't a question that has a broad or perfect answer that covers anyone, there are some things you should consider when thinking about investing in cryptocurrency. Firstly, what is your risk tolerance? Even though some cryptocurrencies have done exceptionally well in the long term, they can be incredibly volatile. Secondly, are you comfortable with the cryptocurrency you are investigating in terms of longer-term stability? Not just network stability or reliability, but in terms of active future development. If there isn't demand and a strong backing, a cryptocurrency can die off; this is something that has happened many times in the past and will likely happen many times more in the future.

If you're thinking about investing in cryptocurrency, always do your own research. Never take financial advice from those that are incentivized to encourage you to buy cryptocurrencies, as they may be purely motivated by the hopes of being exposed to price appreciation. Many people find that cryptocurrencies can be valuable assets to add to their investment portfolio. Whether this includes you and what degree you want to be exposed to them is a purely personal decision.

How Do I Buy Cryptocurrency?

You can buy cryptocurrency in various ways. One relatively common option is to use a centralized exchange to buy your cryptocurrency. However, these platforms are restrictive, especially in regards to the payment methods they accept.

Thankfully, P2P marketplaces provide a great alternative and one that is by far the most flexible. Trading cryptocurrency P2P enables you to trade more directly with other people for a massive range of payment methods and with the protection of an escrow system. If you do opt to use a P2P marketplace, be sure to do your research and ensure that you are making a good choice. In recent years, some platforms have become more restrictive or don't offer non-custodial trading options that can be very important to some traders.

How Does Cryptocurrency Work?

At their core, cryptocurrencies use distributed ledger technology to allow you to send and receive value without the need for a bank or other middleman. They typically use a blockchain where all transactions through the history of the cryptocurrency are recorded in a way that ensures past transactions are continually confirmed and can be verified by anyone with a copy of the ledger or using a service that provides access to it such as a block explorer.

Every time a transaction is performed, this is recorded and validated between many different network participants to ensure that the majority always agrees on the correct outcome and state of the chain. As cryptocurrencies have evolved, there is a range of variations that can come into play. However, in most cases, a cryptocurrency will use a blockchain, confirm transactions in a distributed way, and enable you to send and receive value.

Due to their digital nature, cryptocurrencies generally require the internet for network participants to communicate and successfully support the network. However, in some cases, satellites or other novel approaches to bypassing this limitation are used.

How Can You Mine Cryptocurrency?

Mining cryptocurrency is usually associated with cryptocurrencies that operate using a proof-of-work (PoW) algorithm. Bitcoin and other cryptocurrencies that use PoW use complex computational tasks to help secure the network and reward those that participate. Each part of a blockchain is (as you may have guessed) is called a block. Each block can contain transactions and usually has an estimated time attached for how long it will take to be completed. Miners expend energy and use hardware to attempt to solve complex mathematical problems to "solve" each block and earn a reward built into the network's rules.

Some blockchains allow mining with a standard CPU, some require the use of graphics cards, and in the case of bitcoin, ASICs may be necessary. ASIC miners are specialized computers that are designed to do one task as efficiently as possible. If ASIC miners have been created to mine a specific cryptocurrency, often they are so effective compared to using a GPU or CPU that it becomes unprofitable to mine using these other types of hardware as the network compensates for the use of ASICs.

In general, to mine a cryptocurrency, you would often get some suitable hardware, download a piece of software alongside a copy of the blockchain, and begin trying to solve blocks to win rewards. In addition, miners often work together in "pools," which are merely groups of miners working together to share the block reward. Pools can help make your profitably more predictable and enable you to be more competitive as a larger group.

How Can You Use Cryptocurrency?

To use cryptocurrency, all you will generally need is a compatible software wallet. The wallet you use could be in the form of a hardware wallet, web wallet, mobile wallet, or another form of application. However, you can receive funds with merely a public key. Software wallets just enable you to sign transactions to move cryptocurrency from a wallet address that you control. Generating a new wallet involves creating a pair of keys, one private and one public. The public key can be freely shared with anyone you choose, while the private key should never be shown to anyone. Sending and receiving cryptocurrency using a popular and reputable software or hardware wallet is growing to be relatively straightforward as cryptocurrencies are maturing. You can expect any good cryptocurrency wallet at a minimum to show your current balance and enable you to send and receive cryptocurrency easily.

Sending cryptocurrency can be easily performed using a compatible wallet to send funds to your recipient's wallet address. If you've ever used a digital payment system like Venmo, PayPal, or similar, the process will feel quite similar. However, behind the scenes, cryptocurrency has many advantages as opposed to these types of payment systems.

It's important to remember that not all wallets support all cryptocurrencies and that cryptocurrency transactions are not reversible once confirmed sufficiently, so be sure to confirm the details before broadcasting a transaction.

What Are the Most Popular Cryptocurrencies?

Bitcoin is the most popular cryptocurrency, and it also has the largest market capitalization. However, many other cryptocurrencies have grown significantly over time, also to be quite popular. Ethereum, for example, has a significant market share, as do many up-and-coming cryptocurrencies like Polkadot.

Over time the most popular cryptocurrencies can change as projects become more or less active. It's not uncommon either to see projects fall to the wayside and become inactive. However, for the most established cryptocurrencies like Bitcoin, this is unlikely to be an issue due to the strong community and ecosystem built up around it.

Why are there so Many Cryptocurrencies?

Once Bitcoin started to take off, it was natural for others to want to create their own take on cryptocurrencies. As a result, over the last decade, thousands of cryptocurrency projects have been launched. Bitcoin being an open-source project helped propel some of the earlier projects by enabling them to start from a reliable code base and then tweak it and create alternative cryptocurrencies, which are now commonly referred to as altcoins.

What can you do with cryptocurrency?

  • Send and receive money
  • Pay for goods and services
  • Engage in decentralized finance (e.g., DeFi lending)
  • International remittances
  • Interact with smart contracts

How Secure Is Cryptocurrency?

Each cryptocurrency project has its own security level, which can come down partially to the design, how good the code is, and how many users are actively supporting the network by mining or operating nodes. If any of these parts of the project are lacking, security can become an increased concern.

If you've ever wondered why projects that are based directly on the Bitcoin codebase or even another heavily developed cryptocurrency like Ethereum have had significant issues with security, one of these critical areas is usually to blame. For example, many such cryptocurrencies forked from larger projects have gone through periods of double-spend attacks due to lacking the network support that the original projects have to help secure them against such issues.

How do you store cryptocurrency?

The best way to store your digital currency is using a reliable hardware wallet. As cryptocurrency doesn't have a physical representation, instead storing your cryptocurrency securely is primarily about ensuring your private key or mnemonic phrase to generate your keys are secure. Hardware wallets may seem confusing, but they are merely devices that avoid your private key being exposed while signing transactions. Your private key is required to spend your cryptocurrency, so having it hidden from external forces inside a hardware wallet enables you to transact with less risk than if you were to be handling your private keys directly every time you wanted to move some of your crypto assets.

Storing large amounts of funds in cryptocurrency exchanges that don't provide access to your private keys (non-custodial exchanges and wallets) is never recommended. In the past, several fully custodial exchanges have faced hacks or insolvency, resulting in a loss of funds that directly affect their users. As a result, many cryptocurrency enthusiasts will use the saying "not your keys, not your coins," which references the importance of storing your cryptocurrency securely by storing it yourself.

Get freshly mined articles straight to your inbox!
No spam, pinky promise!