- What are cryptocurrencies?
- How to buy, store and sell cryptocurrencies
- Is it possible to counterfeit cryptocurrencies?
- Examples of popular cryptocurrencies you can buy
- What can you use cryptocurrencies for (besides investing)?
Last year’s Bitcoin craze has made many people curious about cryptocurrencies.
Experts deem that cryptocurrencies and their underlying technology, i.e. blockchain have the potential to completely revolutionize our payment systems – and the financial sector as a whole.
But unfortunately, many people only consider cryptocurrencies a ‘get-rich-quick’ scheme or a long-term investment opportunity, while in truth, cryptocurrencies are much more than that.
In this beginner’s guide, you will learn exactly what cryptocurrencies are, how (and where) they exist, how the ownership system works and more. And by the end of this article, you’ll have a solid foundation and a much richer understanding of exactly what cryptocurrencies are.
So let’s get started.
What are cryptocurrencies?
Cryptocurrencies are money which only exists digitally.
Bitcoin is a famous example of cryptocurrency. Today, there are more than 17.5 million bitcoins in circulation. And the price of one bitcoin, at the time this article was written was 3,595 USD.
And here’s the thing about cryptocurrencies such as Bitcoin:
Unlike the US dollar, they don’t have physical notes or metal coins to represent them on the open market. Yet, we’re saying that approximately 17.5 million bitcoins are in circulation.
How is this possible?
How can a currency which has no physical presence exist? How do you count it if it doesn’t have any notes or coins? Where do you store it?
The answer is simple: In the blockchain.
How cryptocurrencies ‘work’
Digital currency isn’t a new phenomenon. In fact, many of you have been using it for a long time now.
Where? Through your debit or credit card. And here’s how it works.
Say you go to a McDonald’s and use your credit card to buy a Big Mac. Your bank will process this transaction and deduct money from your card and credit it to McDonald’s.
While this happens, no physical money will move from one place to another. Instead, your bank, which stores a digital record of your money in their database, will simply update the account balance to reflect the transaction you made at McDonald’s.
And in this way, your bank stores your money, i.e., currency digitally – simply by updating ‘numbers’ in their digital ledgers.
Cryptocurrencies work in the same way.
But instead of being stored in a bank’s database, cryptocurrencies are stored inside a digital ledger called a ‘blockchain”.
What exactly is blockchain technology?
A blockchain, in simple terms, is a digital ledger that stores information.
Each cryptocurrency has its own blockchain which stores information such as:
- The amount of cryptocurrency which can exist: For example, in Bitcoin’s blockchain, only 21 million bitcoins can exist. People can buy and sell bitcoins from that specific amount only.
- How much cryptocurrency an individual owns: When someone buys/sells cryptocurrency, the information about that transaction, i.e., sender, receiver and amount transferred – is stored securely in the blockchain.
- How much of the cryptocurrency can be mined: When miners validate a transaction, they add a block to the blockchain and then receive a specific amount of cryptocurrency as a reward. Information regarding how much, if any, cryptocurrency a miner gets rewarded with is stored in the blockchain.
For example, Bitcoin’s creator Satoshi Nakamoto programmed Bitcoin’s blockchain so that it can hold a value of 21 million bitcoins in total.
Miners can mine the bitcoins and sell them to other people participating in the blockchain. But they can only mine up to 21 million bitcoins – and not a single more. The blockchain ecosystem will simply stop rewarding miners with new bitcoins once that number is reached. People can buy whatever amount they want from those 21 million. (Note: you won’t actually be able to buy 21 million bitcoins because not all of them are available to be mined yet).
Enforcing this rule or “law” is possible because a cryptocurrency blockchain keeps a record of things such as :
- How much of the cryptocurrency has been mined
- Miners who mined the cryptocurrency, who mined how much – and of the cryptocurrency they mined, how much was sold and how much was kept
- Who sold/bought how much cryptocurrency
By keeping a record of all this activity, the blockchain network keeps track of all the cryptocurrency, i.e. bitcoins circulating in the system – and thus, it ensures that only 21 million bitcoins are mined and that no double spending takes place.
How to buy, store and sell cryptocurrencies
If cryptocurrencies like Bitcoin don’t have any coins or notes – and only exist in the blockchain network, how does one exactly ‘own’ it?
How to own cryptocurrencies
There are three main ways you can ‘own’ cryptocurrencies.
In this section, we will briefly look at how to “own” cryptocurrencies using all three methods.
- Mining: Any app or service built on a blockchain network needs miners. That’s because miners are those people who contribute computational power which makes the blockchain network function. And in return for processing user requests, the miners get rewarded with cryptocurrency of that particular blockchain network which they are helping run. For example, when miners on the Bitcoin blockchain successfully process a transaction, they get rewarded with 12.5 bitcoins. Anyone (including you) can become a miner, provided they have the necessary computers.
- Cryptocurrency exchange: A cryptocurrency exchange is like the Foreign Exchange (Forex), but instead of traditional fiat currency trading, the former facilitates only cryptocurrency trading. A few popular exchanges are Binance, Bittrex, Coinbase, and Coinmama. All you have to do is simply create an account in order to start trading cryptocurrencies on them. But it is important to note that most exchanges sell only limited types of digital currency. So before signing up, make sure the cryptocurrency exchange is selling the type of cryptocurrency you want to trade.
- ICO (Initial Coin Offering): Traditionally, companies and startups looking to crowdfund themselves would file for an IPO (initial public offering) and sell their shares. Today, a new way of doing this has emerged – and it’s called an ICO. Startups and companies who create blockchain-based products and services release their virtual currency – or tokens to be exact – to the general public. You, as an investor, can buy that company’s token in exchange for bitcoins or maybe USD. And similar to the ‘shares’ of a company, the price of the token goes up (or down) in value depending on how successful the blockchain-based product/service is.
The most popular (and risk-free) method is the second option. Crypto trading through a cryptocurrency exchange is easy, fast and reliable. The other two methods are extremely high risk, and you shouldn’t use them if you are a beginner in the crypto world.
How to buy cryptocurrencies
Most cryptocurrencies only exist when they are mined by a miner. And the moment it exists, it gets rewarded to the miner who mined it, who now ‘owns it’ and can sell it to other people in the blockchain network. Every time a cryptocurrency is mined or bought, it is assigned to the new owner’s public key, which is kind of like how money is assigned to a person’s bank account number.
Now, suppose you want to buy 12.5 bitcoins from a miner who is willing to sell it. Here’s how the transaction would take place:
- The miner owns the 12.5 bitcoins. This means he will have access to it because his bitcoins are associated with his public key and that public key, in turn, is associated with his private key.
- To make the transaction, the miner will assign his 12.5 bitcoins to your public key, and sign it with his private key to confirm the transaction, kind of like signing a check with a signature.
- Once done, the transaction, i.e., the message will be broadcasted to the whole blockchain network, where it will be validated and confirmed.
- Once confirmed, a new ‘block’ will be added to the Bitcoin blockchain. This block will include information that the 12.5 bitcoins you bought from miner are now associated with your public key, meaning you are now the current owner of the bitcoins.
- A copy of this new blockchain will be sent to everyone in the blockchain network.
How to store cryptocurrencies
After you buy cryptocurrency from an exchange, it’s a good idea to purchase a cryptocurrency wallet and transfer your virtual currency there.
There are two types of digital cryptocurrency wallets available: hot wallets and cold storage.
A digital wallet doesn’t actually hold cryptocurrencies. Rather, it just securely stores your private and public key which lets you access the cryptocurrencies associated with it.
How to sell cryptocurrencies
Now, if you want to sell 2.5 bitcoins (or whatever amount you want) out of the 12.5 bitcoins you’ve bought, you can do so because you are the new, rightful owner (because your public key is associated with them).
This means that all you have to do is assign the 2.5 bitcoins to the public key of your buyer – and confirm the transaction by signing it with your private key.
Your transaction will then be validated by miners in the blockchain.
Once confirmed, the buyer will become the new owner of the 2.5 bitcoins you sold them – and it is their public key that will become associated with them. And now, like you, they can sell the bitcoins forward by using their private key.
This is how cryptocurrency is bought, owned and sold throughout the system.
Is it possible to counterfeit cryptocurrencies?
If you decide to buy and sell cryptocurrencies, naturally, you’ll want to know if it will be safe to do so. You’ll also want to know whether someone can hand you ‘fake’ bitcoins or if someone will be able to steal your cryptos from you.
The answer is this:
Yes. It is technically possible to counterfeit cryptocurrencies. But realistically speaking, it’s nearly impossible to do so.
Here are three reasons why:
- Cryptocurrency records are stored in a decentralized blockchain network: Any time a transaction is recorded in a new block in the blockchain, a copy of it is stored with everyone in the blockchain network. This means that if a hacker wanted to hack the transaction records in a blockchain to give themselves more cryptocurrency, they would have to hack everyone’s copy of the blockchain and alter the information in them as well – and do this simultaneously. Because if a hacker just tampers with their own blockchain, it won’t match the other ones in the network, which means the change will be rejected. Therefore, counterfeiting cryptocurrency is a difficult task that can take a lot of computational power and many years to achieve.
- Cryptocurrencies are immutable: Once a cryptocurrency and information about who owns it are recorded into a blockchain network, this data cannot be deleted or changed. Only a new block can be added to the blockchain to showcase any changes in cryptocurrency ownership. This means cryptocurrencies cannot be destroyed, stolen or duplicated since there is always a clear trace of how cryptocurrency moves from one owner to the other. Plus, this also means that once someone sells you a specific amount of cryptocurrency, no one can force you to give it back. And similarly, once you transfer your cryptocurrency, you can’t ‘cancel’ the transaction and take it back either.
- Cryptocurrency is protected by strong cryptographic encryption: Your public and private keys which allow you to own, buy and sell cryptocurrencies are protected by strong cryptographic encryptions. These encryptions are extremely hard to break into and can take years and years of sophisticated computational power to ‘crack the code’ and make the right ‘guess’. This effectively makes the cost of hacking into someone’s private key more than the cryptocurrency a hacker might get, thus eliminating their motivation to steal it.
But this does not mean your cryptocurrency is 100% secure. Like your credit card, hackers can steal your private key if you misplace it or carelessly put it in an unsecured location. And if you lose your private key, or a hacker finds out what it is, you will effectively lose all the cryptocurrencies that are associated with it.
The solution to preventing this is to buy a cold storage ‘wallet’ in which you can safely put your private key – and then keep that wallet somewhere that’s highly secure.
Examples of popular cryptocurrencies you can buy
Every blockchain network has its own cryptocurrency or token. This is because the cryptocurrency is the incentive miners get to process the activities happening inside the blockchain. And in turn, blockchains reward miners with their own cryptocurrencies which then go on to be sold again and again in the wider market.
In this section, we will explore five of the most popular cryptocurrencies in the market that you can buy:
Bitcoin needs no introduction, especially since it has been mentioned in this article a million times.
Bitcoin is a cryptocurrency founded by the ever elusive Satoshi Nakamoto, a person or a group which set out to create the world’s first cashless, peer-to-peer virtual transaction system.
The blockchain Bitcoin is based on is exactly that – and is used to securely, anonymously and instantly send money from one place to another without any monitoring by a third-party organization.
Individuals can send money in the form of bitcoins. And to process transactions, miners all over the world contribute their computational power. And for every successful transaction a miner processes, they get rewarded with bitcoins, which as everyone knows, is the official currency of the Bitcoin blockchain.
Ether is a cryptocurrency which is built on the Ethereum blockchain. The difference between the Ethereum blockchain and the Bitcoin blockchain is that the former is programmable.
This means that while the Bitcoin blockchain can be used only to process transactions, Ethereum’s blockchain can be used to create any type of decentralized application – or ‘dApp’.
As with the Bitcoin blockchain, any program built using the Ethereum blockchain will need miners to process any activities or requests its users want. Miners, in this case, will share their computational power to process these requests in exchange for Ether, which is Ethereum’s official cryptocurrency.
Litecoin was one of the very first ‘altcoins’ to be produced after Bitcoin.
Created by Charlie Lee, a Google employee, it is nearly identical to Bitcoin in every respect. The only two ways it differs from Bitcoin is:
- It confirms a transaction in 2.5 minutes instead of 10.
- It uses scrypt in its proof-of-work algorithm whereas Bitcoin uses SHA-256.
The second difference just means that Litecoin requires more expensive and complex mining equipment to solve its proof-of-work algorithm (which is how a block is created to process a transaction in a blockchain network).
Other than that, Litecoin and Bitcoin are two highly identical cryptocurrencies.
Ripple is a blockchain network whose cryptocurrency, XRP, is made for use by banks and financial institutions.
Today, if you want to send large sums of money around the world, it can take quite a few days and considerable fees (+50 USD), even if you use Bitcoin. But Ripple makes it easier for banks to move transactions around the world.
This is because the Ripple cryptocurrency, i.e. XRP is already premined and owned by Ripple, who periodically releases it to banks. (As of now, there are 1 billion XRP coins).
The result of working with banks and premining the XRP coins is that a transaction made on the Ripple blockchain takes less than 3 seconds to process and the fee is less than a penny. Plus, the computational power required to process transactions on Ripple is equal to the power required to send an email, which is a negligible amount.
This gives Ripple a big advantage when compared with Bitcoin, which takes hours to process a transaction and has fees that can be as much as 40 USD.
Tron is a relative newcomer in the cryptocurrency arena. Founded in September 2017 in Singapore, its creator, Justin Sun, made it exclusively for the entertainment industry.
The idea is that today the entertainment industry is largely controlled by a few publishers and middlemen who host the creators’ works and distribute them to consumers. But Tron, as a decentralized network, changes that.
In its blockchain, creators can host their content for free, and consumers can directly pay creators to get access to their favorite content.
Tron hopes that its decentralized storage facilities and its ability to facilitate direct creator-to-consumer relationships will put the power back into the creator’s hands and make it cheaper for consumers to enjoy their favorite entertainment and creative works.
And of course, TRONIX will be the currency consumers will use to pay content creators who host their content in Tron’s blockchain network.
What can you use cryptocurrencies for (besides investing)?
There is nothing about cryptocurrencies which suggest that they should be illegal. But still, many countries around the world have made it so. So before you start investing in cryptocurrencies, either for profit or for purchasing, first confirm whether buying cryptocurrencies is legal in your country or not.
This handy list by Wikipedia will quickly show you if trading cryptocurrencies is legal in your country:
With that in mind, let’s look at a few things you can spend your cryptocurrencies on.
Note: Before we get started with this list, it’s important to note that nearly all retailers and companies only accept bitcoin cryptocurrency. So while you can invest in other cryptocurrencies and trade them, bitcoin is the only one that you can use to actually pay for (and buy) things around the world.
- Games, Movies, and Apps: The Microsoft Store accepts Bitcoin payment. This means you can use it to buy your favorite PC and Xbox games, buy a movie, a music album, and even apps.
- PC parts, laptops, and other gadgets: The popular online electronics store Newegg accepts bitcoin. This means you can pay for your gaming PC, laptop or even a printer with it.
- Gift cards: Gift card platforms like eGifter and Gyft will let you purchase gift cards in exchange for bitcoins. You can buy gift cards of 250+ brands such as Apple iTunes, Dominos, Target and more.
- Air Tickets: The online ticketing website CheapAir lets you purchase air tickets to many destinations around the world using bitcoins.
And that’s just the start.
It’s rumored that Starbucks may start accepting Bitcoin in 2019. And with time, more and more companies, businesses and retailers are planning to accept Bitcoin payments.
The cryptocurrency market is just beginning to grow, and many exciting developments will happen in 2019 and beyond. And now that you know exactly what cryptocurrencies are and how they work, you’ll be able to understand more effectively the different developments going on in the crypto world.