This is a complete beginner’s guide to cryptocurrency in 2022.
If you have no idea what cryptocurrency is and want to learn how it works then keep reading.
The intent of this guide is to explain all about crypto in a way that your grandma would understand. With more investors entering the crypto space, it’s important to have a basic understanding of the ins and outs.
This chapter gives you a basic understanding of what cryptocurrency is and why it was created.
We’ll also dive into the concept of centralization vs decentralization.
Let’s get started.
What is a Cryptocurrency?
Cryptocurrency is a 100% digital form of money.
There is no physical reserve bank printing it, and you can’t hold it in your hand. Much like fiat money such as the US Dollar, you can buy things with it, you can invest, and you can exchange it for other currencies.
How is Crypto Created?
Crypto is created through a process called “mining.”
Mining is a very complex and energy-consuming process. Think of mining as solving a math problem.
No, I’m not talking about 2 + 2 = 4. The math used here is centered around cryptography and needs very powerful computers to solve the equations.
The first miner to solve the equation is rewarded with the respective cryptocurrency.
The technical term for this is proof of work (PoW). Crypto has evolved significantly and there are other methods of proof such as proof of stake but PoW is the original and most common.
Why Was Crypto Created?
Cryptocurrency was created to remove banks and governments from controlling the financial system. This is known as decentralization.
Many people love the idea of a currency that isn’t controlled by a central authority because it makes transactions easier, quicker, and cheaper.
In a traditional financial system, everything is centralized.
The government controls the money supply and interest rates. Banks hold and transfer money while paying very little interest rates.
Ultimately, banks act as an intermediary between sending money from person to person. The costs incurred by banks are then passed down to the customers.
Crypto, on the other hand, utilizes a peer-to-peer system where people send cryptocurrency directly from one wallet to another.
When Was Crypto Created?
2009. Bitcoin was the first cryptocurrency ever created and since then it has exploded in price and popularity.
Why Use Cryptocurrencies?
Cryptocurrencies are used for financial transactions and investing.
A large draw factor for crypto is how much money can be made by price appreciation. Bitcoin, the most popular cryptocurrency, had a value of just a few hundred dollars when it first launched.
Recently, the price of bitcoin surpassed $60,000.
Types of Crypto
In the world of crypto, there are two types of currency.
The first is bitcoin.
All others are alternative currencies, known as altcoins.
When people refer to cryptocurrency, they generally refer to bitcoin. Bitcoin has grown significantly since it was created and is slowly being adopted all over the world.
Look how much bitcoin has grown.
In fact, many stores have bitcoin “machines” where you can buy and sell bitcoin with cash. The country of El Salvador has even made bitcoin its national currency.
Although there is a lot of skepticism around bitcoin, it’s a fact that the world’s knowledge and use of it is growing. I wouldn’t be surprised if nearly every store allows bitcoin transactions in the near future.
Besides bitcoin, there are thousands of other cryptocurrencies known as altcoins.
Altcoins utilize the same technology as bitcoin, but seek to improve upon bitcoin. Some altcoins make transactions quicker while others try to be more energy efficient.
Nearly every altcoin has a project behind it with a unique goal. The value of cryptocurrency is generally derived from the quality of its project.
Ethereum is the most popular altcoin but there are thousands available. You can check out an exchange to find a list of all cryptocurrencies and their prices.
Stablecoins are a form of altcoin pegged to the US Dollar 1:1. Investors can move their assets to stablecoins if they want to reduce their volatility risk and stay in the crypto ecosystem.
You can see the price of the USDC stablecoin stays flat to the US Dollar.
Each stablecoin can be used for different purposes so make sure to do your own research before investing. Here are some common stablecoins.
Meme coins are intended to be a joke. There is no real project behind them and the only way they get value is from speculation.
The most famous example is when Elon Musk sends a tweet about Dogecoin and the price skyrockets.
He posted this on April 1, 2021.
Just a few weeks later, Dogecoin skyrocketed in price.
Meme coins tend to be the most volatile type of cryptocurrency so be careful when investing.
The fact that your portfolio can change by 50% from somebody Tweeting makes it very risky.
Non-Fungible Tokens (NFT’s)
A Non-Fungible Token (NFT) is a form of digital artwork. This can be a photo, music, avatar, video game character, or land in the metaverse. The possibilities are truly endless.
When you buy an NFT, you are purchasing the rights to that digital asset.
What makes NFT’s so valuable is that they are very unique and don’t change over time. A cryptocurrency like bitcoin has a maximum supply of 21 million coins and all are the same whereas there may be only one type of NFT available.
You can explore a multitude of NFT’s on OpenSea.io
The technology that allows crypto to exist is called the blockchain.
Once you understand how it works, you will realize how powerful it is.
What is a Blockchain?
A blockchain is a collection of records.
Records can be anything but at the most basic level, we can consider them as transactions since that is most common in the crypto world.
Fact: Blockchain technology is used by many established companies. While it’s the backbone of crypto, it’s not exclusive to crypto.
How Blockchain Works
When you make a transaction with somebody it gets stored on the blockchain as a record.
Each record is identified by a unique code known as a hash.
A single “block” on the blockchain contains a certain number of records. Once the block reaches its limit, a new block will be created that contains all the information of the previous block as well as any new transactions.
Now, here’s the unique thing about blockchain technology which makes it very secure.
Every time a transaction is made, a copy of all previous transactions is distributed to everybody in the blockchain. This means if there are 1,000,000 people in the blockchain, all 1,000,000 people will receive a copy.
If a hacker wants to change any information, they would need to change the information on at least 51% of all copies. While this is possible in theory, it’s nearly impossible.
When the cryptocurrency is sent from one person to another, all copies of the blockchain act as validation that the transaction did in fact occur.
If somebody sends a single bitcoin to your wallet address, that transaction is documented forever and the record is distributed to millions of people. When you log into your crypto wallet, your single bitcoin will be available on the blockchain because there is a record of it.
You need to understand that different blockchains exist. You don’t necessarily need to know why, but you need to know some are different.
The technology works the same as described above, but some blockchains are faster, cheaper, and more energy efficient.
Certain blockchain networks only work with specific cryptocurrencies. Sending currency to a wallet on a different network may result in losing money.
Every blockchain supports a native currency as well as other currencies used by projects developed on their blockchain.
Let’s have a look at crypto wallets to see how cryptocurrencies move around on the blockchain.
Crypto wallets are necessary in order for you to send, receive, and access your money.
Not all wallets are equal, and it’s important for you to understand the differences.
What is a Crypto Wallet?
A crypto wallet is a safe place where you access, send, and receive cryptocurrency.
How a Wallet Works
Each wallet has a public key and a private key. Public keys are unique addresses where crypto is sent and received.
I grabbed a transaction from blockchain.com. The left address is the sender and the right address is the receiver.
A private key is a unique code that provides access to cryptocurrency, similar to a password. Put simply, a public key is like an email address, and a private key is a password to that email address.
You should NEVER share your private key.
Wallets hold the private keys to your crypto, not the actual crypto itself. The actual crypto is stored on its respective blockchain in the form of a recorded transaction. When you log in to your crypto wallet, the blockchain will link any record associated with your public key and you will be able to access your crypto. Let’s dive into the different types of wallets.
Software wallets are a convenient but riskier method of accessing crypto.
Your private key is stored online in the software program that created your wallet. This means you need to trust that software to keep your money and passwords safe. To access your wallet, you typically need to enter a seed phrase.
A seed phrase is a string of random words you get when you create the wallet.
Most software wallets are applications that you download on your mobile/desktop devices or extensions on a web browser like Google Chrome.
The most secure way to access crypto is by using a hardware wallet. Hardware wallets are physical devices that look like USB drives.
If you plan to trade many currencies and/or large amounts, hardware wallets are the way to go.
Tip: Write down your seed/recovery phrases so you remember them and store them in a safe place.
You might be wondering how to actually purchase a cryptocurrency with your hard-earned dollars.
Luckily for you, there are many places to purchase cryptocurrencies, they are called exchanges.
We’ll dive into centralized and decentralized exchanges.
A centralized exchange (CEX) is the bridge between traditional fiat currencies like the US Dollar and cryptocurrency.
Every crypto investor will need to use a centralized exchange at some point if they wish to convert fiat currency into cryptocurrency or vice versa.
A CEX is typically user-friendly, operated by established companies, and follows the rules and regulations. The most common centralized exchanges are Coinbase, Crypto.com, and Kraken.
Exchanges like Coinbase, Crypto.com, and Kraken store a majority of their crypto assets offline in hardware wallets adding another level of security.
The biggest disadvantage of a CEX is the risk of being hacked. Since they are operating from a central authority, if hackers go after that company the exchange could be at risk.
Decentralized exchanges (DEX) operate using peer-to-peer transactions. DEX’s are only used for exchanging cryptocurrencies amongst each other, they don’t work with fiat currencies.
There is no central authority controlling transactions which leads to lower fees, lower risk of hacks, and greater anonymity.
Popular decentralized exchanges include Uniswap, PancakeSwap, and SushiSwap.
You will need to use a DEX if you wish to invest in a cryptocurrency that can’t be purchased on a CEX.
Risk & Reward
Compared to traditional investments like stocks and bonds, crypto is the riskiest asset to invest in.
Cryptocurrencies trade 24/7 and are very volatile. If you can’t stay disciplined during sharp changes in your portfolio, crypto may not be for you.
Volatility is the biggest risk factor in the cryptocurrency market. It’s common for currencies to shift 15% overnight.
Look at all the major fluctuations of bitcoin over the course of one year.
With the high amount of risk, there are many opportunities to make money. As an investor, you have to decide how much risk you are willing to take on.
If you look at a risk and reward graph, crypto is on the far end of the spectrum. The standard deviation is much higher meaning the fluctuations are going to be more severe.
Volatility – Cryptocurrencies move up and down very quickly. You can go to bed with everything being normal and wake up the next morning to find out the crypto market has changed 15%.
Rug Pulls – When many people invest in a crypto project and the project developers abandon the project taking all the money.
Losing Private Keys – Not being able to remember your wallet’s private keys can lock you out from accessing your crypto.
Taxes – Governments all over the world are still implementing tax regulations for crypto. The ambiguity in the crypto space could lead to heavy taxation in the future.
How to Get Started
If you want to dip your feet in the waters of crypto, there are a few methods.
The first method is the traditional way to purchase cryptocurrency.
The second method is the mainstream method.
In the traditional method, investors actually own the keys to their crypto and can freely move it around. This involves setting up a wallet and is a bit more complex but more rewarding than the mainstream method.
Step 1: Do research and decide which cryptocurrency you want to buy
As with any investment, you should do your own research before investing your hard-earned money. There are many good and bad cryptocurrencies and projects.
It’s up to you to decide which cryptocurrencies to invest in.
Step 2: Add money to a centralized exchange
Centralized exchanges are the bridge from traditional finance to crypto. Here you can take fiat currencies like USD and exchange it for your desired cryptocurrency.
Not all exchanges are made the same. Some offer different currencies than others which is another reason why it’s good to decide what you want to buy before using an exchange.
Here are some exchanges you can look in to:
- Binance (non-US)
Most exchanges allow you to link up your bank account. It normally takes about 3 days to transfer money between a bank and a centralized exchange.
Step 3: Purchase cryptocurrency
Once your money is transferred from your bank to a centralized exchange, you can purchase crypto. The transaction is often instant.
Depending on the exchange, you may have to pay a small fee to purchase a crypto. Fees are generally cheap so you shouldn’t worry too much.
Step 4: Store in your wallet
Now you want to move your crypto from an exchange to a secure wallet.
It’s not a good idea to keep money on centralized exchange because if it gets hacked you could lose your money.
Here are some wallets to choose from.
Many popular investing brokerages allow for the purchase of cryptocurrencies. The most popular are Webull and Robinhood.
This is popular for traditional investors who have money tied up in stocks and bonds on these platforms.
The biggest problem is that you can’t move your crypto around and store it in a wallet. All cryptocurrencies you buy/sell on investment brokerages must stay on the brokerage.
Step 1: Do research and decide which cryptocurrency you want to buy
Much like the traditional method, you’re going to want to decide which currency you want to buy first.
Step 2: Select Brokerage
I found Webull to have the largest selection of cryptocurrencies to choose from but Robinhood is another good option.
If you are an investor in stock and bonds odds are you have heard of these investment platforms.
Step 3: Purchase Crypto
Just like you would purchase a stock, you can purchase your desired cryptocurrency. Just note that for every buy/sell the brokerage will take a small fee.
That’s it for this beginner’s guide to crypto.
Crypto is very fast-moving and complex, but I hope this guide gives you a good understanding.
If you have any questions I encourage you to post down below.