What Is Crypto? A Beginner’s Guide

Crypto has become a popular buzzword over the last decade or so, but don’t be fooled. This is more than just an internet fad or quirky trend.

In truth, cryptocurrency could become the go-to standard for making transactions in the near future. Therefore, it’s useful to be aware of cryptocurrency, not just so you can partake in ongoing conversations and discussions , but also so you can prepare for its future implications.

It can be easy to get overwhelmed when diving head-first into the world of crypto, though. So, let’s go back to basics to understand what it is and why it’s gained such immense popularity.

What Is Crypto?

In simple terms, cryptocurrency is a digital value or virtual currency that is designed to act as a medium of exchange.

Crypto is a digital form of fiat money, which is another way of referring to traditional currencies like the USD or GBP.

Both currencies can be passed between two people, stored away for safekeeping, or used to buy goods, both online and offline.

All types of cryptocurrency operate on a blockchain , which essentially acts as a large database “checkbook” that keeps track of all the transactions that take place within its own bubble. Blockchains are a form of “distributed ledger,” meaning they act as a database shared by multiple people across the internet. 

Blockchains are also instrumental in giving crypto its value. Unlike say gold for example which is inherently valuable because it’s a precious metal, crypto’s value is determined within the blockchain, such as how much crypto is being mined, referring to token creation, or in the case of Ethereum, how much is being staked on the network.

The Difference Between Crypto and Real Money

Fiat money is created and valued by a country’s government, while crypto’s value is influenced by supply and demand within the blockchain. 

Therefore, the banks and central authorities are hands-off when it comes to monitoring cryptocurrency, but they can still pass through laws to affect its legality. 

In the world of crypto, this is referred to as “ decentralization ,” and it means being able to manage and spend a currency without having a central authority, like a bank, for example, involved in a transaction. 

Though cryptocurrency still abides by law, it is often seen as a more private alternative to its fiat counterparts. 

What Is the Purpose of Cryptocurrency?

Ever since the idea of cryptocurrency or “digital cash” first started propping up in the early 1990s, it has always been centered around decentralization and providing freedom to online investors. 

By not being dependent on intermediaries, crypto owners have full control and ownership over their crypto assets. This became an appealing alternative after many people began losing faith in the central banks after the 2008 crisis exposed how unreliable the financial system in place could be.

Additionally, cryptocurrency was created to give online users privacy over how they use their tokens. The rapid emergence of the internet in the 1990s resulted in many worldwide governments trying to monitor the web as closely as they could, but alternatively, cryptocurrency was made to be fully encrypted to protect against unwanted onlookers.

Different Ways to Use Cryptocurrency

The most basic use case for cryptocurrency is buying, selling and trading . Many cryptocurrencies are known to be volatile, meaning that their valued price can change drastically over the course of a week, day, or even an hour.

Crypto investors will, therefore, monitor the cryptocurrency market in an attempt to buy cheap tokens, before selling them off later for profit if the market value rises. This can be done through a cryptocurrency exchange, which is essentially the crypto equivalent of a stock brokerage. 

The beauty of cryptocurrency, though, is that it isn’t only confined to the market; there are also many other ways it can be used. 

• Overseas Payments: Sending cryptocurrency to other countries to be exchanged back into fiat is faster and cheaper than with traditional currencies.
• Shopping: Using crypto as a legitimate payment method in specific businesses including Microsoft, Overstock, and Starbucks. 
• Tipping: Platforms like Gitcoin allow users to tip developers who are contributing to the crypto ecosystem.
• Virtual Goods: Crypto can be spent on virtual goods, such as virtual land, NFTs, or video games, as in-game items.
• Employee Payments: Some businesses will compensate employees with crypto. This is easier for international payments where the crypto can be converted back to fiat currency when it arrives. 

What Is Staking? 

Staking is a slightly more complex use case for cryptocurrency, but don’t worry, it isn’t that hard to understand once you wrap your head around it.

Here’s how it works: a person locks up or “bonds” their tokens on their blockchain for a specific reward. Sometimes, this can be to prove their reliability on the blockchain, which will allow them to be promoted to a “validator” where their job is to verify cryptocurrency transactions on the network.

Other times, it can be much simpler than this as the person staking can simply earn rewards in the form of monetary gain or extra tokens for their efforts.

Where Is a Person’s Cryptocurrency Stored? 

Every person who manages cryptocurrency will require a crypto wallet. As the name implies, these are personal storage spaces that come in the form of web extensions, mobile apps, or even physical devices known as “Hot” or “Hardware” wallets.

Each digital wallet comes with a private key which is required to process and register transactions made. However, it will be up to the investor whether they want to take on the responsibility of protecting their key with a custodial wallet , or if they don’t mind handing it to a cryptocurrency exchange to take care of instead, which would be non-custodial . 

How to Choose What Cryptocurrency to Invest In

So far, we’ve been talking about cryptocurrency as a general term, but the truth is there are over 5,000 unique crypto tokens out there to choose from. With such a staggering variety, how exactly do you go about choosing which one to start investing in?

First, you need to recognize what you intend to use the token for. For example, are you only interested in owning crypto that is stable in value and can be used for simple transactions? Or are you looking to jump onto the crypto market and want something a bit more unpredictable?

Proceed by looking at the basics of what the token and its respective blockchain can offer. This would include the token’s value, the number of use cases, whether it has any staking options, and the size of the community.

These are the most important factors to consider, but as you gain more experience, you may also want to look for advanced features like smart contracts, NFT functionality , DeFi apps , and multi-chain platforms.

Examples of Popular Cryptocurrencies

The good news is that most cryptocurrencies are designed to bring something new to the table in order to help them stand out. As a result, an easy way to choose between them is by remembering that they all have their own perks and functionalities that they specialize in, as is the case with these popular examples below:

• Bitcoin (BTC) – The most popular cryptocurrency with high-grade open-source security. Commonly recognised as being the official first cryptocurrency.
• Ethereum (ETH)  – Ethereum blockchain was the first to establish smart contracts and NFTs.
• Ripple (XRP) – Known for its fast transactions and cheap fees.
• Solana (SOL) – Often seen as the homebase of NFT enthusiasts.
• Litecoin (LTC) – Designed for small and cheap transactions.
• Tether (USDT) – A stablecoin that mimics the value of the US dollar. Good for investors who are cautious about the volatility of markets.
• Dogecoin (DOGE) – A memecoin that is recognized for being wildly unpredictable in value.

Pros and Cons of Cryptocurrency

Cryptocurrency provides a sense of financial freedom which has rarely been seen before, but this level of ambition does still come with a fair share of setbacks. 

Pros

• No Central Point of Failure: Since cryptocurrency doesn’t rely on central banks, it means there’s no risk of an unexpected crisis impacting crypto owners.
• Faster Transactions: The lack of intermediaries makes passing digital money much faster, including across borders.
• Inflation Alternative: Cryptocurrency can act as a hedge fund against fiat inflation.
• Financial Privacy: Since it’s designed to be encrypted, cryptocurrency owners have full control over their assets. However, they can also lend partial control to an exchange if they sign up for a custodial wallet.
• Asset Gateway: Crypto provides an access point to other unique digital assets like NFTs which can provide diversity for a portfolio.

Cons

• Value Unpredictability: The value of a crypto token can change in very short periods, meaning there’s always a risk when buying and trading on the market.
• Cyberattacks: Cyberattacks and scams have unfortunately been quite prevalent in the crypto ecosystem, especially for exchanges. Always check the security measures of an exchange to see what protection they offer.
• Growing Centralization: Centralisation has gradually started creeping into the crypto space as companies are beginning to hold crypto for price appreciation.
• Early Stages: Believe it or not, cryptocurrency is still in its infancy. The regulatory landscape is, therefore, changing constantly, with countries imposing their laws and restrictions on whether and how crypto can be used. This level of unpredictability puts into question whether crypto will be viable in the long term for certain areas of the world.

Key Terms to Remember

Don’t worry about trying to remember everything in one go. The important part is becoming familiar with the key terms, names, and phrases within the crypto ecosystem, as they will appear frequently throughout your experience.

These are some of the primary key terms that every crypto enthusiast should know about:

• Decentralization – Not having to rely on a central bank or authority to make transactions.
• Crypto Exchange – A cryptocurrency business that grants access to crypto markets in real-time.
• Blockchain – A data bubble that keeps track of transactions taking place within its framework.
• Crypto Wallets – Digital storage spaces that are required to start managing cryptocurrency. Can either be custodial or non-custodial.
• Satoshi Nakamoto – The founder of Bitcoin and the author of the Bitcoin whitepaper . His identity has remained a mystery since the paper was published.

On the Flipside

• Though cryptocurrency has had quite a few years to evolve and develop, many unanswered questions add to its unpredictability.
• Similarly, the actual price of crypto fluctuates on a dime, so it’s hard to call cryptocurrency “reliable” in the same way that fiat currency is.

Why This Matters

Since their inception in the 1990s, cryptocurrency and blockchain technology have progressed at an unprecedented rate. The primary reason for this is that token holders want to find new and exciting ways to use their funds. As a result, there are now more possibilities than ever and so many cryptos to choose from.

All of this means that it’s a good idea to jump on the crypto bandwagon sooner rather than later. That way, you can be fully aware of all the benefits of crypto, and how to set up your own personal collection of digital currency if you’re interested.

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