There are very few tech innovations that have had the impact that cryptocurrency and blockchain have had over the past decade. It’s safe to say that blockchain technology and all that’s come with it has changed the world – and there’s no coming back from that.
With all this hubbub, you might have decided it’s finally time to invest in crypto yourself. However, if you really are a newbie to the world of crypto, there’s a lot you’ll want to get familiar with before hopping in.
After all, the world of crypto isn’t always straightforward, especially if you’re not as familiar with the digital world.
What do you need to know before diving in? What are the basics of currencies like Bitcoin and Ethereum? Read on and we’ll walk you through what you need to know.
What is Cryptocurrency?
Let’s start with the absolute basics, shall we?
Cryptocurrency is a form of currency that is similar in many ways to fiat currency – except that it exists only in a digital form. The main distinction between this digital currency and the kind of dollar or coin that you’re used to is that it is not regulated by a central bank or country government.
Generally speaking, large banks and national governments are in charge of creating new currency units, verifying transactions, and controlling the flow of currency.
Cryptocurrency puts this power in the hands of the people – no individual person, group, or entity can control a cryptocurrency.
How Does This Work?
Instead of relying on institutions to do the work of verifying transactions, users work to confirm them on a public ledger known as the blockchain. The blockchain was the genius solution to the problem of easily copied digital information.
The blockchain ledger is maintained across a network of hundreds of thousands of computers around the world. It is completely decentralized, which it makes it impossible to hack, alter, or tamper with.
This public ledger records every cryptocurrency transaction in the history of the currency. There is an easily accessible and traceable record of every transaction that is made, how much, and so forth.
Cryptocurrency users around the world perform highly complicated computer functions in order to help transcribe the ledger – and are rewarded with the creation of new crypto as a result (in many cases, but we’ll talk about this later).
This process is known as mining – and it’s how new cryptocurrency is introduced into the financial ecosystem.
Bitcoin: The Original Cryptocurrency
This all started back in January 2009, when an anonymous inventor operating under the name Satoshi Nakamoto, unleashed Bitcoin and the blockchain upon the world.
Bitcoin was and remains the original and most well-known cryptocurrency. It took some years before the general public came to understand what Nakamoto had created, but over those years, as understanding has increased, the price of Bitcoin has risen and risen.
Bitcoin is not backed by anything – its value is completely based on users’ personal prognosis of its value. For this reason, the price of Bitcoin fluctuates quite frequently between highs and lows.
Bitcoin, and all other cryptocurrencies, are still considered high-risk assets. The prices that they rest at can change quickly and frequently, and those who are interested in investing in crypto need to have an understanding of this going in.
While Bitcoin was the original cryptocurrency, it wasn’t long before other imitators came onto the scene. Many new currencies were created in trying to take the Bitcoin model and improve upon it.
How Many Cryptocurrencies Are There?
More than you might expect!
At this moment, there are thousands and thousands of cryptocurrencies available. Each year, hundreds of new currencies are created and hundreds also go defunct.
Part of the reason why there are so many is that it is simply fairly easy to create one. Launching a new token isn’t difficult – it’s building people’s trust in a token as a holder of value that becomes tricky.
Bitcoin’s biggest competitor, Ethereum, has been able to do that over the past decade. Some believe that Ethereum may even eclipse Bitcoin’s success sometime in the next few years, becoming the main cryptocurrency that people invest in.
This is partly because Ethereum is more environmentally friendly than Bitcoin, relying on a different kind of working process to verify transactions and create new tokens.
On the other hand, new currencies created almost in jest, like DogeCoin, can pick up steam and grow in actual value. After the run-up on AMC stock in 2021, other very-online assets like DogeCoin also shot up in value, but later fell.
In short, there are nearly endless cryptocurrency options out there, but very few that are actually probably worth your long-term investment. That’s why you’ll need to do your research ahead of time if you’re planning on making a serious investment in cryptocurrency.
How Using Cryptocurrency Works
Many people invest in cryptocurrency simply as an alternate form of investment. In the same way, you might invest in a stock or piece of property, the hope of the investor is that the value of the asset will go up over time.
Eventually, they can transfer this value back into fiat currencies and be on their way with much more cash in the bank.
Of course, cryptocurrencies like Bitcoin are also intended to be used in the way that actual currency is used. That means it can be used for direct transactions of all kinds.
How does this work?
Cryptocurrency Transactions
First, you need to have a crypto wallet. A wallet is a key to your digital assets. It provides an address that links to the record of your funds on the public blockchain ledger.
This wallet also has both public and private keys. These keys allow you to provide information to make transactions (like a bank account number) and withdraw and deposit funds (this is more like a private password).
You can buy or sell cryptocurrencies of all sorts on websites and apps known as cryptocurrency exchanges. These websites allow transactions between fiat currencies and crypto, and also between various types of cryptocurrencies.
There are many different exchanges out there, each with different plans and fees for transactions. It’s important to do your research and determine which exchange makes sense for you. It’s also important to ensure the exchange in question is trustworthy.
Every time you make a transaction, the exact nature of this transaction is recorded on the blockchain. The ledger is updated to show the precise balance that has shifted between your and the other user’s wallets.
When you pull money from your wallet and transfer it to something like American dollars, this loss in digital currency is also recorded on the blockchain.
You can visit ATM locations in order to make these types of transactions, or do it completely digitally via an exchange.
Why is Crypto So Popular?
Now that you have a basic understanding of how cryptocurrencies work, you may be curious why they have such a draw on so many people.
One of the main reasons is that they are a very attractive form of investment. You’ve likely heard stories of many people getting rich off of their crypto investments – these are true stories. Crypto’s value as an asset has skyrocketed over the past decade and there’s a lot of attention around it in the mainstream media.
It is possible to invest in crypto and receive huge returns, which is what draws many people in.
In addition, crypto is constantly evolving and growing. It’s getting better and more advanced every year. The ease of access and use of cryptocurrencies is also growing.
Some people believe that crypto is the future of money, and want to be an early adopters of this new future. It’s true that many businesses are developing ways to use blockchain technology in their day-to-day operations, so there could be a long life for this new tech ahead.
You, of course, will have to decide upon the utility and value of crypto for yourself.
What To Know Before You Invest in Crypto
There’s a lot to know about the new world of digital currency. Before you invest in crypto, it’s important to get a well-rounded understanding of how cryptocurrencies work.
The above information can help fill in the blanks in your knowledge. There’s a lot to learn, but with this foundation, you should find it much easier to start investing.
Need more crypto information, updates, and advice? Keep scrolling our blog for more helpful tips and tricks.