Cryptocurrency For Dummies: What is Cryptocurrency and How it Works?

Cruptocurrency for dummies what is cryptocurrency

The world cannot live without cryptocurrency for sure. And yes, they’d been experiencing ups and downs and still are, but the fact is as clear as a day – digital tokens have intertwined with real-world activities and are there to revamp the global financial system. 

If you’re about to get into this world to reap its benefits, welcome! But to play well in this field, you should master cryptocurrency for dummies rules and level up your performance step by step. And we’re to inform you about literally everything a newbie should know. So, without further ado, let us introduce you to the realm of cryptocurrency.

Crypto for dummies: Knowing this is a must

By cryptocurrency seasoned players usually mean all the encrypted decentralized digital money. Take Bitcoin as an example. To help you even more, a digital token is like fiat currency each country possesses and controls. But this one is circulating on a blockchain and is shared and uncontrolled. 

So, the place the coins are functioning on is called a blockchain. It makes up the underlying infrastructure and a so-called shared data archive or data warehouse where anyone is allowed to write their part. Herewith, on blockchain users check transactions. The infrastructure is super shielded because it’s encrypted with 256-bit cryptographic keys. Thus, each activity is not recorded on a server, yet the information about it is logged on this decentralized ledger. 

If you’re interested in figuring out cryptocurrency investing for dummies, knowing about blockchains seems pivotal. The ledgers are regularly examined against one another automatically to keep up with a master. The latter is the longest chain approved by all the involved at any moment. 

Adam Kerpelmen, exec of Juris, the company dealing with blockchain smart contracts, once said that everybody can go verify the ledger as it’s open. However, all is encrypted there, and all you stumble upon there doesn’t make any sense. To check on the ledger slots, having the key is a must. Thus, as we can see, the system is quite safe here and, in the meantime, it’s open and public. At present, it’s unhackable. 

When a new coin is about to come out, the developers issue a “white paper” looking like a sales pitch. They launch an Initial Coin Offer to raise money to create a new token. An ICO is like an IPO (initial public offering) in investing. 

Digital money is legal and liable to tax in the States, and it’s not considered as legal tender but rather as investment capital. Therefore, because of the fact that cryptocurrencies experience some infancy and have some history behind them, investors should make deals and use them considering their historical instability.

Another aspect of the cryptocurrency for dummies basics is its safety. Well, it is secure, in general. However, people and organizations can undermine its safety, but not the underlying technology. The purpose of criminals is to make users disclose any data about the access to an exchange, phish for an email address and its credentials or lend wallet’s  private keys. The most common practice, when dealing with exchanges, is penetrating an email box and then resetting a password. That’s why multi-factor identification is so powerful here. 

What makes crypto so prevailing?

Let’s say there are many believers in the crypto concept throughout the world. As you’re gripping cryptocurrency investing for dummies, you’ll find the following reasons for such popularity:

  • many see cryptos like Bitcoin or Ethereum as digital money of the future and hurry to acquire them now because they have a huge potential to skyrocket in worth
  • some believers (let’s call them this way) love the fact that cryptos will unseat banks in their money supply management, as bit by bit the institutions will be downplaying the worth of money via inflation
  • other believers love the innovation built in a ledger as it’s flat-out secure thanks to decentralization 
  • some traders like digital money since it’s boosting in worth and they are not interested in its extended adoption as a method to move money

Where Do You Store It?

There’s a great solution to keep your coins by using intermediaries – exchanges or wallets. When dealing with exchanges, you purchase and keep the token by turning to their service. Speaking of the wallets, there are two types of keys to them, each aiming at different things: a public one for letting others send you cryptos; a private one serves to let you withdraw funds from the wallet. Therefore, keeping access to a private one is crucial so that no one could penetrate it.

When figuring out crypto for dummies rules, knowing things about wallets is critical because they allow storing digital money safely. At present, there are over 50 million wallets in use. They support a big deal of cryptocurrencies, including stablecoins, native blockchains coins like BTC, and tokens like Ethereum’s ERC20 standard. 

For the record, stablecoins are just a type of cryptos tied to traditional currency reserves or physical goods (gold, petrol) and whose exchange rate is less likely to be volatile than one of the typical cryptos.

So, crypto wallets are like online bank accounts, herewith, your cryptocurrency cannot be frozen. In fact, users represent themselves their own banks. They offer a public key, or public address (it’s like a bank account number), and a private one like a password. It’s essential to understand that a wallet does not really store your holdings, but it possesses the individual keys necessary to spend them.

The coins circulate on the blockchain, a shared record of digital asset operations. Imagine having your individual key, the relevant assets are yours and you decide on how to use them. Inside a wallet, users are allowed to send coins to friends, relatives – you name it, accept them from others, check the portfolio’s efficacy, and exchange assets. 

Wallets differ as well. There are custodial wallets and noncustodial wallets with the latter including paper wallets, metal wallets, and digital hardware wallets. To proceed from cryptocurrency for dummies level to a trained one, do your homework and identify which one is the most convenient for you. 

We’ll just conclude here the following: your assets are super valuable. So is the wallet where you keep them. Make sure a chosen type has both security and accessibility. The simplest way to get started is to use a custodial account suggesting password protection. It might be reset depending on ID authentication – just like they do in a bank.

Most ‘powerful’ digital money by market capitalization.

We will cite here the 10 most valuable cryptos by market cap. The data provided refers to February 18. Take a look. 

Token Market Cap
Bitcoin $969.6 billion
Ethereum $222.3 billion
Tether $33.1 billion
Binance Coin $30.5 billion
Cardano $28.3 billion
Polkadot $28.1 billion
XRP $24.4 billion
Litecoin $15 billion
Chainlink $13.3 billion
Bitcoin Cash $13.1 billion

 

Cryptocurrency Miners: key people in the crypto realm?

 Miners are those kind, diligent people that do computer-intensive job. In the crypto field, their work looks like a real one of real miners. But unlike them, crypto miners made little money for the last ten years, some others even lost a big deal of money on this chancy activity.

What does cryptocurrency mining for dummies suggest? Miners are the main players in the whole machinery since they approve the legitimacy of every transaction demanded by users. To validate one or a few transactions solicited by others, miners are required to do the following.

They keep in mind that everybody is aware of everything, suggesting that each transaction fulfilled in the system is duplicated and anyone is able to access it. Miners will examine the transactions’ logs to ensure users have at least 100 coins for getting started. Once the balance is verified, miners will release a particular hash value. It has an explicit configuration, meaning it should commence with a specified number of zeros.

Herewith, to count this value, the system suggests two benchmark data, according to the crypto mining for dummies guide. These are the proof-of-work of miners and transaction record information. In fact, miners work super hard since the tiniest modification in data input has to generate a serious deviation in hash value output. These people have to spot a particular value for a proof-of-work indicator that will issue a hash with zeros in the beginning. If your system needs at least 30 zeros in every confirmed operation, these guys should calculate about 2^30 various hash values to identify the correct proof-of-work.

When they find it, they are about to gain a transaction fee that can be considered as a part of the approved transaction. Such a transaction is relayed to fellows in the system and kept in a precise database – blockchain.

Blockchain for Dummies: ABC of all operations behind

Cryptocurrency investing for dummies also starts with a deep understanding of the blockchain. Old people might associate it with a ledger or record of something. Imagine getting a sweater as a birthday present. When someone got it for you, many “sides” created a ledger. A credit card company that tracked the transaction, payment processor, delivery company, online store, etc. are all its participants. So, a ledger means recording of operations happening. 

Additionally, a ledger comes as a database that demonstrates how lots of different info is related to each other. In our example, a database ties all the ledgers together: online shop, product, client, credit card, etc. – and makes them relatable.

Now, imagine putting all your ledgers into a box and shipping it off, and a company adding your box to all other ones you sent them. Now, let’s make it through the lens of blockchain. It’s a digital ledger. You enter data into it, and the computer puts information into a box or a block. When the block is full, the computer seals it – just like you tape up a box before sending it. When the box is joined to other ones, this produces a chain of boxes. In other words, it’s a block-chain.

It carries the logs of all processes ever made in the network. Each approved transaction constitutes one more ring in the chain. Every organization developing blockchain counts on this open ledger. Thus, the Bitcoin blockchain is an open ledger in which all operations are recorded in consecutive order.

How many engaged miners are there in your network? When learning cryptocurrency mining for dummies, you should know it’s limitless. This implies three or more miners might approve the same transaction. There and then, the system verifies the overall work a miner puts in approving the transaction by just calculating zeros. The one who put in major effort will dominate and their block will prevail. 

Supervising The Supply of money

 The golden rule of the Bitcoin network suggests that the biggest quantity of BTC generated should be no more than 21K. It is not reached, and some experts think the number will hit the mark by 2140. In fact, this number doesn’t look like too much, but here’s the fact: the BTC system allows fractional values up till the eighth decimal. This tiniest part of a coin is called a Satoshi, in recognition of Satoshi Nakamoto, the founder of the Bitcoin protocol.

According to this cryptocurrency for dummies guide, miners get new coins as a compensation for confirming transactions. It’s not actually the transaction fee indicated when doing a transaction record. It is well determined by the system.  The size of the compensation shrinks after a while and probably will get a zero point when the overall quantity of coins released is achieved. When this comes, transaction fees are going to be even more essential as miners might consider prioritizing more pivotal operations for approval.

Besides establishing the highest limit in the biggest amount of tokens, the Bitcoin network additionally restricts the daily creation of new tokens. It takes about 15 minutes for regulating the least number of prevailing zeros necessary for a proof-of-work estimation, the time needed to validate the transaction, receiving perks from new coins. 

If the period of joining new blocks to the blockchain reduces, the mechanism behind might demand that proof-of-work releases 45 or 50 prevailing zeros. Therefore, by restricting the pace and the quantity of coins released, the Bitcoin system is efficiently running the supply of money.

FAQ

How do I buy cryptocurrency?

Any book of cryptocurrency investing for dummies says that some cryptos can be acquired with the U.S. dollars, while others require BTC or another digital money. To do this, a wallet or an online app storing holdings comes in handy. In general, you set up an account in an exchange, and further send real money to purchase cryptos like BTC and ETH. 

Are cryptocurrencies legal?

It’s a great question if just starting to figure out crypto for dummies. It is absolutely legal in America, while China does not allow it for usage. Therefore, the legal status comes down to an individual country. Yet, frauds happen, especially with attempts to befool investors. It’s always about individual responsibility to learn the subject well.

Should you buy cryptocurrency?

Experts explain cryptocurrency for dummies as a quite risky activity as it is chancy and volatile. Moreover, stock trading initiated by stable companies is less uncertain than putting money into virtual coins like ETH.

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