What is Cryptocurrency? A Complete Guide for Beginners

Read this beginner’s guide to learn more about what bitcoin is, how the system behind it works, and the baseline information on investing in the most well-known crypto coins.

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It is a type of digital currency that is intended to be used over the internet for digital transactions. These transactions are recorded on a peer-to-peer network known as the blockchain. The “coins” are packs of data that are encoded using cryptography which makes them nearly impossible to counterfeit or double-spend.

Most cryptocurrencies are decentralised and not controlled, issued, or distributed by a government or other central governing authority; They are theoretically immune to government interference or manipulation.

Seen as the first alternative to the traditional banking system – decentralised digital currencies are expected to bring equality of opportunity and economic freedom around the world.

How does it work?

A blockchain is a peer-to-peer (P2P) network of computers running free, open-source software. Using blockchain technology, crypto transactions allow for transferring value online without the need for a middleman like a bank or payment platform.

Transactions are recorded in code on an open, distributed ledger across participants of the digital currency’s entire blockchain network. Each currency has its own blockchain, which is an ongoing, constantly re-verified record of every single transaction ever made using that currency. Essentially, it is “blocks” of data that are then linked together on a “chain” of previous cryptocurrency transactions.

rypto transaction work?

A peer-to-peer electronic cash system

Bitcoin, the first-ever cryptocurrency is also the most popular by market capitalisation. Bitcoin (BTC) was launched in 2008 as “an electronic payment system based on cryptographic proof instead of trust” when the pseudonymous Satoshi Nakamoto published the whitepaper

The title captures two key features of cryptocurrency:

Peer-to-peer

Cryptocurrency allows for direct P2P payments without third-party intermediaries such as banks or payment processors. This is a major reason why Bitcoin is commonly regarded as a highly ‘decentralised’ currency.

Electronic cash

Many attempts have been taken to develop electronic cash, but what makes crypto stand out is its clever use of existing technologies like cryptography and distributed systems (blockchain) to make it highly secure and efficient.

Consensus mechanisms

The whitepaper describes that cryptographic proof comes in the form of transactions that are verified and recorded on a blockchain using a consensus mechanism called proof of work.

Proof-of-work is a consensus mechanism used to verify crypto transactions on a blockchain – using an algorithm that provides a mathematical problem to computers that race to solve it. Each participating computer device, also known as a “miner,” solves a mathematical puzzle to help verify a group or block of transactions.

The first to solve the problem and add them to the blockchain ledger is rewarded with a small amount of cryptocurrency for its efforts. Bitcoin, for example, rewards a miner 6.25 BTC per block of verified transactions.

The computing devices typically require intense computer power and electricity resources, and the “miners” doesn’t necessarily make large profits mining on a small scale.

Proof-of-stake blockchains don’t require miners to spend electricity on duplicative processes (competing to solve the same puzzle). It is a verification that removes energy-intensive equation solving for crypto transactions.

Typically, proof of stake blockchains employs a network of “validators” who “stake” (contribute) their own crypto in exchange for a chance of getting to validate the new transactions. update the blockchain ledger, and earn a reward. The number of transactions each person can verify is limited by the amount of cryptocurrency they’re willing to “stake,” or temporarily lock up in a communal safe for the chance to participate in the process.

Reducing the amount of power necessary to check transactions makes it a more efficient consensus mechanism than proof-of-work. It allows for faster verification/confirmation times for transactions on the blockchain.

For example, the Bitcoin blockchain has an average transaction speed of 10 minutes using proof-of-work to verify transactions. Compared with the Solana blockchain which can verify up to 3,000 transactions per second using proof-of-stake.

Bitcoins biggest rival by market capitalisation, Ethereum, is already making the move to switching from a proof-of-work to a proof-of-stake mechanism; Ethereum is expected to reduce its energy consumption by 99.95% once this migration process is complete.

Fiat Currency vs Cryptocurrency

Traditional money known as Fiat money is a government-issued currency not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.

The United States Dollar (USD), British Pound Sterling (GBP), and the Euro (EUR) are examples of modern paper currencies. These currencies give the central banks greater control over the economy because they can control how much money is printed. If too much is printed, it can lead to hyperinflation as seen in the past.

Fiat Currency

  • The value of a fiat currency is determined by the government. Its value is retained through the stability of the nation’s government and its economy.
  • Monetary policies are used by central banks to manage the value of each currency in relation to others.
  • In most cases, making digital transactions using fiat within the traditional banking infrastructure will require an intermediary (like a bank) to facilitate the exchange of funds between two parties.

Cryptocurrency

  • Like all goods and services, the value of cryptocurrency is determined by supply and demand.
  • It cannot be influenced by monetary policy tools, inflation rates, and economic growth measurements.
  • Transactions are facilitated via the blockchain without any centralised intermediary involvement – giving users more financial freedom.

The theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation has many differences – at least at the current stage of development. While fiat currencies are still used by the majority, some believe that cryptocurrencies and the blockchain technology that underpins them may very well revolutionize finance and money as we know it today.

Central bank digital currencies (CBDC) are already being developed (even implemented in some cases) by nations as a way of transitioning from fiat currencies to digital currencies. They are similar to cryptocurrency but are issued by a central bank. The value is pegged to that country’s fiat currency.

Should You Invest in Cryptocurrency?

Doing your own research and seeking financial advice from a professional is recommended across most crypto platforms, same as Coinfall. Cryptocurrency prices have so far been highly volatile and are regarded as a speculative investment by some. Understanding the benefits and risks can help you make more informed decisions on your investments

Here are some things to consider:

  • You can easily transfer cryptocurrency to anyone else at any given time, unlike stocks or bonds
  • Crypto transactions are much faster than fiat transactions
  • The number of people who hold Bitcoin and other digital currencies is growing – with millions already investing around the world
  • The value is determined by supply and demand, rather than by a centralised government and monetary policies
  • Centralised intermediaries like banks and monetary institutions aren’t necessary to enforce trust and solve disputed transactions between the two parties
  • The signup process is quick and only takes a few minutes
  • Purchasing is easy and secure using a debit card or bank account
  • Buy as little (or as much) as you want with reasonably low minimum purchase limits
  • You can buy fractional coins. For example, you can buy $50 worth of Bitcoin or Ethereum
  • Cryptography eliminates the possibility of a single point of failure – for example, a large monetary institution setting off a cascade of crises around the world
  • Investments can generate profits – with crypto markets skyrocketing and reaching $2 trillion at one point
  • Cryptocurrency can be used to transfer the store of value across borders/countries at much lower fees. For example, fiat currency can be converted to Bitcoin then moved across borders – then withdrawn using the fiat currency of the destination
  • Though transactions are made anonymously, they are also pseudonymous – they leave a digital trail that agencies (usually affiliated with the government) can track down. Technologies could later be developed to identify wallets to a person.
  • Cryptocurrency has a reputation for being a popular tool for criminal activities and illicit purchases.
  • They are used by hackers for ransomware activities – with an increasing number of incidents each year.
  • Although cryptocurrencies are decentralised in theory with an even distribution of wealth between the many participants on a blockchain, it is not the case just yet – ownership can be highly concentrated with some investors regarded as ‘crypto whales’ for owning a large portion of the market supply of a coin.
  • Cryptocurrencies that use proof-of-work uses up considerable amounts of energy resources. Mining can too be highly concentrated with industrialised size mining operations for some.
  • The blockchains are highly secure; however, the crypto exchanges and wallet provider platforms can be hacked. Millions of hard-earned money have previously been stolen from users – resulting in devastating losses.
  • Crypto prices are highly volatile – most have experienced rapid surges and crashes in value.

Cryptocurrencies are used for a wide range of things from online activities to exploring new technological advancements; The list of things you can do is likely to grow with time. The global adoption of digital currencies and the advancement of blockchain technology will likely impact the day-to-day life of many people – regardless of their decision on investing in cryptocurrencies.

How do you purchase cryptocurrency?

To buy cryptocurrency (such as Bitcoin, Ethereum, Dogecoin and others) using Fiat currency (such as The United States Dollar or The Euro), you’ll first need to pick an online exchange or broker that deals in crypto. Both are essentially online platforms that connect new users (or connects for the user) with the blockchain.

Crypto Exchanges

A cryptocurrency exchange is an online platform where buyers and sellers can interact digitally to trade cryptocurrencies – some popular exchanges include Coinbase, Crypto.com, FTX, and Binance. While they all serve the same purpose, each has set different fees and limits, with varying interest rates (APY), DeFi services, and features. Some even offer FREE crypto or cashback on trading fees to new users when you sign up!

Crypto Brokers

A cryptocurrency broker is an online platform that interacts with an exchange for you. Users can purchase cryptocurrency directly from the broker, often using a more easy-to-use interface; Some popular brokers include Robinhood, SoFi, and Easy Crypto AI. They all serve the same purpose, each with different fees, limits and varying rates on cryptocurrencies.

While a Crypto Broker may seem like the more convenient and beginner-friendly method, their rates may not necessarily align with the best possible market price for when you purchase or sell a particular cryptocurrency. Brokers often charge a higher fee, and in some cases are known to restrict the movement of user funds out of the platform.

As crypto exchanges now offer similar user-friendly purchase options to uncomplicate the experience, we believe this is the more secure and affordable method to purchase crypto as a new investor. This also gives you an opportunity to learn the standard trading interface of the exchange, and by doing so find out how to pay lower fees for your next crypto purchase.

You can easily learn and compare the fees, new user bonuses, and other important information about popular crypto exchanges with Coinfall. For more information, please read our full guide on “How to Purchase Cryptocurrency” for beginners.

Popular Crypto Exchanges

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Rating: 4.5 out of 5.

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How do you store cryptocurrency?

When you purchase crypto via an exchange, your funds will be allocated to your Exchange Crypto Wallet; Sometimes known as your Spot Trading Account, it is essentially a place to keep your crypto holdings secure within the exchange.

The more prominent exchanges are now insured against crime and have other security measures in place to (prevent cyber attacks and theft) – but having full control of your funds by transferring them out of the exchange and into a DeFi Wallet is the more secure method for storing your crypto.

If you don’t plan on trading or staking your crypto on the exchange, you can move your funds to a Hot Wallet (also known as DeFi Wallets) or a Cold Wallet for added security.

DeFi wallets

Also known as Hot Wallets, they are stored online and are accessible via digital devices such as phones, computers or tablets that are connected to the internet. Users can interact with things such as NFTs using these wallets with DeFi apps or an in-wallet internet browser that lets you surf the DeFi internet world. For beginners, we recommend the Exodus wallet (available as a mobile or desktop app).

Hardware wallets

Also known as Hardware Wallets, they take the form of external devices, like a USB drive or a hard drive. Ellipal, a company that supplies cold wallets describes them perfectly

– “Air-gapped cold wallet can never be connected to the internet. The cold wallet is fully protected from unauthorized access, cyber hacks, and every other vulnerability that comes with connecting to the internet. Cold wallet is the highest security type of crypto wallets, which means the owner of the wallet has full control of their private keys

With both wallets (hot or cold) it is important that you store your private keys in the safest way available to you. If you lose this code associated with your wallet, you will lose all your crypto funds. Although some cold wallet providers sell private key storage devices to keep it safe – if a cold wallet device breaks or fails you can lose all your crypto.

You can easily learn and compare information about popular crypto wallets using Coinfall. For more information, please read our full guide on “How to Purchase Cryptocurrency” for beginners.

Popular Crypto Wallets

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(Cold wallet)

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Rating: 4.5 out of 5.

(Hot wallet)

Trezor
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180+
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Connect to the FTX exchange

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DeFi Browser extension

Rating: 4.5 out of 5.

(Hot wallet)

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Connect to Crypto.com exchange

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Ellipal is an Affiliated Partner

Final thoughts

Cryptocurrencies provide solutions to many shortcomings of the traditional financial system. Extreme economic inequality, identity theft, and most importantly high fees are some of the potential issues it was designed for and has the potential to address. We believe that recognising the vast potential in blockchain technology beyond the financial sector is critical – So far disrupting traditional methods of business on the Internet (web3), Logistics (supply chains), and Art (NFTs) industries.

We think it’s essential to bridge the gaps in knowledge about cryptocurrencies between the rich and those who have been less fortunate. By spreading the word about cryptocurrency to ordinary people, we look for satisfaction in the financial freedom and decentralised ideologies that we hope positively impact communities across the globe.

Frequently Asked

  1. By publishing this guide, we are not recommending or suggesting in any way or form that Cryptocurrency is a suitable investment.
  2. We published and routinely update this guide to help people decide what’s best for them – Coinfall is conservative – Bitcoin has proven to be highly volatile in 2021 and 2022 and we strongly suggest reading this guide from the FMA before making any investment. Like the FMA, Coinfall is also cautious.
  3. We present this information in good faith and remain objective at all times. ​By including this guide, we are not advocating that cryptocurrency is an investment. We may earn a referral bonus for anyone that clicks on some of our links – see our disclaimer for more details.