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What is Cryptocurrency? — An Easy Guide for Dummies

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There are 2 groups of people when it comes to cryptocurrency. Members of the first group are those who have delved into the likes of Bitcoin or Ethereum and were smiling to the bank due to profits, or badly burnt due to you know, losses. As for the other group, they are the ones who keep hearing of it and always feel like a noob when people talk about it.

As popular as it is, a lot of people still don’t know how it works. Yes, even those who have been investing in it, or using it to make transactions. Here, we’d decipher what it entails.

Before we dive in, here are facts about cryptocurrencies I think you should be aware of:

  • Cryptocurrency is the main deal. Sure. But the real tech lies in blockchain.
  • Although it sounds and looks ambiguous, the learning curve to get involved in it is very shallow. In other words, it is simple to get into.
  • Despite it being popular, they are banned in certain countries.
  • There are over 2,000 cryptocurrencies in existence, but Bitcoin is the king and is 5 times worth the cost of the next biggest cryptocurrency, Ethereum.
  • One of the main goals of cryptocurrency is to curb double-spending, a common flaw in digital currencies where a particular digital token or unit is spent twice. Such a flaw can lead to inflation. This brings us to the most important fact,
  • This article would help you understand it better.

Intrigued? There’s more. Dive in.

What is Cryptocurrency?

A cryptocurrency is a digital asset (content that is stored digitally) designed to work as a means of exchange, which is protected and made secure by cryptography, a method of masking or protecting certain information through codes.

Majority of cryptocurrencies are distributed via blockchain technology, a digital ledger (record book) network which allows data to be stored on numerous servers and made visible to end-users in real-time. This type of distribution prevents monopoly, or in other words, no one has control over it.

The purpose of blockchain technology in cryptocurrency is to ensure the transparency and integrity of transactions being made.

How Cryptocurrency Transactions Occur?

Transactions

In cryptocurrency, transactions are made between users/peers using wallets. These wallets are a medium which enables users to manage tokens and transactions.

They can be physical, or software-based, and are used to store the public and private keys of the users. These public and private keys are essential in making secure transactions.

The public keys are a series of alphanumeric code which allow a user to make transactions (send or receive) with a wallet. The private key, on the other hand, serves as a digital ID and grants a user ownership of a wallet.

Validation

Now, when a transaction has been initiated, the blockchain network is notified. But the transactions can’t be confirmed immediately and has to undergo validation, which takes a couple of minutes.

When the transaction is then confirmed, it gets registered in the digital ledger/record book, or in other words, the blockchain network. These confirmations are made by miners and are the only ones who can confirm/validate transactions made. When they confirm a transaction, they broadcast it in the blockchain technology network and every node (computer) in the network registers/records the transaction.

Let’s take a more in-depth look at crypto mining.

Cryptocurrency Mining

Cryptocurrency mining, or crypto mining, is a very crucial area of cryptocurrency, as it handles the verification of transactions and also the ‘creation’ of new coins. This process is performed by miners.

Miners are responsible for validating information before registering it to the blockchain network. This often involves solving complicated mathematical problems that are associated with a particular transaction.

Miners also earn from this activity. When a particular transaction is made, the first miner that can solve a problem related to that transaction would receive a reward, which is a fractional amount of a cryptocurrency.

Miners usually require dedicated hardware or computer to perform such activities. Also, the probability of being the first miner to validate a transaction and earn a reward in the process is directly proportional to the computing power of the hardware used. In simpler terms, that implies that miners with more powerful hardware have a higher chance of validating a transaction.

This has resulted in mining pools, a situation where a group of miners combine their computing power to gain an advantage when validating a transaction. When they eventually earn a reward, they split it amongst themselves according to the individual computing power each miner contributed.

Types of Cryptocurrency

In this section, we’d be looking at 5 cryptocurrencies, ranked in no particular order.

1. Bitcoin

Bitcoin.org
Bitcoin.org

Bitcoin is the most popular cryptocurrency on the list and was created by a group/an individual going by the alias, ­Satoshi Nakamoto. It is the first decentralised cryptocurrency.

The aggregate value of all existing cryptocurrencies is over $214 billion with Bitcoin representing more than 68% of that value.

The success garnered by Bitcoin led to the creation of altcoins, or alternative coins. Since Bitcoin is open-source, developers used its source code to create other variants. With time, these currencies have implemented distinct features.

2. Ethereum

Ethereum.org
Ethereum.org

Ethereum is a programmable blockchain and is quite similar to Bitcoin, but with noticeable differences.

While most cryptocurrencies are used to make payments, Ethereum also serves as a marketplace to host contracts and other services.

3. Litecoin

Litecoin.com
Litecoin.com

Litecoin is a by-product of Bitcoin. The Litecoin blockchain can handle more transactions at a lower cost than its Bitcoin counterpart. Litecoin’s major feature is the high rate/speed at which transactions are validated.

4. Ripple

Ripple.com
Ripple.com

XRP was created by Ripple Labs Inc and is primarily built for payments. It is based on XRP Ledger, an open-source decentralised blockchain that claims to settle transactions within a very short period (3 – 5 seconds).

Unlike other cryptocurrencies, Ripple can’t be mined. Once a Ripple has been used, it is eliminated and can’t be re-used. This implies that the number available would reduce as more people use it, increasing its value in the process.

5. Bitcoin Cash

BitcoinCash.org
BitcoinCash.org

Often called Bcash, it is built upon Bitcoin’s source code and is primarily used as a medium of exchange.

How Do I Make Cryptocurrency Transactions?

As earlier mentioned, cryptocurrency transactions work with a wallet. But another component comes into play, an exchange.

What Is A Cryptocurrency Exchange?

According to Wikipedia,

cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies

In other words, a cryptocurrency exchange provides a platform for you to buy or sell cryptocurrencies, using fiat money (USD, or GBP) or another cryptocurrency.

Top Cryptocurrency Exchanges

According to CoinMarketCap, here are the top three cryptocurrency exchanges based on traffic, liquidity, and trading volumes.

a. Binance

Binance.com
Binance.com

Binance provides a platform for trading several cryptocurrencies. It is the largest in the world based on trading volume.

Founded2017
HeadquartersMalta
Websitebinance.com

b. Coinbase

Coinbase.com
Coinbase.com

Founded by Brian Armstrong and Fred Ehrsam, Coinbase is a widely used exchange platform operated by millions of users in over 100 countries. It enables users to buy cryptocurrencies using fiat currencies, making it easier for beginners.

Coinbase also offers an API for developers to enable them to accept cryptocurrencies in their applications.

Founded2012
HeadquartersSan Franciso, California
Websitecoinbase.com

c. Kraken

Kraken.com
Kraken.com

Kraken is on a mission “to accelerate the adoption of cryptocurrency so that you and the rest of the world can achieve financial freedom and inclusion.” It is known for its low fees and is a great choice for experienced users.

Founded2011
HeadquartersSan Franciso, California
Websitekraken.com

Advantages of Cryptocurrency

a. Speed

The speed at which cryptocurrency transactions occur and are verified is no comparison with its fiat counterpart. This is because the barriers encountered for cryptocurrency transactions is relatively low to those encountered by fiat currencies.

b. Decentralisation

This is a big trade-off cryptocurrency has over its fiat counterpart. Since the process involving transactions, verifications, and mining is based on a blockchain network, a situation where an organisation, group or individual has authority over the process is eliminated. In simpler terms, you can say cryptocurrencies are immune to monopoly.

c. Privacy

The identity of users conducting cryptocurrency transactions is anonymous to the whole network as they can only be identified by their public addresses. And this public address is in no way connected to the user’s real identity. This is advantageous to people or organisations who prefer to make anonymous transactions.

Disadvantages of Cryptocurrency

a. Non-refundable

In a situation where a user sends a cryptocurrency to a wrong address, it would be nearly impossible for it to be reversed as cryptocurrencies are designed to be irreversible. If such a situation occurs, the best attempt one can make is to find a way to lookup the owner of the wrong address and request that it should be returned.

b. Illegal transactions

Due to the anonymous nature of crypto transactions, it is sometimes used to perform illegal transactions.

c. Environmental Effects

As we saw earlier, cryptocurrency mining takes a lot of computing power. Depending on the energy source, high usage can emit harmful substances into the atmosphere.

Key Takeaways

You made it through this lengthy write-up and hence we’ve come to a close. Let’s take one more look at key aspects:

  • Cryptocurrencies are digital assets designed to work as a means of exchange and are protected and made secure by cryptography, a method of masking or protecting certain information through codes.
  • Cryptocurrencies are based on a digital ledger system known as Blockchain.
  • The blockchain system is decentralised and prevents monopoly, meaning no individual or organisation has authority over it.
  • Cryptocurrency transactions are made possible through wallets.
  • These wallets can be physical or software-based, and store a user’s public and private keys
  • Public keys facilitate the sending and the receiving of cryptocurrencies while the private key serves as a digital ID to verify ownership of a user’s wallet.
  • Cryptocurrency transactions aren’t finalised until it is validated. The validations can only be made by miners.
  • Miners make these validations by solving mathematical problems using specialised hardware and receive rewards as a result.
  • The first miner to validate a transaction is also the one who receives the reward.
  • The computing power of the miner’s hardware determines how fast he/she can validate a transaction.
  • Due to the high computational power involved to gain an advantage, miners usually form a mining pool.
  • In a mining pool, miners combine their computational power to gain an advantage. If a mining pool successfully validates a transaction, they split the reward according to the computational power each miner contributed.
  • The 5 top cryptocurrencies are Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash
  • Bitcoin is open-source, the most popular cryptocurrency, and was founded by Satoshi, an alias for a group/individual.
  • Due to the success of Bitcoin, other cryptocurrencies were built using its source code, and are called altcoins, or alternate coins.
  • Ethereum not just serves as a medium of exchange, but as a platform to host contracts and other financial services.
  • Litecoin is very similar to Bitcoin but has lower fees and a higher validation speed.
  • Ripple is primarily meant for payments and unlike other cryptocurrencies, it can’t be re-used and mined.
  • Bitcoin Cash is very similar to Bitcoin and is primarily meant for payments.
  • Cryptocurrency transactions aren’t made possible by wallets alone but through exchanges.
  • A cryptocurrency exchange provides a platform for users to buy or sell cryptocurrencies using fiat or other cryptocurrencies.
  • The top three exchanges based on their trading volume are Binance, Coinbase, and Kraken.
  • Three major advantages of cryptocurrencies are speed, decentralisation, and privacy.
  • Cryptocurrencies also have their disadvantages as they are non-refundable/irreversible, used for illegal transactions, and have negative effects on the environment.
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Joseph David is a FrontEnd Developer and Technical Writer
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