By Kaila Krayewski
Have you ever wanted to explore the confusing world of cryptocurrency but have no idea where to start? Have you tried looking into it and been baffled by the concept of “mining” virtual coins and the whole crypto-jargon thing in general? Well, you’re not the only one, so we’re here to help you make sense of the mining, the market caps and the moon trips as we take you on an idiot’s guide to cryptocurrency.
What is cryptocurrency anyway?
Ever since Bitcoin burst onto the scene in January 2009, potential investors have been scrambling to understand exactly what cryptocurrencies are, how they work and if the bubble will ultimately burst. Cryptocoins are gradually making a place for themselves in our financial future, but for novices wanting to invest, what do they actually need to know about the brave new world of cryptocurrency?
A cryptocoin is a form of digital currency created by the coding and decoding of text (in order to make it secure), which is called cryptography. Before we can try to understand cryptocurrencies, however, we have to talk about blockchains — the key process behind all cryptocurrency transactions. Unlike websites that use their own private database that no one else can access, a blockchain is a public database that any user can view at any time. Essentially, a blockchain is a digital ledger full of “blocks” (digital pages) that record all purchases and transactions regarding cryptocurrencies. They exist on many users’ computers across the globe instead of being stored in just one central location.
How do blockchains work?
In a blockchain, whenever someone spends or transfers cryptocurrency, their entry joins a queue ready to be added to the public database. Before that can happen, however, the entries need to be validated, and as there isn’t just one centralised entity in charge of the database, this task is completed by users — or “miners” in cryptocurrency speak (there’s a whole language, but we’ll get to that). In exchange for validating the transactions and adding them to the blockchain, the users receive cryptocurrency. This is called mining (so people would say they are “mining Bitcoins”), allowing users to keep track of cryptocurrency transactions without the need for any central recordkeeping.
Exchanges
Bitcoin is the cryptocurrency that started it all, and with it often being referred to as “digital gold”, it’s unlikely to leave the marketplace any time soon. Other popular cryptocoins include Ether (whose blockchain is generated by Ethereum), Ripple, Dash, Bitcoin Cash and Litecoin. Out of these, the most popular cryptocurrencies don’t always have to be mined; they can be bought for fiat (physical money such as dollars or pounds) from exchanges such as Coinbase, Kraken and LocalBitcoins (which puts users wanting to buy coins in touch with those wanting to sell them).
Cryptocurrencies that don’t have their own blockchain can use the blockchains of other cryptocoins, and when this happens the units are called “tokens” rather than coins. A blockchain can have many tokens running on its public database, but unlike popular cryptocurrencies, tokens cannot be mined. “Currency pairs” or “trading pairs” are cryptocurrencies that can be traded for each other, such as ETH/BTC (the abbreviations for Ethereum and Bitcoin), where Ethereum can be bought or sold using Bitcoin and vice versa.
What is crypto slang?
The world of cryptocurrency is full of jargon that to normal people can sound a little crazy. So, we already know “mining,” but when a coin or token goes up sharply in value (or at least is expected to) the crypto-lingo is that it’s going to “hit the moon” or is “going to the moon.” For investors whose coins are about to go to the moon, it’s a running joke to use the term “Lambo,” referring to all the Lamborghinis they plan on buying once they’ve made their fortune. It really is a whole new language.
What are the main cryptocurrencies?
Bitcoin
Bitcoin (abbreviated to BTC) was the first-ever cryptocurrency, and nine years after its introduction, it’s still (more or less) going strong. This cryptocoin’s invention has been shrouded in mystery ever since it first appeared, with the creator (known only under potential pseudonym Satoshi Nakamoto) remaining an enigma since the first white paper on the subject came to light in 2008. While several individuals have been named as the possible Bitcoin inventor, no one has ever taken credit for the revolutionary idea. As other cryptocoins were bought initially with Bitcoin, its price tends to affect the value of all other coins.
Ethereum
Created by the non-profit Ethereum Foundation in Switzerland, Ethereum (ETH) is a blockchain in which users mine Ether, a cryptotoken. As well as their primary function as a cryptocurrency to be traded, these Ether tokens are used to pay for online services and transaction fees. The Ethereum Virtual Machine (EVM), run on the Ethereum network, “makes the process of creating blockchain applications much easier and efficient than ever before. Instead of having to build an entirely original blockchain for each new application, Ethereum enables the development of potentially thousands of different applications all on one platform.”
Ripple
Ripple came onto the scene in 2012 and is both a cryptocurrency and digital payment network. Ripple’s abbreviation is XRP and it’s a cryptocoin that cannot be mined. Currently, several large companies are considering using Ripple as a method for money transfers, including Western Union. As CEO Hikmet Ersek states, “we’re excited about our work towards a pilot implementation of xRapid, which uses XRP in payment flows.” If more companies follow in Western Union’s footsteps, Ripple could soon be a real contender in the cryptocurrency marketplace, even rivalling Bitcoin.
Dash
According to its official website, Dash (its symbol simply being DASH) is a “fully-incentivised peer-to-peer network,” where, just like Bitcoin, miners “are rewarded for securing the blockchain.” The idea of Dash is to be “digital cash you can spend anywhere,” with Dash users being able to spend this cryptocurrency both online and in-store. In order to make this happen, they’ve teamed up with a number of merchants, from web stores such as Brave New Books to online casinos such as Crypto Games.
Bitcoin Cash
Bitcoin Cash (BCH) is a cryptocurrency started by Bitcoin miners in response to worries regarding Bitcoin’s ability to scale up. Without the capacity to scale effectively, these users were “concerned with the future of the cryptocurrency” and so created a new currency through a process known as a “hard fork,” which is when a cryptocurrency splits into two different coins. Compared to the original Bitcoin block size of 1mb, Bitcoin Cash has increased its block size to 8mb, allowing for more scalability in the future.
How to start investing in cryptocurrency
Getting into cryptocurrency is going to involve a lot of research. Research, research, research. Basically, read about other people’s experiences and learn from their mistakes, because with cryptocurrencies, there’s bound to be a few. Beginners can start by looking at exchanges such as Coinbase, KuCoin or CoinMama, though you should consider the site’s fees, exchange rates, security requirements, usability, the regions the site covers and any reviews written by other users before deciding on one exchange over another. This should give you a good idea of which exchange is best for you, and then you can start investing.
How do you protect your cryptocoins?
There are many pitfalls that need to be avoided when trading in cryptocurrencies, and one of the main issues you need to consider is how to protect your coins. Once a user buys coins via an exchange, those coins stay on that exchange until they’re removed into “wallets.” Many users will just leave their coins on the exchange, but this is a dangerous game to play. Exchanges can go bankrupt or they can get hacked, with both scenarios resulting in your cryptocurrency being lost forever. If the coins are removed and placed into a password-protected wallet there’s less chance of this happening, though of course, nothing is ever completely secure on the internet.
Keeping track of cryptocoins
Keeping track of cryptocurrencies and their ever-changing values could be a full-time job in itself, but sites such as Coinmarketcap can help. This site shows how all the different cryptocoins rank, clearly displaying the value of each coin in circulation, as well as the total value of the entire cryptocurrency market. At the time of writing, the market cap figure is $483,650,675,901, with this number covering 1,541 cryptocurrencies spread out over 8,894 markets, so if you’re getting into the crypto life, you’ll need to be checking these sites daily.
Are there crypto-scams?
It’s the internet, of course there are scams! Yes, the world of cryptocurrencies is, unfortunately, littered with people trying to scam users out of their hard-earned money so crypto-newbies should avoid buying into new cryptocoins unless they’ve done a lot of homework. The U.S. Commodity Futures Trading Commission (CFTC) warns of “pump and dump” schemes, which is when large organised groups of people all buy a certain coin, pushing the price up and attracting more (new and usually naive) buyers. The scammers then sell their coins at the same time, making the value of the coin crash (and causing the naive buyers to lose out) as they bask in the smell of their fraudulent crypto-cash.
If you’ve made it this far through all the crypto-talk, then congratulations! You can now go forth and explore the complicated-but-captivating world of cryptocurrencies. It can be a hard sector to break into, but if you do enough research and if you time your transactions correctly, these coins can make for a sound investment in the future — especially if you find your cryptocoins going to the moon.
