Cryptocurrencies for Beginners: Part 1
Discover the history of cryptocurrencies, cryptocurrency wallets, cryptocurrency mining, cryptocurrency transactions, and how to keep your funds safe.
History of the Cryptocurrencies
Money represents value. Throughout history, salt, wheat, shells, and gold were utilized as a medium of exchange. People must believe that something is and will be valuable in order for it to symbolize value. [1]
It was difficult to divide a hard object like gold for tiny transactions, and it was difficult to transport gold. As a result, people began to trust governments and banks. Governments and banks represented these assets with a certificate known as money, which can be readily carried around and used to make minor payments. And you could always go to the bank and get your gold back. [1]
The relationship between gold and money weakened over time, and people began to rely only on money. As a result, after the 1970s, money had no gold representation.[1]
Today’s money has some drawbacks[1]:
- It is centralized: The governments or central banks have complete authority over the currencies.[1]
- It is unlimited in terms of quantity: The government or central bank can print as much money as it needs to cause market inflation by reducing the value of money.[1]
Nowadays, our money is primarily digital, thanks to credit cards, digital banks, PayPal, and other services. Why isn’t everyone copying their money if our money is digital? This is known as the “dual spending problem.” When a user tries to spend the same digital asset twice, this is known as double-spending. [1]
Centralized Money
A centralized authority, such as a bank or payment processor, can authenticate transactions and prevent double-spending by keeping a record of who owns what. This is the most often used method, however, it introduces a single point of failure.[1]
Every transaction or net worth is known to the centralized authority. It also controls the value of money by producing more of it. Wells Fargo Bank, for example, is vulnerable to the creation of bogus accounts and credit cards in order to increase the bank’s revenue stream. The government can freeze your accounts and restrict your access to your funds at any time.[1]
Bitcoin
In October 2008 Satoshi Nakamoto published a document called white paper at www.bitcoin.org. This paper claimed it solved the double spending problem without having a central authority.[1]
Bitcoin is a decentralized logging system. We can look at the logs at any moment and see all the transactions and balances, but they are pseudo-anonymous, which means we don’t know which transaction and balance belongs to whom.[1]
We can watch the first purchase in history, which is made by a man named Laszo to someone else in order for them to buy him two pizzas using Bitcoin (260.980.000$ in August 2023). We can see the date, the amount, and the accounts, as you can see.[1]
Because cryptocurrencies are decentralized, in order to commit fraud, you must hack in order to change 51% of all logs worldwide, which is almost impossible on major cryptocurrencies.[1]
Crypto Wallets
Crypto Wallets are cryptocurrency sending, receiving, monitoring, and storage programs.
Wallets keep track of cryptocurrency transfers on the blockchain and keep their own balances up to date.[2]
Private Keys
There are various sorts of crypto wallets based on where their private key is kept. A private key is your crypto wallet’s password.[2]
Crypto Address
The crypto address is likewise generated by the private key. The secret key cannot be discovered simply by analyzing the crypto address.[2]
Hierarchical Deterministic (HD) Key Wallets
An HD key is a string of words rather than a private key with letters.[2]
If your wallet is stolen or damaged, you can use this HD key to rebuild your private key. As a result, you must keep these keys in a secure location.[2]
Full Node Wallets
These wallets store the entire blockchain in order to validate transactions.[2]
SPV (Simple Payment Verification) Wallets
SPVs use full node wallets to validate transactions, which allows them to be faster and use less disk space. These wallets are commonly used with mobile devices.[2]
Hot Wallets
These are referred regarded as wallets that are internet-connected. They are the most common, but also the least secure.[2]
Web Wallets
These are electronic wallet services. Some websites store your wallets for you, which makes them insecure.[2]
Desktop Wallets
The wallets are kept on desktop computers, which are vulnerable if the PC is connected to the internet.[2]
Mobile Wallets
Phone wallets are dangerous to your security and privacy.[2]
Cold Storage Wallets
Paper, hardware, and brain wallets are examples of wallets that do not have an online connection.[2]
Paper Wallets
These are QR codes that have been printed on paper.[2]
Hardware Wallets
They are both safe and practical wallets. In these wallets, your wallet is stored on a hard disk or a USB.[2]
Brain Wallets
This is the mechanism for generating private keys from a selected text or set of words, such as a password. Significantly less protected.[2]
Multi-Signature Wallets
These wallets only allow transactions with the permission of a sufficient number of private keys from preset keys. A group of persons who handle the transactions.[2]
When choosing a wallet, keep in mind that security and convenience are inversely related.[2]
Cryptocurrency Mining
Banks keep transaction logs, and in the decentralized cryptocurrency environment, people all around the world act as log updates.[3]
The practice of creating fresh blocks of transactions on a cryptocurrency’s blockchain is known as crypto mining. This is accomplished by employing computers to solve complex mathematical problems. The first computer to solve the puzzle is rewarded with cryptocurrency and gets to add the block to the blockchain.[3]
This method protects the cryptocurrency network because it is extremely difficult to solve problems without the proper equipment. This makes tampering with the blockchain or creating counterfeit cash extremely difficult. Because these challenges are difficult to solve, no one can, and a value of rarity is created. The solution to the problem has no purpose other than to add value.[3]
The resolved transactions are then forwarded to the network of miners, who can also update the chain. By completing the transaction, the miner receives the transaction fee charged by the coin transferer.[3]
Mining power and mining difficulty are inversely related. When there are fewer miners in the ecosystem, mining becomes easier; when there are more, mining becomes more difficult. This is done to keep the cryptocurrency’s generation rate consistent.[3]
Mining Hardware
Hal Finney, the first miner, mined the first Bitcoin chains in 2009 using the CPU of his laptop.[3]
Later, GPUs were mined because one GPU (graphics processing unit meant to create graphics for games) was equal to ten CPUs.[3]
FPGAs are 3 to 100 times faster than GPUs, although they are more difficult to install.[3]
ASIC (Application Specific Integrated Circuit) miners, which are specifically engineered for mining, debuted in 2013.[3]
Mining Pools
Mining units work together to solve the problem first, then divide the charge. This allows small miners to join the game and earn a fee despite the fact that they cannot solve the puzzle on their own.[3]
Mining Profitability Factors
There are several elements that contribute to the profitability of the mining process[3]:
- Hash Factor: This is the general difficulty of the mathematical problem type that you must solve in order to mine.[3]
- Block reward: The number of coins generated as a result of the number of issues answered.[3]
- Mining difficulty: As the number of miners in the system grows, the task becomes more difficult to solve.[3]
- Electricity costs: Mining and cooling systems require a lot of electricity.[3]
- Power consumption: The power usage of your mining machine.[3]
- Pool fees: The pool deducts a fixed proportion of your revenue.[3]
- Coin value: How much money can you make by earning coins?[3]
- Increase in difficulty: How many miners will join the network in the future, and how difficult will it become?[3]
There are mining profit calculators available online[3].
Cloud Mining
Cloud mining is the process of hiring a cloud service to mine for you. In today’s market, this is unprofitable. [3]
Web Mining
Web mining is a website that uses your hardware to generate revenue. This technology is currently used as browser hijacking and hence illegal, but in theory, it can be used as an alternative to serving advertisements on your website. You can mine a coin or token instead by offering a web service.[3]
Is mining bad for the environment?
Many elements come into play. Mining does need electricity, but modern banks also print paper and perform calculations. Also, if properly configured, this system could be less polluting than our current ones.[3]
Large companies with large computing sources can enter mining.
Yes, but because their computing sources are not ASIC, they will be less profitable, and the community is so huge that even large corporations can become lost in the competition.[3]
Sending and Receiving Cryptocurrencies
While sending and receiving cryptocurrency, three stages take place in the background[4]:
- Signing
TX message: Sender, Recipient, Amount being sent. The wallet hashes these values using the private key.[4]
- Broadcasting
This hashed TX message is sent by the wallet to all nodes (computers that control transactions all around the world). These nodes check to see if the operation is legal. The transaction is saved in the memory pool once it has been validated. At this point, you can examine the transaction using a block explorer.[4]
- Receiving
The nodes will compete solving the highest fee transactions first. It might take 10 minutes to an hour to complete a transaction that has approximately more than 6+ approvals.[4]
How to buy cryptocurrencies?
Never invest more than 5% of your total wealth.[5]
Accepted Countries
Not every exchange accepts people from all around the world.[5]
Accepted Payment Methods
Some exchangers do not accept all payment methods. [5]
Fees
Fees are classified into three types: deposit fees, transaction costs, and withdrawal fees.[5]
Exchange Rate
Some exchanges have cheap fees but higher exchange rates than the competition. This means that fees are hidden in the exchange limit.[5]
Buying Limits
Your purchasing limit is determined by your payment type and level of identification verification. Large purchases are not permitted on several exchanges.[5]
Reputation
Is the currency well-known in the neighbourhood? What role do the supports play in the exchange process? Is there a lot of backlash to the trade in online forums?[5]
Trading Platforms
Trading platforms are websites that link buyers and sellers without requiring you to speak with the other party. The platform normally receives a small charge for the transaction. When you place an order, it may take some time to exchange the currency.[5]
Brokers
Brokers are websites that make the process easier by allowing you to buy coins at a predetermined price. Buying from brokers is more expensive.[5]
For trades worth more than $10,000, there are dedicated exchanges and brokers.[5]
It is strongly encouraged that you transfer your coins from the exchange to your wallet to keep them safe.[5]
How to Keep Your Bitcoins Safe?
People steal cryptocurrency because they cannot store it securely. The technology itself is highly secure; for example, no one blames the dollar for being hazardous.[6]
Keep your private key in a safe place. [6]
Never use public Wi-Fi to connect to your wallets.[6]
Always utilize hardware wallets for huge quantities of coins. When you frequently exchange cryptocurrency, you should use online wallets. Use secure passwords while using online wallets. A strong password has more than eight characters and includes upper and lower case letters as well as unusual characters. Reusing outdated passwords is not a good idea.[6]
You can also use 2-factor authentication software such as Google Authenticator or Authy. 2FA refers to combining what the user possesses and knows in order to make something more secure. For example, receiving a password and confirmation from your cell phone.[6]
Always double-check the website’s URL. Is that appropriately spelt? Is it preceded by “https://”? Is it followed by “.com”?[6]
Cloud mining and currency doubling sites are generally illegal Ponzi schemes. A Ponzi scheme is something that is presented as a low-risk, high-return investment that works by transferring money from new members to old members. And, in most cases, the creator steals all of the money.[6]
Remember that cryptocurrency transactions are irrevocable; once sent, you cannot recover it. As a result, always double-check the address and never enter it manually (use copy-paste or a QR code). Use Escrow services like Bitrate if you don’t trust the other side of the transaction. Wait for 6 confirmations to ensure that the transaction is valid.[6]
Thank you for sticking with me until the end. I hope it was helpful.
References
[1] 99Bitcoins, (4 April 2018), What is Bitcoin? Bitcoin Explained Simply:
[https://www.youtube.com/watch?v=41JCpzvnn_0&list=PLU52pNodXIGdM6XDgHVG7DsPytlsrR_6b]
[2] 99Bitcoins, (8 February 2017), What is a Bitcoin Wallet?
[https://www.youtube.com/watch?v=A1Pl5hYHXiI&list=PLU52pNodXIGdM6XDgHVG7DsPytlsrR_6b&index=2]
[3] 99Bitcoins, (12 July 2018), What is Bitcoin Mining?
[https://www.youtube.com/watch?v=BODyqM-V71E&list=PLU52pNodXIGdM6XDgHVG7DsPytlsrR_6b&index=3]
[4] 99Bitcoins, (21 September 2017), Bitcoin Transactions — from “Send” to “Receive”:
[https://www.youtube.com/watch?v=ZPFL6R-voW0&list=PLU52pNodXIGdM6XDgHVG7DsPytlsrR_6b&index=4]
[5] 99Bitcoins, (23 September 2017), How to Buy Bitcoins in 2023? (4 different methods reviewed)
[https://www.youtube.com/watch?v=tuUO-Q4_b5c&list=PLU52pNodXIGdM6XDgHVG7DsPytlsrR_6b&index=5]
[6] 99Bitcoins, (30 May 2017), How to Keep Your Bitcoins Safe? avoiding scams, theft and fraud:
[https://www.youtube.com/watch?v=trzf_Lk5rdQ&list=PLU52pNodXIGdM6XDgHVG7DsPytlsrR_6b&index=6]
