A Beginner's Guide to Cryptocurrency: Bitcoin, Altcoins, and More

Cryptocurrency is a form of digital currency that uses cryptography to secure transactions and control the creation of new units. Cryptocurrencies operate independently of governments and central banks, allowing for peer-to-peer transactions between users across the globe.

The first and most well-known cryptocurrency is Bitcoin, which was created in 2009 by the mysterious Satoshi Nakamoto. Since then, thousands of other cryptocurrencies have been created, referred to as "altcoins." While Bitcoin still dominates the market, other popular cryptocurrencies include Ethereum, Litecoin, Solana, and Ripple.

This beginner's guide will cover the basics of cryptocurrency and what you need to know to get started.

What is Cryptocurrency?

Cryptocurrency is digital money that is designed to be secure and anonymous. Conventional currency is issued by central banks, while cryptocurrency is not tied to any bank or government and allows users to spend money anonymously.

The "crypto" in cryptocurrencies refers to complicated cryptography that allows for the creation and processing of digital currencies and their transactions across decentralized systems. Alongside this important "crypto" feature of these currencies is a common commitment to decentralization; cryptocurrencies are typically developed as code by teams who build in mechanisms for issuance (often via a process referred to as "mining") and other controls.

Cryptocurrencies are almost always designed to be free from government manipulation and control, although as they have grown more popular this foundational aspect of the industry has come under fire. The currencies modeled after Bitcoin are collectively called altcoins and have tried to present themselves as modified or improved versions of Bitcoin. While some of these currencies are easier to mine than Bitcoin, there are tradeoffs, including greater risk brought on by lesser liquidity, acceptance and value retention.

History of Cryptocurrency

The first cryptocurrency was Bitcoin, which was founded in 2009 by an anonymous person or group known as Satoshi Nakamoto. No one knows who Satoshi Nakamoto really is. Satoshi published a white paper describing how Bitcoin would work, and then released the Bitcoin code to the public.

Bitcoin was the first digital currency to solve the double-spending problem without the use of a third-party intermediary. Previous attempts at digital currencies failed because there was no way to prevent someone from spending the same digital dollar twice.

Satoshi solved this problem by introducing a public ledger called the blockchain to record all Bitcoin transactions. The blockchain prevents double-spending and keeps track of ownership in a decentralized digital ledger. Bitcoin also introduced a novel reward system to incentivize people to run computers and secure the network - a process known as mining.

After Bitcoin there have been over 6,000 altcoins introduced, but Bitcoin still remains the dominant cryptocurrency. Some notable altcoins include Ethereum, Litecoin, Ripple, Monero, and Dash. Each altcoin aims to solve problems in Bitcoin or provide additional features.

The adoption and price of Bitcoin started picking up steam in 2014 and 2015. Major retailers like Microsoft, Overstock.com, and Dish Network started accepting Bitcoin as payment. Bitcoin's price rose from $13 in January 2013 to over $1100 in November 2013.

However, Bitcoin's price is very volatile. It plummeted after MtGox, one of the largest Bitcoin exchanges, collapsed in 2014 after losing hundreds of thousands of Bitcoins to hackers.

Despite setbacks, increasing acceptance by retailers and speculative investment kept Bitcoin's price rising, and by December 2017 it reached nearly $20,000. However, in 2018 Bitcoin's price collapsed once again, dropping over 80% from its peak.

Today cryptocurrencies are becoming more mainstream and seeing increased adoption. The total market cap for cryptocurrencies exceeded $800 billion in early 2018. However many economists argue that cryptocurrencies have no intrinsic value apart from what people are willing to pay for them. Time will tell if cryptocurrencies represent the future of money or just another bubble.

How Cryptocurrency Works

Cryptocurrencies use two important technologies that allow them to work in a decentralized way without a central authority: blockchain and cryptography. Let's look at how these work.

Blockchain

Blockchain is the technology at the heart of most cryptocurrencies, and it's responsible for their success. The blockchain is essentially a digital ledger of all transactions across a peer-to-peer network. Groups of approved transactions together are added to the ledger in "blocks." New blocks are added to the end of the blockchain, hence the name.

When a transaction occurs, computers responsible for securing blockchain network will validate the transaction. Once verified, the transaction will be combined with other transactions to create a new block of data for the ledger. The new block is then added to the existing blockchain. This entire process is known as "mining."

Blockchains are designed to be immutable, meaning transactions cannot be altered or deleted. The distributed ledger is shared between parties, so transactions are transparent and verifiable by everyone involved. This helps prevent fraud, since falsifying or deleting a transaction would require compromising the entire network.

By storing data across a network, blockchain eliminates the risks associated with data being held centrally. Even if one system in the blockchain network goes down, the ledger will still exist on the rest of the nodes. This makes blockchains incredibly secure. Blockchains also reduce transaction costs because there are no third-party intermediaries required to validate transactions.

The technology allows parties who don't fully trust each other to exchange value without any centralized intermediary acting as a gatekeeper. This has major implications, especially in industries like banking where ledger books are often aggressively guarded from competitors' eyes. The decentralized and transparent nature of blockchain means competitors can inspect each other's ledgers, dramatically lowering costs while improving trust and accountability.

Cryptography

Cryptography is what makes cryptocurrencies like Bitcoin secure. Cryptography refers to the practice of encrypting and decrypting information using complex mathematical and computational techniques. These techniques are used to send secure information between parties.

With cryptocurrencies, cryptography is used to generate public and private keys. These keys are very long strings of letters and numbers that form the secure digital identity used to access a cryptocurrency account and authorization transactions.

• Public keys allow others to send currency to your account. Think of it like your bank account number. You freely give this out to people who need to pay you.
• Private keys prove you own the account. Like your PIN or password that you never show anyone.

You use your private key to "sign" transactions that authorize moving cryptocurrency from your account to someone else's. This proves that you are the true owner.

When grouped together, cryptographically signed transactions form the basis of blockchains. This is mathematical proof that the transactions are valid and prevents fraud.
Cryptography ensures that transactions cannot be altered once recorded on the blockchain ledger. This deters fraud and enhances security. The complex mathematical problems that cryptography presents also helps regulate the generation of new cryptocurrency units, preventing inflation.

Types of Cryptocurrency

While Bitcoin is the first and most well known cryptocurrency, there are over 6,000 different cryptocurrencies in existence today. These are collectively known as "altcoins" or "alternative cryptocurrencies."

Some notable altcoins include:

• Ethereum (ETH) - Ethereum is the second most valuable cryptocurrency after Bitcoin. It is a software platform that allows developers to build applications on top of it. Ethereum enables "smart contracts" and the Ethereum Virtual Machine that can execute scripts and run decentralized applications.
• Litecoin (LTC) - Litecoin is very similar technically to Bitcoin, but processes blocks 4 times faster. The faster transaction time is the main advantage Litecoin has over Bitcoin. Litecoin was founded in 2011 by Charlie Lee.
• Ripple (XRP) - Unlike Bitcoin and Ethereum, Ripple uses a trusted network of servers to validate transactions. This allows transactions to go through much faster with lower fees compared to Bitcoin. The Ripple payment protocol is used by banks and other financial institutions to facilitate international money and asset transfers.
• Monero (XMR) - Monero is an open-source cryptocurrency that uses cryptography to completely obfuscate sender, receiver, and transaction information. Transactions on Monero cannot be linked to a particular user or real-world identity. Monero is popular on the darknet and other criminal enterprises looking to launder money or make secretive transactions.
• Zcash (ZEC) - Like Monero, Zcash also offers complete anonymity for users and transactions. However, Zcash also gives users the option of transparency by allowing for optional recording of sender, receiver and amount information. This gives Zcash users the ability to audit transactions if necessary.

There are many other types of altcoins offering unique use cases or advantages. However, Bitcoin still remains the most adopted, trusted, and valuable cryptocurrency with the largest community.

Benefits and Risks of Cryptocurrency

Now that you understand the basics of how cryptocurrency works, let's examine some of the key benefits and risks of using and investing in crypto.

Benefits

Peer-to-Peer Transactions - With most cryptocurrencies transactions occur directly between users, without any central authority or banks involved. This saves time and eliminates transaction fees associated with third-party financial institutions.
No Government/Central Bank Control - Cryptocurrencies are designed to operate independently of any government or central bank authority. This means no government can just print more cryptocurrency or cause inflation by their actions.
Anonymous Transactions - Most cryptocurrencies allow you to send and receive money anonymously without providing your name or identity. However, all transactions are still recorded on the blockchain.
Accessibility - There are very few barriers to obtaining cryptocurrency from anywhere in the world. All you need is an internet connection. This promotes financial inclusion, especially in developing countries.
Low Transaction Fees - Sending cryptocurrency to another user generally attracts very low processing fees compared to remitting money through banks. This is because there is no middle-man involved.
Fast Fund Settlement - Cryptocurrency transactions are settled quickly between users with no intermediary approvals required. This allows for instant or near instant fund settlements.
High Portability - Cryptocurrencies can be accessed from anywhere with an internet connection using a cryptography-secured digital wallet app on any smartphone or computer. Your funds travel with you easily.
Programmable Transactions - Many cryptocurrencies allow for smart contracts that automatically execute transactions and distribute funds when certain conditions are met. This enables innovative functionality.

Risks

Of course, along with the benefits, there are also unique risks to keep in mind when dealing with cryptocurrency.

High Volatility - The prices of cryptocurrencies are highly volatile compared to traditional currencies. Sudden ups and downs in price are common, making cryptocurrencies risky short-term investments.

Permanent Transactions - Because cryptocurrency transactions are irreversible, there is no recourse in the event funds are accidentally sent to the wrong recipient. Transactions cannot be reversed once added to the blockchain.

No Regulatory Oversight - Cryptocurrencies currently operate outside government regulations and oversight. There is no authority to report to if you lose funds or encounter fraud.

Criminality - The anonymous and decentralized nature of cryptocurrencies has attracted criminals looking to use them for money laundering and other illegal activities. However, most cryptocurrency networks still keep a permanent ledger of transactions.

Security Failures - Over the years billions of dollars worth of cryptocurrencies have been lost or stolen due to exchange hacks and security failures. Creating secure crypto wallets takes proactive measures.

Tax Implications - In many countries capital gains realized from cryptocurrency trading or exchanging is considered taxable income. Proper reporting is essential.

Immature Industry - The cryptocurrency industry is still evolving and changing rapidly. There are unknowns around regulation, security, and adoption long-term. Investing with caution is advised.

Understanding both the benefits and unique risks of cryptocurrency is key to making informed investment decisions and utilizing these new financial technologies safely and securely.

How to Buy Cryptocurrency

If you want to buy cryptocurrency, there are several ways to do it. Here are the main methods for buying crypto:

Cryptocurrency Exchanges - The most common way to acquire crypto is to purchase it on an online cryptocurrency exchange. Popular exchanges include Coinbase, Binance, Kraken, Gemini, KuCoin, and Bybit. Most accept a variety of payment methods. Fees are usually .5-5% per transaction.

Trading Apps - There are several user friendly apps to easily buy and sell crypto, such as Coinbase, Cash App, and Revolut. Some connect directly to your bank account. Most have higher fees than traditional crypto exchanges.

P2P Trading Platforms - You can trade crypto directly with a seller without a centralized intermediary through peer-to-peer platforms like Paxful, Binance p2p, or kucoin p2p . This allows for more payment flexibility.

ATMs - There are thousands of Bitcoin ATMs worldwide where you can convert cash into crypto without an online account. However, fees are high at 10-20% on average per transaction.

Mining Cryptocurrency - Another option is to mine crypto. Mining creates new units of cryptocurrency using specialized computer hardware and earns a reward in crypto. However, mining now requires expensive, specialized equipment and high energy costs.

Accept Crypto as Payment - If you provide products or services, you can choose to accept direct cryptocurrency payments. Services like BitPay and Coinbase Commerce make integration easy.

Crypto Rewards Cards - New credit cards like the Coinbase Card, Crypto.com Visa Card, BlockFi Rewards Card, and Gemini Credit Card offer 1-5% back in crypto rewards on purchases. This lets you stack sats (fractional satoshis, the smallest Bitcoin unit) as you spend.

No matter which method you use, be sure to research the fees, accepted payment methods, security practices, and verification requirements before choosing an on-ramp to buy crypto.

How to Sell and Trade Cryptocurrency

Once you acquire cryptocurrency, there are several ways to sell or trade it:

Cryptocurrency Exchanges - The same exchanges you use to buy crypto can also be used to sell crypto or exchange it for other cryptocurrencies. Exchanges like Coinbase, Binance, and Kraken allow this functionality.

Trading Apps - Mobile crypto trading apps like Coinbase, Robinhood, Cash App, and Revolut also allow instant selling of crypto into your local currency. Some offer fractional share trading.

P2P Trading Platforms - You can trade crypto with buyers and sellers directly on peer-to-peer platforms like Paxful, Binance p2p, or kucoin p2p. Browse listings to find buyers in your area willing to pay cash or other payment methods.

Merchant Payments - More and more online stores and merchants now accept direct cryptocurrency payments using integrations like BitPay and Coinbase Commerce. Look for crypto payment options during checkout.

Crypto Debit Cards - Use crypto debit cards like the Coinbase Card, Crypto.com Visa Card, or Binance Card to convert crypto into cash that can be spent anywhere major credit cards are accepted. Use like a normal debit card.

ATMs - There are some Bitcoin ATMs that allow you to sell Bitcoin for cash, however availability is limited compared to machines that support buying crypto with cash. Fees are high, around 7-15%.

Mining Payouts - If you mine cryptocurrency, your earned rewards can be sold into Bitcoin or your local currency using a mining pool provider such as NiceHash, MiningPoolHub, Nanopool, or F2Pool.

Decentralized Exchanges - DEXs like Uniswap, SushiSwap, and PancakeSwap allow exchanging ERC-20 tokens without signing up for a centralized exchange. Popular for some altcoin trading.

Trading or selling cryptocurrency is easy once you have it. Look for low fees and solid security practices when choosing the best option for your needs.

How to Store Cryptocurrency

Cryptocurrency is stored in a digital wallet. Wallets don't actually store your cryptocurrency, which exists only on the blockchain. Rather, they store the private and public keys needed to access your funds. Some key things to know about cryptocurrency wallets:

Custodial vs Non-custodial - Custodial wallets are hosted by a third-party exchange or service provider. They manage your private keys. Non-custodial wallets give you complete control by allowing you to download or generate private keys locally.

Hot Wallet vs Cold Storage - A hot wallet is connected to the internet to enable easy access and transactions. However, this makes them more susceptible to hacking. Cold wallets like Trezor or Ledger are offline hardware devices for more secure storage of large amounts.

Mobile, Desktop, and Web wallets - Wallets are available in many convenient formats. Mobile crypto wallets like TrustWallet and Coinbase Wallet offer quick access on the go. MetaMask is a popular Ethereum web wallet that works via browser extensions. Exodus, Jaxx, and Electrum are examples of desktop wallets installed on your PC.

Paper Wallets - For super secure cold storage, you can even create paper wallets containing your encrypted private keys printed or written on paper. They're offline and can be stored safely in a secure place to protect your holdings.

Security Best Practices - Never share your wallet private keys or seed phrases. Use strong, unique passwords on all your wallets. Enable 2-factor authentication if available. Only download wallets from official websites and app stores. Don't hold large amounts on mobile or web wallets long term.

Choosing a secure crypto wallet appropriate for your needs is critical. Conduct thorough research before deciding where to store cryptocurrency holdings and private keys.

The Future of Cryptocurrency

While cryptocurrencies like Bitcoin have seen tremendous growth and adoption over the past decade, there is still uncertainty around the long-term future and total addressable market. Here are some thoughts on where the crypto space might be headed:

• Continued retail and institutional investment as cryptocurrencies gain mainstream traction as an investable asset class.
• Additional regulation of the crypto space is widely anticipated. This could help mature the market and improve integrity. However, over-regulation could constrain development.
• Greater mainstream adoption for payments and transactions as more major retailers and businesses accept cryptocurrencies. However, volatility needs to reduce greatly first.
• Decentralized Finance (DeFi) will play a larger role for crypto banking services like borrowing/lending without an intermediary. DeFi surpassed $100 billion locked in 2021. However, DeFi is currently very experimental.
• The rise of central bank digital currencies (CBDCs) and stablecoins pegged to fiat could provide the benefits of digital currencies while minimizing volatility. Most major central banks are researching CBDCs.
• Scaling solutions like the Lightning Network and sharding will allow faster, cheaper blockchain transactions and better accommodate growth. This is critical for mainstream adoption.
• Continued technological innovation around blockchain, smart contracts, sidechains, privacy, and interoperability solutions to improve upon first-generation crypto networks.
• Concerns around the energy consumption required for crypto mining will need to be addressed for wider social acceptance. Alternatives to energy-intensive Proof of Work are being explored.
• Integration of crypto, NFTs, and metaverse virtual environments will create new use cases for digital ownership and decentralized participation. Brands are just starting to explore business models here.
• Geopolitical issues around different nations' stances on cryptocurrencies will impact regulatory trajectories and influence how crypto evolves in the global financial system.

The cryptocurrency space is still in its early innings with many unknowns. However, its transparent, decentralized nature holds unique promise to transform economic and social structures.

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