Layman’s Cryptocurrency Guide

Table of Contents

What is a Cryptocurrency?

A cryptocurrency is digital money or currency. Cryptocurrencies ,or crypto for short, are a form of virtual money that can be used to buy and sell goods and services like regular money.  It is a type of digital asset that is used to store value or used as a medium of exchange. As a digital asset, crypto-currencies do not exist in any physical form. 

The units of cryptocurrencies are usually referred to as coins or tokens. Due to their digital nature, crypto can be expressed, owned and transferred fractionally. You can transfer 0.000233 bitcoins. 

Records of coin or token ownership is typically recorded in a computerized database called a ledger. This ledger is secured using strong cryptography to:

  • Secure transaction records
  • Control supply of new tokens
  • Verify transfer of coin ownership

Cryptocurrencies derive their name from the strong cryptography used to secure the network. This cryptography or encryption methods make it extremely difficult for cryptocurrencies to be counterfeited.

Cryptocurrencies generally use decentralized control unlike regular money. The US dollar is issued and controlled by the Federal Reserve (US Central Bank). This is an example of centralized control as only one entity controls the currency. Most currencies have a similar arrangement with a nation’s central bank. 

Using a decentralized system, crypto-currencies use distributed ledger technology (DLT), usually a blockchain, as a public registry of all crypto financial transactions. This distributed ledger consists of a system of computers and databases that have all system-wide financial transactions simultaneously shared, stored, and replicated around the world on many servers, computers and sites in different countries. As such, there is no centralized control of the cryptocurrency.

What is the most popular cryptocurrency?

Bitcoin is by far the most popular cryptocurrency. It was the first decentralized digital currency. According to Statista, Bitcoin held 66% of the total crypto-currency market in 2020. Other popular cryptocurrencies are Ethereum, Tether, Binance Coin, Cardano. Learn more about Bitcoin here

What is the difference between crypto and fiat (regular) money?

Crypto and regular money differ in form and control. 

FORM 

Crypto is a digital-only form of money while regular money (fiat currency) exists in physical form and online. 

CONTROL

The supply of regular money is centralized, typically controlled by a country’s central bank while crypto-currencies are decentralized with no central authority.

Is trading crypto legal?

This is a difficult question to answer and will depend on what country you are in. Trading crypto is legal in most countries. Even in countries where Bitcoin trading is illegal, there is still trading activity due to the difficulty in tracking these transactions. Please search for specific country regulations before trading. However, there are a few large major crypto exchanges like Binance, Coinbase, Huobi Global

Can I change crypto into cash?

Yes, in most countries. You can exchange money for crypto with anyone you know who wants to deal or with a crypto exchange like Binance or Coinbase. You can even use a Bitcoin ATM if you have that available near you.

Why are there so many cryptocurrencies?

According to Coinmarketcap, as of 31 July 2021, there are 11,120 cryptos or cryptocurrencies with a total market capitalization of 1.6 trillion dollars. There are so many cryptocurrencies floating around with new ICOs (Initial Coin Offering) regularly creating even more. 

So why? Why do we have more cryptocurrencies than even the fiat (government-backed) currencies? 

These are the interesting reasons we found from our research;

DECENTRALIZED AND OPEN NATURE

Blockchain technology is open source. This just means that anyone (software developer) who has the original source code can create something new with it. This decentralized and open nature of blockchain technology allows anyone who understands how blockchain technology works to create any cryptocurrency they like because it is not controlled or regulated by anyone, so this helps in the rapid rise of numerous altcoins and cryptos.

NUMEROUS USES

There are many cryptocurrencies because there are many wide-ranging uses of cryptocurrencies. There are cryptocurrencies that aim to be a store-of-value e.g Bitcoin, and there are others that use the blockchain technology to revolutionize various industries from sports, health, energy, social networks, payments, machine learning, security etc. 

UTILITY CRYPTOS

Ethereum, for example, has a utility or infrastructure function. This means that it serves as a network where other developers can create applications and even other cryptocurrencies or tokens using its network. Augur and OmiseGo are two cryptos created on Ethereum’s network infrastructure.

WEALTH

For many, May 22 is just another day, but for a Bitcoiner, May 22 is known as Bitcoin Pizza Day. On May 22, 2010, Laszlo Hanyecz paid 10,000 Bitcoins for 2 Papa John’s pizzas. This was the first commercial bitcoin transaction. 

As of today, those 10,000 bitcoins would be worth 395 million dollars. They could buy a lifetime supply of pizzas. This astronomical increase in value has also driven the rise of cryptocurrencies with many founders, investors and developers creating their own cryptos hoping to make it big.

There are a few crypto billionaires today and you can expect that their numbers will increase rapidly in the years to come.

FORKING

If you imagine a “fork in the road”, one road branches off and becomes two. This is what forking is. It’s a complex process but the general gist is that when there is a disagreement between developers and miners, a fork can be created that follows new rules that are different from the previous underlying rules governing a cryptocurrency or token. This allows those in favor of the old rules to still use the old cryptocurrency, while those in favor of the new rules can use the new cryptocurrency forked from the old one. This process of forking increases the number of cryptocurrencies available. 

For instance,

  • Bitcoin has given birth to LitecoinBitcoin Cash & Bitcoin Gold.
  • Ethereum has given birth to Ethereum Classic
  • Even Litecoin, a fork, has Litecoin Cash, a fork of a fork.

SEARCH FOR IMPROVEMENT

The constant search for the best or a better digital currency has spurred the creation of many cryptocurrencies and even the crypto industry itself. Some new cryptos are focused on speed of transactions because the older crypto transaction validation times were getting too long. Other new cryptos focus on security to create an improved altcoin or crypto. This constant search for improved uses of blockchain technology will drive the creation of more cryptos in future to improve the world and the existing cryptocurrency space. 

Why do people use bitcoin or other cryptocurrencies?

People use bitcoin and other cryptocurrencies for many reasons: 

Speed

In many countries, settling international transactions or even local ones takes a few days. Using bitcoin or other cryptocurrencies, your transaction can be settled in a few minutes or less.

Anonymity

A lot of early adopters of cryptocurrencies used them to protect their identity online. This has become a double edged sword with many criminal elements using crypto for illegal activities. However, the anonymity provided by the blockchain was and still remains a major reason people use cryptocurrencies.

Bank Charge Savings

A lot of crypto currencies offer extremely low transaction fees that easily beat bank charges to transfer money from one user to another.

Investment

The rapid rise of Bitcoin’s value has led many people to purchase cryptos in the hope that the value of their altcoins will rise in future. In developing countries, with high inflation, and a weak local currency, users invest in bitcoin and other cryptos to protect against the weakness of their national currency.

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