What is Cryptocurrency? Breaking Down the Crypto Basics for Beginners
- By Localcoin
- September 20, 2021
At Localcoin, our mission is to provide a simple, secure buying and selling experience of digital currency for customers across North America. From running North America’s largest Bitcoin ATM network to our online retail platform, we are constantly seeking to innovate in the blockchain infrastructure space. Welcome to our blog, where customers can educate themselves on the world of cryptocurrency, learn more about our company vision and more!
With global interest in cryptocurrencies continuing to grow, it’s safe to say that this new type of financial product is here to stay. And with that newfound mainstream popularity comes a whole lot of questions for newcomers looking to get started in this exciting new financial and technological space. And you know what? The questions are warranted!
No matter how simply your friends or financial advisor try to break it down for you, it’s a technology that can be downright difficult to wrap your head around. But let’s try anyway! Keep reading our beginners guide and come along as we try to answer some of the most common and pressing questions surrounding cryptocurrency.
Browse This Content:
- What is Cryptocurrency
- Why is it Called “Cryptocurrency”?
- Who Invented Cryptocurrency? How Did it Start?
- What is Blockchain And How Does it Allow for Decentralization?
- What Does Mining Mean for Cryptocurrencies?
- How Does a Crypto Transaction Work?
- How Do I Buy and Sell Cryptocurrency?
- The Advantages and Disadvantages of Cryptocurrency
- What is the Current State of Cryptocurrency?
What is Cryptocurrency?
To put it as simply as we can: Cryptocurrency is a (relatively) new, all-digital form of decentralized currency. Cryptocurrencies are mediums of exchange unlike traditional fiat currencies we are familiar with; they are private currencies created, stored and processed outside of a central bank or government. One of the first ways cryptocurrency was ever described to the public was as a “peer-to-peer electronic cash system”, as outlined by its creator(s).
Why is it Called “Cryptocurrency”?
Cryptocurrencies are secured by cryptography, which is the science of encoding and decoding information. When data is encrypted, it becomes less and less discernible to those without a “key” to decode the information. In the case of cryptocurrency, this makes it impossible to double-spend or counterfeit.
Because of the lack of centralized authority overseeing the buying and selling of this currency, encryption is essential to every step of the transaction process. It’s also key to the underlying philosophical aims of cryptocurrencies, which were to be secured, managed and regulated by the public, rather than by centralized authorities with their own aims and agendas.
Crypto coins (different types of digital currency) are not physical pieces of money you can see and hold. They may just exist as computer files stored in databases, but they are so much more than that.
Who Invented Cryptocurrency? How Did it Start?
It all started in 2008 with the creation of Bitcoin. Bitcoin was invented by an anonymous individual or group of individuals under the alias “Satoshi Nakamoto”. To add to the intrigue, we still don’t know the truth behind Satoshi Nakamoto’s identity. On January 3rd 2009, Nakamoto mined the starting block of the blockchain called the “genesis block”. Embedded in the first block was the text, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”, illustrating that Bitcoin was created largely in response to the 2008 Financial Crisis. This crisis, caused by some of the largest banks in the world, illustrated the potential risks associated with relying on banks to be trusted intermediaries in all of our financial transactions.
Other reasons behind the creation of this coin address what Nakamoto called “inherent weaknesses in the trust-based model”. According to Nakamoto, Bitcoin would be able to:
- Eliminate the need to share personal information with an intermediary,
- Reduce fraud and counterfeiting,
- Reduce transaction fees,
- Prevent inflation and manipulation with a limited amount of Bitcoin that can be mined (21 billion), and more.
This would be possible by using a decentralized authority rather than an intermediary that operates based on trust. For example, when you manage your money via a bank, you trust the bank to process your transactions fairly and securely. You also trust the bank to keep your private information safe. At the same time, the bank has to trust you so as to not be frauded, which is why they require heaps of your private information.
Since Bitcoin's creation, thousands of other coins (“altcoins”) have been created using a similar, decentralized framework in order to provide the same benefits to users.
What is Blockchain And How Does it Allow for Decentralization?
You can’t answer the question, “what is cryptocurrency” without explaining the biggest motivator behind Bitcoin’s creation — decentralization.
Rather than going through intermediaries like a bank or brokerage, the software itself is the middleman, allowing buyers, sellers, lenders, and borrowers alike to make secure, validated transactions on a peer-to-peer basis without any institution involved. Many, but not all cryptocurrencies are decentralized networks. Blockchain technology is what makes decentralization possible for coins like Bitcoin:
Blockchain is a type of database that contains a public, digital ledger (record) of all transactions made pertaining to a specific coin. Every single transaction, however small or big, is grouped into blocks and chained together in chronological order, hence the name “blockchain”.
Blockchain is powered by nodes, or individual computers owned by members of the network; thousands of nodes have the same, full record of this data, making it impossible for one node to manipulate the information without the others knowing about it. Nodes communicate in order to check and validate each new block of transactions added to the blockchain, solidifying them and making the transactions irreversible. This network is decentralized because no one owns the ledger. Instead, all the members collectively oversee it and, ideally, abide by its rules and safeguard the security of the transactions.
What Does Mining Mean for Cryptocurrencies?
If you’re new to the cryptocurrency space, or you’re only casually familiar with it, you’ve almost certainly heard the term “mining” tossed around. You may be wondering now, what does this term mean and where does it fit into the process? To put it simply, mining accomplishes two things. Let’s have a look at Bitcoin mining as an example:
- It is how new coins are minted and entered into circulation.
- It is a key step in the continued secure evolution of the Bitcoin Blockchain.
Most crypto traders won’t be a part of the Bitcoin mining process. It can be complicated, requiring an incredibly large amount of computing power. However, miners are essential to the existence of Bitcoin, other mined coins, and to the existence of their respective blockchains. The only way to release new currency into circulation is through mining it. Bitcoin miners specifically verify the legitimacy of Bitcoin transactions by solving for their encrypted hash values, and in return, receive newly minted crypto tokens.
Confused yet? To better understand mining and how this complex system can be used for buying and selling, let’s have a look at a Bitcoin transaction.
How Does a Crypto Transaction Work in a Nutshell?
Let’s break it down. Here’s what’s going on behind the scenes in an average Bitcoin transaction:
- When I want to make a transaction, I send or broadcast a file containing all the transaction information (how many Bitcoins are being traded, sender/recipient information, etc. ) to the blockchain from my crypto wallet (more on this soon).
- This transaction file is then analyzed by many different computers on the blockchain network to confirm its authenticity.
- From there, many different transaction files are grouped together into blocks and miners will then compete to have their block of transactions permanently added to the blockchain’s ledger, thus confirming those transactions and locking them in place.
- This “competition” comes down to using a lot of computational power to try and be the first to solve complex mathematical problems. The reward? Blocks of transactions have mining fees attached to them, meaning that successful miners will be rewarded with newly minted Bitcoins!
- The user receives confirmations that measure how many new blocks have been added since their transaction, making it increasingly verifiable and irreversible. Each crypto coin requires a different amount of confirmations to be “complete”, it is recommended that users wait for at least one confirmation.
- The transaction is complete after a varying amount of time.
How Do I Buy and Sell Cryptocurrency?
Buying your first crypto coins starts with obtaining a crypto wallet to “store” it in. Wallets for cryptocurrency don’t contain actual coins — they exist to keep track of ownership. Plus, they are necessary for the generation of public addresses which make it possible to send and receive coins.
Your wallet’s public address, balance and transactions can be viewed by anyone on the blockchain in a decentralized network, but they are not tied to your identity, and your coins are protected in your wallet by a private key. Private keys are long sequences of letters and numbers unique to you that both act as a password for accessing your coins and as digital signatures that verify your transactions on the blockchain.
Once you have a wallet set up, you can buy and sell cryptocurrency using an exchange (a private business that allows users to exchange crypto for other coins or fiat currency), or even at a physical ATM! Similarly to the stock market, participants will have to closely watch crypto markets in order to determine when they are comfortable buying and selling coins. Newcomers and even experts can find online crypto communities where members are discussing market forecasts, tips and tricks and more.
Buyers and sellers can find crypto ATMs in their local communities; these internet-enabled terminals help users buy and/or sell coins such as Bitcoin, Etherum and Litecoin. These ATMs are connected to the blockchain network, allowing customers to purchase cryptocurrency with cash or sell crypto from their wallet. Using a crypto ATM can be as simple as scanning a QR code and following the steps outlined on the machine.
The Advantages and Disadvantages of Cryptocurrency
Now that you understand what cryptocurrency is and the philosophy behind its creation, let’s dive into real-life implications of digital currency. While the reasons behind its existence can sound ideal, it may not be a suitable endeavor for everyone. These properties vary based on coin, but generally, these are some of the most relevant advantages and disadvantages of crypto:
- Public digital ledgers used by most coins allow for transparent and verifiable transactions. This also reduces instances of manipulation.
- Decentralization simultaneously allows for more privacy as a mediary does not need to identify you.
- Encryption allows for stronger security compared to other electronic transactions.
- Many crypto coins can be purchased using any kind of currency. There are relatively low transaction fees and minimal barriers for international transactions, making it a rival to wire transfers.
- Anonymity can make illegal activity more difficult to trace. For example, when buying and selling on the dark web or laundering money.
- If one loses their access to a wallet by forgetting their private key, any coins in that wallet are irretrievable.
- Crypto exchanges can be susceptible to hacks. These transactions are also irreversible.
- Cryptocurrency markets are not yet mature and are mostly driven by speculation, making them volatile.
- Bitcoin mining in particular requires large amounts of electricity, which can be harmful to the environment.
What is The Current State of Cryptocurrency?
So, what is cryptocurrency? Cryptocurrencies are constantly evolving mediums of exchange with large implications in the world of finance. As of August 2021, cryptocurrencies are accepted by a long list of major retailers including Microsoft, AT&T, large food chains and even Tesla, whose founder Elon Musk has become a champion for cryptocurrency, helping to bring it to the mainstream. At the same time, new altcoins are gaining popularity due in part to their smaller energy consumption requirements, leading to more diverse, environmentally-friendly ways to buy and sell crypto. While the future of cryptocurrency is unknown, one thing you can count on is that it will be constantly evolving, whether that means continuous growth and expansion, or unpredictable highs and lows.
Whether you’re interested in cryptocurrency as an exciting hobby or as a more private and secure alternative to banking, crypto is being made accessible to anyone by Localcoin. Localcoin ATMs offer a simple, user-friendly way for anyone to buy and sell Bitcoin, Litecoin and Ethereum. This is especially meaningful for beginners who are seeking a hassle-free way to dive into the world of digital currency with confidence! Newcomers and experts alike can easily access Localcoin ATMs when and where they need to. As one of North America’s largest Bitcoin ATM network, with more than 600 terminals across Canada and the U.S, we make buying and selling cryptocurrencies easy and accessible for crypto enthusiasts in their communities.
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