Cryptocurrencies for dummies
Updated: Mar 3, 2020
When you think of Cryptocurrencies, what is the first thought that pops into your head?
If you’re anything like I was, it was likely something along the lines of: ‘I have literally no idea.’
That’s a normal reaction for us when it comes to something new and unheard of, right? We can’t be expected to know everything right away, especially regarding technological advancements since they move and develop so quickly.
In simple terms, a Cryptocurrency is a digital asset which uses cryptography (hence: cryptocurrency) to secure transactions.
In this article, we will explore four main points about cryptocurrencies:
- Why are cryptocurrencies useful?
- Which is the best beginner cryptocurrency?
- What are crypto exchanges?
- Who controls cryptocurrencies?
After you've finished reading, head on to the comments and let us know if this article helped bridge any knowledge gaps you may have had! So without further ado, brew a nice cup of coffee, sit back and learn all about Cryptocurrencies.
Why are cryptocurrencies useful?
We could view cryptocurrencies as an upgrade to our traditional financial systems. Its the merge of money and technology, and as time has shown, technology has become an intrinsic part of our daily lives as is making itself super useful.
One of the main positive aspects of cryptocurrency is decentralized. To put it in simple words, it means that it is not tied to any financial entity - "internet money" cannot be controlled by any central bank. Whereas fiat currencies like dollar, euro, and others, have way more limitations. Since these regular currencies are tied to nations and geographic regions, transferring larger amounts of money between these regions/parties may draw the attention of certain government institutions and, thus, cause problems.
Moreover, while having all the control in their hands, governments are free to manipulate the supply of traditional currencies, which consequently may drive local economies to extensive inflation. Therefore, with cryptocurrencies coming into the picture, the responsibilities and management of currencies are being taken over by the community of individual users via software.
This way the "absolute power" is distributed among all the members of the blockchain network, and when moving the money around no middleman like your bank or a digital payment service takes a cut. The low-fee cryptocurrency transactions can be sent and received directly between peers and confirmed within minutes.
Blockchain-based currencies can also be a somewhat salvation for people outside traditional banking because people who do not have traditional bank accounts are rater common in more developing economies.
For instance, Africa, the Middle East, and South-East Asia have more than 2 billion adults who have to rely on their family and friends to make simple financial transactions. So cryptocurrencies would allow these individuals to better interact with their society and to manage their capital autonomously, that way contributing to the economic growth.
Which is the best beginner cryptocurrency?
Bitcoin is currently and historically the largest cryptocurrency in the world. It is one of the oldest cryptocurrencies to become famous as a system of payment, capable of handling millions of transactions after the network became live. It has been high on adoption rates around the world and has faced many ups and downs over the years. The vast majority of cryptocurrency users support Bitcoin, and they believe the coin will continue to reach greater heights in the future.
The second-largest cryptocurrency in the market, Ethereum was developed to utilise smart contract technology and has a big community behind its development. It has one of the largest asset communities backed by the Ethereum blockchain, and those tokens are known as ERC20. The best part of this is that ETH is available on almost every exchange, and can be stored in many different wallets, allowing support for various operating systems and devices.
Ripple, token name XRP, is the third-largest cryptocurrency currently on the market. It is a network of institutional payment providers, which has its own technology known as the Ripple Protocol Consensus Algorithm (RPCA), and is used for low commission currency exchanges, payment ecosystems and very quick international transactions. Many banks already support XRP, which makes this one of the best choices for beginners.
Bitcoin Cash (BCH)
Bitcoin Cash was the first fork of Bitcoin, and became famous as one of the best cryptocurrencies, as per the market cap. Bitcoin Cash has a huge userbase and a very promising future ahead, which is why it is accepted all over the world. For a beginner, BCH is definitely one of the best options to try out.
Litecoin is a peer to peer (P2P) cryptocurrency that uses the same encryption techniques as Bitcoin, but Litecoin has a faster transaction confirmation rate, and has recently been upgraded for better privacy and scalability. Litecoin is basically an improved version of Bitcoin, and since it's supported by most wallets, it's a great choice for a new crypto enthusiast.
What are Crypto Exchanges?
A cryptocurrency exchange is an online platform where you can trade one type of digital asset (crypto or fiat currency) for another. This platform is like an online shop where you go to digital currency shopping. In crypto exchanges, you can use traditional money to buy cryptocurrency, exchange different types of cryptocurrencies, and also store your digital capital.
There are four main types of cryptocurrency exchanges out there. Traditional exchanges are like traditional stock exchanges where buyers and sellers trade based on the current market price of cryptocurrencies. Generally, each transaction in such an exchange platform will be charged a fee. These traditional exchanges offer different ways of trading: some deal only with cryptocurrencies, while others allow trading fiat currencies like the dollar or euro for cryptocurrencies like Bitcoin or Ethereum as well.
Cryptocurrency brokers offer an exchange service that you could get for example at the airport or specialized currency exchange shops. Customers buy and sell cryptocurrencies at a price set by the broker. So basically it is no longer a peer-to-peer transaction but it includes a third party, which is the broker.
Furthermore, there are also Direct Trading Platforms that offer direct trading between buyers and sellers with no fixed market price. It means that sellers established their rates. And those willing to buy crypto either find the seller on such platform or they indicate the rates they are willing to buy for and the platform does the matching, i.e. brings the seller and the buyer together.
Yet another, though not that often discussed type of crypto exchange is Cryptocurrency Funds. In such exchanges, cryptocurrency assets are managed professionally via the fund, hence, individuals can invest in cryptocurrency without having to purchase or store it directly.
Who controls Cryptocurrencies?
The team developing the currency has control
In open-source models for cryptocurrency development, there is often 'core' team of founders which get the project started. Bitcoin, Litecoin and others have all been created using this format.
Anybody who assists the core team to improve the currency has a small amount of control over the development too. Since open-source models are just that - open, public contributors can take the base code and add to it. If the changes they make are deemed to be useful are a peer review, then the changes can be merged into the main base code. It's a cool way for anyone with the technical prowess to have a little bit of control over a coin they are interested in.
The payment network
The network on which the coin and all of its transactions are held on also control the currency. This is done at a software level. The network of computer systems that make up the network is distributed over many places. As such, the level of control exercised here is tied to the operations of the cryptocurrency itself.
This security mechanism is another way in which cryptocurrencies are controlled. Not all crypto coins are mined, usually only those utilising a POW (proof of work) system have miners. But all cryptocurrencies have some mechanism for securing the network. The miners all have an agreement based on encryption which ensures the transactions recorded into the distributed ledger are legitimate. Usually, in exchange for helping to secure the networks, these miners are paid in the network's cryptocurrency.
Cryptocurrency exchanges (that's us!)
Cryptocurrency exchanges facilitate the ability to move stored values of one crypto coin into another. Exchanges are the only outside organizations that have a semblance of "control" over a given coin. The thing to remember here is that exchanges don't actually control the price of a coin. They simply facilitate the exchange between two parties. Think of them as a matchmaker. They simply put a seller of one thing together with a seller of another thing.
We really hope that this article has helped you to overcome some of your fears or apprehensions about investing and using cryptocurrencies! After all, the future is coming, so the quicker you get on this train, the better.