Cryptocurrency: A Comprehensive Guide for Beginners

Dean Decho, 7 min read
Last Updated: 22 May, 2023

cryptocurrencies with background illustration

Welcome to this very fundamental part of our cryptocurrency guides where you will find out what is cryptocurrency and how exactly does it work!

If you’ve landed here, chances are you’ve heard about Bitcoin, Ethereum, or Litecoin.

They are the frontrunners of a revolutionary form of digital asset – cryptocurrency.

The buzz surrounding cryptocurrency has only amplified in recent years, and it’s likely that the trend will continue.

However, this novel financial domain can seem daunting for those new to the subject. So, let’s start with the basics: What exactly is cryptocurrency?

What is cryptocurrency?

A cryptocurrency is a digital or virtual currency secured by cryptography, making it nearly impossible to counterfeit or double-spend. Unlike traditional money, cryptocurrencies are decentralized, meaning they’re not under the control of any government or financial institution.

Bitcoin, the most famous and first-ever cryptocurrency, was created in 2009. Since then, numerous cryptocurrencies have been launched, each with its unique features and uses. Cryptocurrencies are created through a process called mining, where miners solve complex mathematical problems to validate transactions and add new blocks to the blockchain. This digital ledger keeps track of all cryptocurrency transactions.

However, there’s much more to cryptocurrencies than just being a novel form of digital money. They have evolved into sophisticated financial instruments and have even spurred a wave of decentralised applications. Still, with the potential high returns and revolutionary technology, comes considerable risk. Hence, it’s crucial to understand how to navigate this space before jumping in.

If you want to know which are the best cryptocurrency exchanges – check our list of the best crypto exchanges.

A Glimpse into the History of Cryptocurrencies

art bitcoin

Cryptocurrencies are decentralised digital currencies, i.e. they are not subject to the control of governments or financial institutions. Bitcoin, the first and best known cryptocurrency, was created in 2009. Cryptocurrencies are often described as digital or virtual gold because they are rare and have a high storage value. Cryptocurrencies are created through a process called mining.
Miners are rewarded with cryptocurrency to verify and record transactions on the blockchain, the public register of all cryptocurrency transactions. The first digital currency, Bitcoin, was created in 2009 by an anonymous person or group of people with the name Satoshi Nakamoto. Bitcoin was created as a peer-to-peer electronic money system. Transactions are verified by the network nodes through cryptography and recorded in a distributed public ledger called a blockchain.

Bitcoin is unique in that it has a fixed supply: a maximum of 21 million units can circulate.

Following Bitcoin, numerous cryptocurrencies have come to the fore. Ethereum, launched in 2015, holds second place in popularity after Bitcoin. As of 2018, its market capitalisation crossed $70 billion. While most cryptocurrencies are used primarily as a medium of exchange or a store of value, Ethereum has given rise to decentralised applications and smart contracts.

Key takeaway: Despite the exciting potential, cryptocurrencies are speculative investments carrying considerable risk. Prices can fluctuate rapidly and significantly, causing the value of your investment to go up or down.

The Mechanics: How do Cryptocurrencies Work?

Cryptocurrencies are virtual or digital tokens that use cryptography to protect transactions and control the creation of new units. Cryptocurrencies use a decentralised ledger system, usually based on blockchain technology, to record transactions. Bitcoin, for example, uses a blockchain ledger to track the ownership of digital tokens (bitcoins). Transactions in cryptocurrencies are verified by a network of computers called miners. Miners verify transactions by solving complex mathematical problems, then add the transactions to the blockchain.

When a new block of transactions is added to the blockchain, the miners are rewarded with a small amount of cryptocurrency. Cryptocurrencies are not regulated by governments or financial institutions and their value is not backed by any assets. This makes them a highly speculative investment. Cryptocurrencies are also prone to theft and fraud. There have been several high-profile cases of exchanges being hacked and users having their funds stolen. Before investing in cryptocurrencies, it is important to research and understand the risks and rewards associated with them.

The Pros and Cons of Investing in Cryptocurrencies

Like any investment, cryptocurrencies come with their set of potential advantages and disadvantages. Here’s what you should know.

The Advantages

Cryptocurrencies offer a level of decentralization that is unattainable with traditional financial systems. This makes them immune to government interference and control. The potential for high returns due to market volatility is another attractive aspect for risk-takers. When the price of a cryptocurrency is low, buying and holding until its value increases could result in significant gains.

Cryptocurrencies are a relatively new asset class with a lot of room for growth. As they become more widely accepted and used, the value of these digital currencies could increase significantly.

Key takeaway: Do your own research before investing.

The Disadvantages

Despite their potential for high returns, the volatility of cryptocurrencies also makes them a risky investment. The price can plummet just as quickly as it can skyrocket. Regulatory risk is another significant concern. While currently largely unregulated, future governmental interventions could potentially impact the cryptocurrency market negatively.

Security is another critical concern. Cryptocurrencies are stored in digital wallets, which, if not secured correctly, can be vulnerable to hacking. There have been several instances of high-profile cryptocurrency exchange hacks resulting in substantial losses.

Moreover, scams associated with Initial Coin Offerings (ICOs) and fraudulent practices make it vital to carry out thorough due diligence before investing in cryptocurrencies.

Lastly, liquidity risk and counterparty risk are notable concerns. The former implies you might not be able to sell your cryptocurrencies for cash whenever desired. The latter suggests the risk of failure of the other party in a transaction, typically a cryptocurrency exchange.

It’s important to note that geopolitical events and technology obsolescence can also affect the cryptocurrency market. Therefore, any investment in cryptocurrency should only be made after careful consideration and research.

Best Cryptocurrencies to Invest In

Investing in cryptocurrencies requires a keen understanding of the technology, features, and growth potential of each cryptocurrency in the expansive digital landscape. With numerous cryptocurrencies vying for investor attention, deciphering which ones are worth your time and money can be a complex task.

To help simplify this, our comprehensive guide provides in-depth analysis and expert insights into some of the best cryptocurrencies to invest in.

This resource covers various cryptocurrencies from different sectors within the crypto ecosystem, their unique value propositions, long-term sustainability, and how they could shape the future of finance.

What are Smart Contracts?

Blockchain technology has revolutionized the way we approach contracts with the introduction of smart contracts. These autonomous contracts run when predetermined conditions are met, encoded directly into the contract itself, and eliminate the need for intermediaries. They hold immense promise for industries that rely heavily on complex contracts such as real estate, healthcare, and legal, among others.

Our in-depth page to smart contracts unravels their underlying technology, explores how they revolutionize traditional contracts, highlights the role they play particularly within Ethereum’s ecosystem, and discusses potential future developments.

Whether you’re a developer looking to implement smart contracts or an investor interested in their application, this guide will serve as a valuable resource.

Understanding Privacy Coins

In the world of cryptocurrencies, privacy coins stand apart. They are a unique breed of cryptocurrencies that uphold the ethos of complete financial privacy and anonymity. Privacy coins aim to make blockchain-based transactions untraceable, in contrast to more transparent transactions like Bitcoin.

They leverage sophisticated cryptographic techniques to achieve this anonymity, making them the choice of users who prioritize privacy in their financial transactions.

To understand the importance, workings, and implications of these privacy-focused cryptocurrencies, we’ve put together an extensive read on privacy coins. This resource shows you the different types of privacy coins available, the technology behind them, their uses, and potential future developments.

Avoiding Crypto Mistakes

Cryptocurrency investments are fraught with potential pitfalls and mistakes that could impact your financial standing. Whether you’re a seasoned investor or a beginner in the crypto space, it’s crucial to be aware of these mistakes to avoid unnecessary losses. From investing without a clear strategy to falling for scams, we’ve identified some of the most common errors investors make. Our guide on common crypto mistakes to avoid provides practical advice on how to sidestep these errors and make informed investment decisions. We tackle various topics, including investment strategies, understanding market trends, security measures, and more.

A Step-by-step Guide to Buying Cryptocurrency

Embarking on your cryptocurrency investment journey can be a thrilling yet intimidating experience, especially when making that first purchase. Given the range of platforms and cryptocurrencies available, it’s easy to feel overwhelmed. To make this process more straightforward and secure, we’ve prepared a step-by-step guide on how to buy cryptocurrency. This guide provides detailed instructions, from setting up your crypto wallet to making your first purchase and ensuring its secure storage. It’s designed to offer you a clear pathway, whether you’re looking to buy Bitcoin, Ethereum, or any other cryptocurrency.

Wrapping Up

Cryptocurrencies, being decentralized and free from government control, have brought a fresh perspective to the traditional monetary system. They offer a new form of peer-to-peer electronic currency, beginning with Bitcoin in 2009 and growing to thousands of other coins today.

Cryptocurrencies have been gaining popularity due to their potential for high returns, but they also come with substantial risks, such as volatility, regulatory risk, and risk of fraud or theft. It is essential to be well-informed and cautious while venturing into the world of cryptocurrencies.

While it’s important to understand cryptocurrencies as a whole, each coin has its unique features and potentials. Before investing, take the time to research and understand the specific cryptocurrency you’re interested in. And remember: never invest more than you’re willing to lose.

With careful consideration and prudent decision-making, you can potentially profit from the world of cryptocurrencies while mitigating risks. The journey might be complex, but with the right knowledge and tools, you can navigate it successfully. Good luck!

Frequently asked questions in relation to what is cryptocurrency?

What is cryptocurrency and how does it work?

Cryptocurrency is a digital asset designed to function as a medium of exchange that uses strong cryptography to protect financial transactions, control the creation of additional units and verify asset transfers.

Cryptocurrencies are decentralised, meaning they are not subject to the control of a government or financial institution. Bitcoin, the first and best known cryptocurrency, was created in 2009.

Cryptocurrencies are often traded on decentralised exchanges and can also be used to purchase goods and services.

What is the simple explanation of cryptocurrencies?

A cryptocurrency is a digital asset designed to function as a medium of exchange that uses cryptography to protect transactions, control the creation of additional units and verify asset transfers.

Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative and virtual currencies.

Are cryptocurrencies real money?

Yes, cryptocurrencies are real money. You can use them to buy goods and services, or exchange them for other currencies.

What is the main purpose of cryptocurrencies?

The main purpose of cryptocurrencies is to provide a decentralised and secure way of conducting transactions. Cryptocurrencies are often used as an alternative to traditional fiat currency and can be used to purchase goods and services.

Dean Decho

Dean is a passionate advocate for the financial freedom and independence offered by Bitcoin and the cryptocurrency space. He's built this crypto learning platform to help others in the industry learn, grow and be part of it.